Virtually None of Its $102 Billion Offshore Stash Has Been Taxed By Any Government

An analysis of Apple Inc.’s financial reports makes clear that Apple has paid almost no income taxes to any country on its $102 billion in offshore cash holdings. That means that this cash hoard reflects profits that were shifted, on paper, out of countries where the profits were actually earned into foreign tax havens.

How We Know Apple’s Offshore Cash is Largely in Tax Havens

Under current law, corporations can indefinitely defer paying U.S. income taxes on their offshoreprofits. Multinational corporations with offshore profits sometimes disclose in their financial reports the amount of tax they would pay if there were no “deferral” and their offshore profits were taxable in the United States. But this potential tax rarely amounts to the full 35 percent U.S. corporate tax rate, since these companies typically have already paid some foreign income taxes on these foreign profits when they were earned. Companies are allowed a “foreign tax credit” against their U.S. tax when and if the profits are subject to U.S. tax. So a company that has already paid (for example) a 25 percent tax rate on its unrepatriated offshore income would only pay the difference between that amount and the U.S. corporate tax rate of 35 percent (in this example, 10 percent) when that income is repatriated to the U.S.  

The data in Apple’s latest annual report show that the company would pay almost the full 35 percent U.S. tax rate on its offshore income if repatriated. That means that virtually no tax has been paid on those profits to any government.

At the end of March 2013, Apple’s foreign subsidiaries had accumulated $102.3 billion in cash, cash equivalents and marketable securities. Based on more complete information provided in Apple’s latest full annual report, without “deferral” Apple would owe $35 billion in U.S. income taxes on this cash hoard.

Here is what we know from Apple’s 2012 annual report:

• At the end of fiscal year 2012, Apple had $82.6 billion in cash and cash equivalents parked offshore.

• Of this $82.6 billion, $40.4 billion was “permanently reinvested” foreign income that the company declared it had no plans to ever allow the United States to tax. Without “deferral,” however, Apple said that it would owe a U.S. tax bill of $13.8 billion on this $40.4 billion stash. That works out to a 34.2 percent U.S. tax rate

• The remainder of Apple’s offshore cash at the end of its last fiscal year was $42.2 billion. Apple did not treat this amount as “permanently reinvested” offshore. Therefore, it reported a potential future U.S. tax liability of $14.7 billion, which means a 34.9 percent U.S. tax rate.

• So all together, without deferral, Apple would have paid $28.5 billion in U.S. taxes on its $82.6 billion in offshore cash. This means the company’s U.S. tax rate would have been 34.5 percent, barely under the maximum U.S. corporate tax rate.

Applying this same U.S. tax rate to Apple’s $102.3 billion offshore cash hoard as of March 2013 would generate $35.3 billion in U.S. income taxes, without deferral.

Much of Apple’s Offshore Cash Hoard Likely Reflects Profits Shifted from the U.S.

In recent interviews, Apple CEO Tim Cook has denied that any of its cash in tax-haven subsidiaries has been shifted from the U.S., stating that “Apple does not funnel its domestic profits overseas. We don't do that.”

While it’s virtually impossible to know precisely the source of Apple’s offshore cash, it seems very likely that much, if not most, of it stems from profits that were actually earned in the United States but shifted into tax havens. After all, the primary source of Apple’s profits is the research and design work that it does in the U.S.

But if a larger than expected amount of Apple’s offshore cash was generated by profits shifted into tax havens from foreign countries where Apple does real business, then that provides further proof that the “territorial” tax system used by countries such as the United Kingdom, Germany and so forth make offshore profit-shifting even easier to do than the United States’ “deferral” system.

A “Territorial” Tax System or “Repatriation Holiday” Would Increase Incentives for Apple to Shift Profits to Offshore Tax Havens

If Congress simply repealed the rule allowing U.S. corporations to defer U.S. taxes on their offshore profits, there would be no incentive for a company like Apple to claim that its profits are earned in offshore tax havens. The profits would be subject to the U.S. corporate tax no matter where they are generated.

But many multinational corporations are pushing Congress to move in the opposite direction and exempt offshore corporate profits from U.S. taxes. Some companies are lobbying for a permanent exemption, which is essentially what a “territorial” tax system provides. Others are lobbying for a temporary exemption, which proponents call a “repatriation holiday.”

A “repatriation holiday” is a tax amnesty for offshore corporate profits. Most variations of this type of proposal would allow U.S. corporations to bring their offshore profits back to the U.S. and pay no U.S. corporate taxes on those profits, or pay U.S. corporate taxes at an extremely low rate.

A similar repatriation amnesty was enacted in 2004 and is widely considered to have been a failure. A CTJ fact sheet explains why proposals for a second repatriation amnesty should be rejected:[i]

• Another temporary tax amnesty for repatriated offshore corporate profits would increase incentives for job offshoring and offshore profit shifting... One reason why the Joint Committee on Taxation concluded that a repeat of the 2004 “repatriation holiday” would cost $79 billion over ten years is the likelihood that many U.S. corporations would respond by shifting even more investments offshore in the belief that Congress will call off most of the U.S. taxes on those profits again in the future by enacting more “holidays.” 

• The Congressional Research Service concluded that the offshore profits repatriated under the 2004 tax amnesty went to corporate shareholders and not towards job creation. In fact, many of the companies that benefited the most actually reduced their U.S. workforces.

[i] Citizens for Tax Justice, “Why Congress Should Reject A “Territorial” System and a “Repatriation” Amnesty: Both Proposals Would Remove Taxes on Corporations’ Offshore Profits,” October 19, 2011. http://www.ctj.org/pdf/corporateinternationalfactsheet.pdf

Updated Figures Show 3.6% of U.S. Taxpayers would Face a Tax Increase

President Obama has proposed to limit the tax savings for high-income taxpayers from itemized deductions and certain other deductions and exclusions to 28 cents for each dollar deducted or excluded. This proposal would raise more than half a trillion dollars in revenue over the up­coming decade.[1] Despite this large revenue gain, only 3.6 percent of Americans would receive a tax increase under the plan in 2014, and their average tax increase would equal just less than one percent of their income.

As illustrated in the table below, the deduction for state and local taxes would make up over a third of the total tax expenditures limited by the proposal. In combination, the deduction for state and local taxes and the deduction for charitable giving would make up just over half of the tax expenditures limited.

Previously published estimates from Citizens for Tax Justice of this proposal assumed that it would only affect taxpayers with adjusted gross income (AGI) above $250,000 for married couples and above $200,000 for singles.[2] Such an income threshold was included in the version of the proposal that appeared in the President’s jobs bill in 2011, the only actual legislative language for the proposal. However, documents recently released by the administration make clear that there is no longer such an income threshold. This change raises the share of U.S. taxpayers affected by the proposal by about one percentage point.

How the President’s “28 Percent Rule” Would Work

The President’s proposal is a way of limiting tax expenditures for the wealthy. The term “tax expenditures” refers to provisions that are considered to be government subsidies provided through the tax code. As such, these tax expenditures have the same effect as direct spending subsidies, because the Treasury ends up with less revenue and some individual or group receives money. But these tax subsidies are sometimes not recognized as spending programs because they are implemented through the tax code.

Under current law, there are three income tax brackets with rates higher than 28 percent (the 33, 35, and 39.6 percent brackets). People in these tax brackets (and people who would be in these tax brackets if not for their deductions and exclusions) could therefore lose some tax breaks under the proposal.[3]

Currently, a high-income person in the 39.6 percent income tax bracket saves almost 40 cents for each dollar of deductions or exclusions. An individual in the 35 percent income tax bracket saves 35 cents for each dollar of deductions or exclusions, and a person in the 33 percent bracket saves 33 cents. The lower tax rates are 28 percent or less. Many middle-income people are in the 15 percent tax bracket and therefore save only 15 cents for each dollar of deductions or exclusions.

This is an odd way to subsidize activities that Congress favors. If Congress provided such subsidies through direct spending, there would likely be a public outcry over the fact that rich people are subsidized at higher rates than low- and middle-income people. But because these subsidies are provided through the tax code, this fact has largely escaped the public’s attention.

President Obama initially presented his proposal to limit certain tax expenditures in his first budget plan in 2009, and included it in subsequent budget and deficit-reduction plans each year after that. The original proposal applied only to itemized deductions. The President later expanded the proposal to limit the value of certain “above-the-line” deductions (which can be claimed by taxpayers who do not itemize), such as the deduction for health insurance for the self-employed and the deduction for contributions to individual retirement accounts (IRA). [4]

Most recently, the proposal was also expanded to include certain tax exclusions, such as the exclusion for interest on state and local bonds and the exclusion for employer-provided health care. Exclusions provide the same sort of benefit as deductions, the only difference being that they are not counted as part of a taxpayer’s income in the first place (and therefore do not need to be deducted).

Exempting the Charitable Deduction from the 28% Limit
Would Reduce the Revenue Gain by 19 Percent

Any proposal to limit tax expenditures gives rise to a debate about which tax expenditures should be subject to such a limit and which should be exempt. For example, some charities have objected to the limit applying to the deduction for charitable giving, on the mistaken view that limiting this deduction would significantly reduce charitable giving.[5]

Excluding a tax expenditure from the proposed limit may reduce the revenue impact of the proposal slightly more than or less than the corresponding percentage in the table on the second page. For example, while the table on the second page illustrates that the charitable deduction makes up 15 percent of the tax breaks that would be limited under the President’s proposal, exempting the charitable deduction from the limit would actually reduce the revenue impact by 19 percent. While the table on the second page illustrates that the deduction for state and local taxes makes up 36 percent of the total tax breaks limited by the proposal, exempting this deduction from the limit would reduce the revenue impact of the proposal by 34 percent. The reason for these slight differences reflects interactions among various tax provisions.

Exempting the Charitable Deduction from the Proposed Limit would Largely Turn the
Remaining Proposal into a Limit on the Value of Deductions for State and Local Taxes

Some tax-exempt organizations, particularly universities and museums, have expressed fear that the limitation on the value of the charitable deduction will result in less charitable giving. Research suggests this fear is unfounded.[6] But another point that has received little attention is that amending the President’s proposal to “carve out” the charitable deduction would concentrate the effects of the proposal even more on the deduction for state and local taxes — which is the most justifiable of all the tax breaks the President proposes to limit.

The deduction for state and local taxes paid is sometimes seen as a subsidy for state and local governments because it effectively transfers the cost of some state and local taxes away from the residents who directly pay them and onto the federal government. For example, if a state imposes a higher income tax rate on residents who are in the 39.6 percent federal income tax bracket, that means that each dollar of additional state income taxes could reduce federal income taxes on these high-income residents by almost 40 cents. The state government may thus be more willing to enact the tax increase because its high-income residents will really only pay 60 percent of the tax increase, while the federal government will effectively pay the remaining 39.6 percent.

But viewed a different way, the deduction for state and local taxes is not a tax expenditure at all, but instead is a way to define the amount of income a taxpayer has available to pay federal income taxes. State and local taxes are an expense that reduces one’s ability to pay federal income taxes in a way that is generally out of the control of the taxpayer. A taxpayer in a high-tax state has less income to pay federal income taxes than a taxpayer with the same pre-tax income but residing in a low-tax state.

Another argument in favor of the itemized deduction for state and local taxes paid is that the public investments funded by state and local taxes produce benefits for the entire nation. This can be seen as a justification for the deduction for state and local taxes paid because it encourages state and local governments to raise the tax revenue to fund these public investments that the jurisdictions might otherwise not make. 

For example, state and local governments provide roads that, in addition to serving local residents, facilitate interstate commerce. State and local governments also provide education to those who may leave the jurisdiction and boost the skill level of the nation as a whole, boosting the productivity of the national economy. State and local governments may have an incentive to provide less of these public investments than is optimal for the nation because the benefits partly go to those outside the jurisdiction. The deduction for state and local taxes may counter this inclination of state and local governments to under-invest in these areas.

[1] Citizens for Tax Justice, “President Obama's Tax Proposals in his Fiscal 2014 Budget Plan,” April 11, 2013. http://ctj.org/ctjreports/2013/04/president_obamas_tax_proposals_in_his_fiscal_2014_budget_plan.php   

[2] This report replaces the report with those previous estimates, titled “Who Loses Which Tax Breaks Under President Obama's Proposed Limit on Tax Expenditures?” which was published on March 29, 2013.

[3] Many of the wealthy taxpayers whose deductions and exclusions are targeted by the proposal would also experience a change in their alternative minimum tax (AMT). The AMT is a backstop tax, meaning it forces well-off people who effectively reduce their taxable income with various deductions and exclusions to pay some minimal tax. If a tax change only increases the regular income tax and not the AMT, some taxpayers who currently pay AMT will not be affected at all. Very generally, one of the AMT changes in the proposal essentially ensures that the increase in a taxpayer’s regular income tax would also be applied to the AMT to ensure that the tax increase shows up on the final income tax bill. The other AMT change would limit the savings for each dollar of deductions or exclusions to 28 cents for those whose income is within the “phase-out range” for the exemption that prevents most people from being affected by the AMT. The impacts of these changes are included in the estimates shown here.

[4] The most recent description of the proposal provided by the Obama administration can be found in Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals,” April 2013, page 134. http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf  

[5] For example, see Joseph Cordes, “Effects of Limiting Charitable Deductions on Nonprofit Finances,” presentation given February 28, 2013 at the Urban Institute. Cordes finds that the President’s proposal to limit the tax savings of each dollars of deductions and exclusions to just 28 cents would reduce charitable giving by individuals by between 2.2 percent and 4.1 percent, and the actual loss of total charitable giving would be smaller because some charitable contributions are made by foundations, corporations and other entities rather than individuals affected by this proposal.  http://www.urban.org/taxandcharities/upload/cordesv5.pdf  

[6] Id.

Apple & Facebook Biggest Beneficiaries of Stock Option Loophole

Earlier this year, Citizens for Tax Justice reported that Facebook Inc. had used a single tax break, for executive stock options, to avoid paying even a dime of federal and state income taxes in 2012. Since then, CTJ has investigated the extent to which other large companies are using the same tax break. This short report presents data for 280 Fortune 500 corporations that, like Facebook, disclose a portion of the tax benefits they receive from this tax break.

• These 280 corporations reduced their federal and state corporate income taxes by a total of $27.3 billion over the last three years, by using the so-called “excess stock option” tax break.
• In 2012 alone, the tax break cut Fortune 500 income taxes by $11.2 billion.
• Just 25 companies received more than half of the total excess stock option tax benefits accruing to Fortune 500 corporations over the past three years.
• Apple alone received 12 percent of the total excess stock option tax benefits during this period, enjoying $3.2 billion in stock option tax breaks during the past three years. JP Morgan, Goldman Sachs and ExxonMobil collectively enjoyed 10 percent of the total.
• In 2012, Facebook wiped out its entire U.S. income tax liability by using excess stock option tax breaks.
• Over the past three years, Apple slashed its federal and state income taxes by 20 percent using this single tax break.

How It Works: Companies Deduct Executive Compensation Costs They Never Actually Paid

Most big corporations give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (while employees report this difference as taxable wages).

Before 2006, companies could deduct the “cost” of the stock options on their tax returns, reducing their taxable profits as reported to the IRS, but didn’t have to reduce the profits they reported to their shareholders in the same way, creating a big gap between “book” and “tax” income. Some observers, including CTJ, argued that the most sensible way to resolve this would be to deny companies any tax deduction for an alleged “cost” that doesn’t require an actual cash outlay, and to require the same treatment for shareholder reporting purposes.

But instead, rules in place since 2006 maintained the tax write-off, but now require companies to lower their “book” profits somewhat to take account of options. But the book write-offs are still usually considerably less than what the companies take as tax deductions. That’s because the oddly-designed rules require the value of the stock options for book purposes to be calculated — or guessed at — when the options are issued, while the tax deductions reflect the actual value when the options are exercised. Because companies typically low-ball the estimated values, they usually end up with much bigger tax write-offs than the amounts they deduct in computing the profits they report to shareholders.

Reforming the Excess Stock Option Tax Break

Despite the changes that took effect in 2006, the stock option tax break is still clearly reducing the effectiveness of the corporate income tax. A November 2011 CTJ report assessing the taxes paid by the Fortune 500 corporations that were consistently profitable from 2008 through 2010 identified the excess stock option tax break as a major factor explaining the low effective tax rates paid by many of the biggest Fortune 500 companies.1

In recent years, some members of Congress have taken aim at this tax break. In February of 2013, Senator Carl Levin (D-MI) introduced the “Cut Unjustified Loopholes Act,” which includes a provision requiring companies to treat stock options the same for both book and tax purposes, as well as making stock option compensation subject to the $1 million cap on corporate tax deductions for top executives’ pay.

The PDF version of this report includes the full list of 280 corporations and the size of their reported federal and state tax break for excess stock options in the three year period between 2010 and 2012.

1 Citizens for Tax Justice, Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010, November 3, 2011, page 10. http://ctj.org/corporatetaxdodgers/

Senator Bernie Sanders of Vermont recently appeared on Real Time with Bill Maher and disputed the claim by the Tax Foundation that the U.S. has the highest corporate tax in the world.

During a debate over spending and revenues, Senator Sanders said it’s time to ask the “one out of four corporations not paying any taxes” to contribute. The Wall Street Journal’s Stephen Moore replied with the standard complaint, “We have the highest corporate tax rate in the world. ... Thirty-five percent. The Tax Foundation says the United States of America has the highest corporate tax rate.”  Sanders replied that this is the “nominal, not effective” corporate tax rate.[1] The Tax Foundation then issued a written response claiming that even the effective corporate tax rate in the U.S. is very high compared to those of other countries. [2]

Senator Sanders is right, the Tax Foundation is wrong.

Effective Tax Rates vs. Nominal or Statutory Tax Rates

The U.S. statutory tax rate of 35 percent is almost entirely irrelevant. The effective corporate tax rate (what corporations actually pay as a percentage of their profits) is what matters, and it’s far lower than the statutory corporate tax rate because of the loopholes that allow corporations to avoid taxes. The U.S. effective corporate tax rate is also far lower than the Tax Foundation claimed in a written response to Senator Sanders.

While the statutory corporate income tax rate for the U.S. may be high compared to those of other countries, the total federal corporate income tax collected in the U.S. in 2010 was equal to just 1.3 percent of our gross domestic product  — in other words, 1.3 percent of our total economic output — according to the Treasury Department. The figure is 1.6 percent of GDP when state corporate income taxes are included.[3]

Data from the Organizations for Economic Cooperation and Development (OECD) show that the OECD countries other than the U.S. collected corporate tax revenue equal to 2.8 percent of their combined GDPs in 2010. This is another way of saying that the weighted average of corporate tax collected as a percentage of GDP for the countries that are the U.S.’s main trading partners and competitors was 2.8 percent in 2010. (2010 is the most recent year for which the OECD has complete data.)[4]

Some critics of corporate taxes claim that the declining share of the GDP paid in corporate income taxes collected in the U.S. reflects in part the growth in “pass-through” entities which are taxed only under the personal income tax and not under the corporate income tax. But almost all of the corporate income tax is paid by giant corporations, hardly any of which have shifted to pass-through status.[5]

In addition, effective corporate tax rates (on non-pass-through corporations) are very low in the United States, as CTJ has demonstrated in its comprehensive corporate tax reports.

One of the most cited of those reports was released in November of 2011 and examined most of the Fortune 500 companies that had been profitable each year over the 2008-10 period. Collectively, the companies studied paid just 18.5 percent of their profits in U.S. corporate income taxes over the three years that were studied — only half the 35 percent official corporate tax rate. Thirty of the companies paid less than nothing and had negative corporate income tax rates over that period.[6]

We are currently working on an update to this study, and recently released data showing ten examples of companies that paid negative or extremely low effective tax rates in 2012 and over the past five years.[7]

The Tax Foundation Relies on Flawed Research

In its written response to Senator Sanders, the Tax Foundation claims that

Even when including all deductions and credits available to companies to lower their tax liabilities, the “effective” tax rate of U.S. corporations is still among the very highest in the world. The most recent studies show a U.S. effective corporate tax rate of roughly 27 percent, compared to an average of 20 percent for other developed countries.

To back this assertion, the Tax Foundation cites its 2011 report that reviewed nine different studies of effective tax rates.[8] On close inspection of these studies, it turns out that six of them do not even examine the taxes and profits of actual firms but rather are based on models of taxation applied to hypothetical firms.

Only three of these studies are based on what the authors considered to be the actual taxes and profits paid by firms according to their financial reports. But these studies have several severe methodological problems that made it almost impossible for them to come to any conclusion other than that U.S. corporate taxes are high.

For example, one of the studies, by Kevin S. Markle and Douglas A. Shackelford of the National Bureau of Economic Research, actually states (on page 10) that it excludes those companies with a negative effective tax rate.[9] This essentially means that the study simply excludes those companies that are corporate tax dodgers, which obviously will result in a higher estimate for the average effective tax rate.

To take another example, a study by PricewaterhouseCoopers and the Business Roundtable counts what companies report in their financial filings as “deferred” taxes, as well as “current taxes” as taxes paid by a company.[10] As we have explained before, current taxes are the taxes a company actually pays during the year, while deferred taxes are the taxes that the company might pay at some point in the future (and if they ever are paid they will show up as current taxes in the financial report for that year).[11] In other words, “deferred” taxes are taxes that companies have not paid (and may never pay) and should not be counted as taxes paid.

Determining Actual Effective Corporate Tax Rates

Ultimately, the only way to understand how much corporations are actually paying in taxes is to do the painstaking work that CTJ does in going through the financial reports filed by corporations, and uncovering the hidden tax breaks that go unnoticed in the large, error-prone databases that these other studies tend to rely on.

For example, a simple reading of Facebook’s 2012 10-K annual financial report might suggest that the company pays a very large amount of federal income tax: the income tax note for the 2012 report says the company paid a current federal income tax of $559 million on its $1.062 billion in pretax US income. This implies an effective federal tax rate of 52.6%, which is a lot.

But in fact, the company reduced its federal income taxes by more than $1 billion in 2012 through the “excess stock option” tax break, the effects of which are not reported in the income tax note. Researchers using databases that simply report the contents of the income tax note will miss this essential piece of information.

The truth is that, by any measure, U.S. corporate income taxes are very low. And as a share of the economy, they are much lower than are corporate income taxes in almost every other developed country.

[1] Bud Meyers, “Bill Maher, Bernie Sanders, Makes Fool of Stephen Moore,” Daily Kos, April 12, 2013. http://www.dailykos.com/story/2013/04/12/1201358/-Bill-Maher-Bernie-Sanders-Makes-Fool-of-Stephen-Moore

[2] Richard Morrison, “Yes, Sen. Sanders, We Really Do Have the Highest Corporate Tax Rate in the World,” Tax Foundation, April 12, 2013. http://taxfoundation.org/article/yes-sen-sanders-we-really-do-have-highest-corporate-tax-rate-world

[3] In calendar 2010, the U.S. federal government collected $193.4 billion in corporate income taxes. (Monthly Treasury Statements for January 2010 to December 2010, http://www.fms.treas.gov/mts/backissues.html.)  In addition, state and local governments in the U.S. collected $42.9  billion in corporate income taxes in 2010 (U.S. Census Bureau, http://www2.census.gov/govs/estimate/summary_report.pdf. Table A-1 (page 6). So total federal, state and local corporate income taxes in the U.S. in 2010 were $236.3 billion. This is 1.6 percent of U.S. GDP in 2010, which was $14.5 trillion.

[4] OECD data is available at http://stats.oecd.org/ The OECD routinely far overestimates U.S. corporate taxes as a percentage of GDP, and we have corrected OECD’s error. For some reason, the OECD gets its U.S. corporate tax information from U.S. Bureau of Economic Analysis (BEA), which includes profits of the Federal Reserve as “corporate taxes.” Historically, this has caused OECD to overstate U.S. corporate income taxes by about 10 percent. But Federal Reserve profits have ballooned in recent years, causing OECD to overstate U.S. corporate income taxes by 23 percent in 2009 and 32 percent in 2010.  In addition, the OECD initially publishes preliminary data from the BEA, which includes corporate taxes paid by U.S. corporations to foreign governments (an error which OECD later corrects when BEA releases final data). Because of these two errors, OECD currently overstates U.S. federal, state and local corporate by almost two-thirds in 2010.

[5] The U.S. corporate income tax has always been paid by a relatively small number of companies that has not changed very much over time. IRS data show that in 1995, 6,258 companies (which had assets of at least $250 million that year) paid 78 percent of the corporate income tax collected during that year. In 2008, a similar number of companies, 6,584 companies (which had assets of at least $500 million that year) paid 82 percent of the corporate income tax collected during that year.

[6] Citizens for Tax Justice, “Corporate Taxpayers and Corporate Tax Dodgers: 2008-2010,” November 3, 2011. http://ctj.org/corporatetaxdodgers/

[7] Citizens for Tax Justice, “Ten (of Many) Reasons Why We Need Corporate Tax Reform,” April 10, 2013. http://ctj.org/ctjreports/2013/04/ten_of_many_reasons_why_we_need_corporate_tax_reform.php

[8] Philip Dittmer, “U.S. Corporations Suffer High Effective Tax Rates by International Standards,” Tax Foundation, September 2011. http://taxfoundation.org/sites/taxfoundation.org/files/docs/sr195.pdf

[9] Kevin S. Markle and Douglas A. Shackelford, “Cross-Country Comparisons of Corporate Income Taxes,” National Bureau of Economic Research Working Paper No. 16839, February 2011, http://www.nber.org/papers/w16839.pdf.

[10] “Global Effective Tax Rates,” PricewaterhouseCoopers and Business Roundtable, April 14, 2011, http://businessroundtable.org/studies-and-reports/global-effective-tax-rates/.

[11] Citizens for Tax Justice, “GE Tries to Change the Subject,” February 29, 2012. http://ctj.org/ctjreports/2012/02/ge_tries_to_change_the_subject.php

Here are the percentage changes in federal taxes that Obama proposes over the upcoming decade by type of tax:

■    Personal income taxes, mostly on the wealthy, would go up by 4 percent.

■    Corporate taxes would increase by 1 percent.

■    Excise taxes would increase by 10 percent.

■    Estate and gift taxes would go up by 40 percent.

In total, federal revenues would increase by 2.8 percent over 10 years.

Except for the excise tax increases (mainly almost a $1 per pack tax hike on cigarettes), most of the President’s proposed net tax increases would fall on the very well off.

Because his tax proposals are so modest, the President found it necessary to propose major reductions in domestic programs in order to reduce future budget deficits. Overall, his budget predicts that domestic appropriations will fall by almost a third as a share of the GDP by fiscal 2023. That sharply reduced level would also be a third less as a share of the GDP than under President Ronald Reagan.

In the text of his budget, the President also says he favors “revenue-neutral” “corporate tax reform that will close loopholes [and] lower the corporate tax rate.” Toward that end, he lists 57 specific changes that he would make to limit or expand corporate loopholes in the context of reform (these items are not included in his budget plan). Enacting all of these proposals would raise an average of less than $10 billion a year. That would allow about a half a percentage point reduction in the corporate tax rate from the current 35 percent to about 34.5 percent.

A summary list of the tax changes proposed by the President and their estimated revenue effects can be found below:

Read this fact sheet in PDF.

Of all the OECD countries, which are essentially the countries the U.S. trades with and competes with, only Chile and Mexico collect less taxes as a percentage of their overall economy (as a percentage of gross domestic product, or GDP).

This sharply contradicts the widely held view among many members of Congress that taxes are already high enough in the U.S. and that any efforts to reduce the federal deficit should therefore take the form of cuts in government spending.

As the graph to the right illustrates, in 2010, the total (federal, state and local) tax revenue collected in the U.S. was equal to 24.8 percent of the U.S.’s GDP.

The total taxes collected by other OECD countries that year was equal to 33.4 percent of combined GDP of those countries. 

As the table below illustrates, the U.S. has steadily moved closer and closer to becoming the least taxed OECD country over the past three decades.

In 1979, the U.S. had the 16^th highest taxes as a percentage of GDP, out of 24 countries at that time.

In 2010, the U.S. had the 32^nd highest taxes as a percentage of GDP, out of 34 OECD countries.

Taxes collected by other OECD countries as a percentage of GDP have been above 31 percent throughout this period of years, and in some years have exceeded 34 percent.

In the U.S., taxes as a percentage of GDP never even exceeded 29 percent during this period, except for three years (1998 through 2000). After that, taxes were reduced by the Bush-era tax cuts and other changes, most of which were made permanent in the legislation approved by Congress on New Year’s Day to address the “fiscal cliff.”[i]

[i] For more information about the effects of the “fiscal cliff” deal, see Citizens for Tax Justice, “New Tax Laws in Effect in 2013 Have Modest Progressive Impact,” April 2, 2013.

As the table above illustrates, the richest one percent of Americans will receive 21.9 percent of the total income in the U.S. in 2013. Under the tax rules in effect this year, they will pay 24 percent of the total federal, state and local taxes. If Congress had extended all of the tax rules that had been in effect in 2012, then the richest one percent of Americans would pay 23.1 percent of the total taxes this year. In either scenario, the share of taxes paid by the richest one percent is slightly (but not dramatically) larger than the share of total income received by this group.

In other words, the richest one percent of Americans are not paying a disproportionate share of taxes, and the tax changes that took effect this year did not make a dramatic difference.

Taxes that Have Changed in 2013

The taxes that have gone up in 2013 (but which would not have gone up if Congress had extended all 2012 federal tax laws) include the following:

■ Personal income tax rates and limits on exemptions and deductions.
Under the fiscal cliff deal, two parts of the personal income tax cuts originally enacted under President George W. Bush were allowed to partially expire for the rich. The first is the reduction in the top income tax rate from 39.6 percent to 35 percent. The rate was allowed to revert back to 39.6 percent for married couples with taxable income greater than $450,000 and singles with taxable income greater than $400,000. The second is the personal exemption phase-out and the limitation on itemized deductions (often called “PEP and Pease”) which were allowed to come back into effect for married couples with adjusted gross income (AGI) greater than $300,000 and singles with AGI greater than $250,000.

■ Hospital Insurance (HI) taxes on income of the wealthy.
Two increases in the Medicare Hospital Insurance (HI) tax were enacted as part of President Obama’s major health care reform law, and the fiscal cliff deal did nothing to prevent them from taking effect in 2013 as scheduled.

Before 2013, the HI tax was a 2.9 percent tax on earnings. (Technically employed people directly pay half the tax while their employer directly pays the other half, but economists agree that the worker ultimately bears even the latter half of the tax in the form of reduced wages and benefits.)

One increase in the HI tax is the introduction of a higher rate (3.8 percent) for earnings above $250,000 for a married couple and above $200,000 for a single person (in other words, an additional 0.9 percent tax on earnings above these levels). The other increase allows the HI tax to apply to most types of investment income (which had been exempt from the HI tax until now) besides retirement income. This part of the tax is a 3.8 percent tax on investment income to the extent that it makes up a taxpayer’s AGI in excess of $250,000 for a married couple or $200,000 for a single person.

■ Social Security payroll taxes.
The Social Security payroll tax is normally 12.4 percent of earnings, up to a cap that is adjusted for wage growth each year. (This year the tax applies to a worker’s earnings up to $113,700.) Half the tax is paid directly by employees while the other half is paid directly by employers. (Again, economists agree that even the latter half of the tax is ultimately borne by employees.) The tax takes up a larger percentage of income for the typical low- or middle-income worker than it does for a high-income person because of the wage cap and also because high-income people are more likely to receive a portion of their income in the form of investment income, which is not subject to this tax.

In 2012, a payroll tax “holiday” was in effect which reduced the Social Security tax to 10.4 percent. (Technically, the part of the tax paid directly by employees was reduced from 6.2 percent to 4.2 percent.) The fiscal cliff deal did not extend the payroll tax holiday, meaning the tax rate reverted to 12.4 percent in 2013.

Why Have Some Observers and News Reports Claimed that the Poor Pay Little or Nothing While the Rich Pay a Disproportionate Share of Taxes?

Some political commentators and some major media outlets have reported that low- and middle-income Americans pay little or no taxes while the rich pay a hugely disproportionate share of taxes, and that this is especially the case in 2013 as a result of the fiscal cliff deal.

Sometimes this misconception occurs because people erroneously focus only on the federal personal income tax, which is the most progressive major tax we have. In other instances, thoughtful people do look at all of the federal taxes Americans pay, but ignore state and local taxes and measure income in a way that is incomplete. The next two sections address each of these sources of confusion.

The Federal Personal Income Tax Is Progressive, But Most Other Taxes that Americans Pay Are Regressive

In April 2009, estimates released by the Urban-Brookings Tax Policy Center (TPC) created a tsunami of misunderstanding that raged for years and finally crested during the presidential campaign of Mitt Romney in 2012. The figures released by TPC in 2009 showed that nearly 43.4 percent of Americans would have “zero or negative tax liability” that year.[1]

Close examination of the table containing the figures made clear that TPC had estimated 43.4 percent of Americans would not pay federal personal income taxes that year. It was certainly not saying that this group would not pay other federal taxes or state and local taxes.

But that was largely lost in the months that followed. A news article about the figures quoted a TPC senior fellow saying, “You’ve got a larger and larger share of people paying less and less for the services provided by the federal government. The concern is that the majority can say, ‘Let’s have more benefits, spend more,’ if they’re not paying for it. It’s ‘free.’ That’s not a good thing to have.”[2]

A TPC update in June of that year increased its estimate to 46.9 percent — nearly 47 percent of Americans.[3]

Flash forward to the presidential campaign trail in 2012, where Mitt Romney famously told a room full of donors, during what he believed to be an off-record event,

“There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it... These are people who pay no income tax.”[4]

For several years, Citizens for Tax Justice has estimated the total federal, state and local taxes paid by Americans in each income group. We’ve found that no one group is getting a free-ride and that the tax system overall is just barely progressive. For example, the table above shows that the poorest fifth of Americans (the “lowest 20%”) will pay 2.1 percent of the total (federal, state and local) taxes in America in 2013. The table also shows that this same group will only receive 3.3 percent of the total income in the country this year. So the poorest fifth of Americans do pay a share of taxes that is lower than their share of total income, but not dramatically lower.

Likewise, the richest one percent of Americans in 2013 will pay 24 percent of total taxes and receive 21.9 percent of total income. In other words, the share of taxes paid by the richest Americans is slightly greater than their share of total income, but not dramatically so.

The table also shows that the tax changes that took effect this year did not dramatically alter this distribution of America’s taxes.

Incomplete Measures of Income Result in Incomplete Measures of Distribution of Taxes

There is no comprehensive source for estimates of state and local taxes other than those generated by CTJ’s partner organization, the Institute on Taxation and Economic Policy (ITEP). The figures in this report and the accompanying fact sheet, which incorporate state and local tax estimates from ITEP, are therefore the only real estimates of the total taxes paid in America.

Some analysts do at least estimate total federal taxes. However, when these analysts estimate effective federal tax rates for all federal taxes, they typically come up with figures that are different from ITEP’s estimates of effective federal tax rates. This is often because these analysts are estimating income in a way that is less comprehensive than the method used by ITEP.

An incomplete estimate of income affects the calculation of effective tax rates, which are taxes divided by income. For example, imagine that two economists agree that a group of people paid $500,000 in taxes one year, but disagree about the amount of income this group received during the year. One economist believes the group of people received $1 million in income and therefore had an effective tax rate of 50 percent. The other economist believes the group of people received income of $2 million and therefore had an effective tax rate of 25 percent.

Disagreements about measuring income in America today are not as dramatic as in this example, but they nonetheless lead to different estimates of effective federal tax rates.

Specifically, some analysts assume that the income reported by high-income taxpayers to the IRS is essentially equal to all of the income that these taxpayers have. However, many kinds of income are not included in federal adjusted gross income, but are nonetheless real income.

In estimating taxpayers’ income, ITEP begins with the adjusted gross income (AGI) reported by taxpayers to the IRS and then adds sources of income that are not included in AGI. For the bottom three-fifths of Americans this additional income primarily reflects untaxed transfers, most notably non-taxable Social Security benefits. In the top income group (the top one percent), the additional income primarily reflects ITEP’s conservative estimates of unreported and unrealized capital gains and understated business income.

For the income groups in between, additional income includes the above items, but the difference is much smaller than it is in the lower and top income groups, because wages subject to withholding dominate the total income of taxpayers in these in-between groups.

As a result of these adjustments, the income concept ITEP uses to separate taxpayers into income groups and to calculate effective tax rates is bigger than the income reported on tax returns. By our measure of income, in the bottom three quintiles, 75 percent of total income is reported as part of AGI on tax returns. In the top income group, 78 percent of total income is reported as AGI on tax returns. In the in-between groups, 91 percent of total income is reported as AGI on tax returns. The overall average is 85 percent.

This definition of income is one that most people understand. For example, Social Security recipients know that they receive Social Security benefits even if some or all of those benefits are not taxable. Likewise, high-income investors know that the capital gains they report on their tax returns are generally considerably less than the capital gains they actually enjoy. This means that people can look at ITEP’s estimates for different income groups and easily identify which income group they fall into.

One final note: Effective tax rates are calculated as taxes divided by income. The income definition that ITEP uses to calculate effective tax rates when all taxes are included in the analysis is the definition of income just described, plus two adjustments to account for sources of income recognized by all economists (even if not entirely understood by most people trying to determine which income group they belong to).

First, in computing effective Social Security and Medicare tax rates we (like virtually all analysts) count both the employee and employer shares of these taxes. But that logically requires including the employer share of the taxes in income (as well as in taxes) in calculating effective tax rates.[5] Second, since we include corporate income taxes, attributed to investors, in our total tax calculations, we also include in income, for purposes of calculating effective tax rates, pretax corporate profits (of non-pass-through corporations), net of taxable dividends paid to individual shareholders.[6] These two adjustments increase the total income used for calculating effective tax rates by an average of 14 percent.

[1] Tax Policy Center, Table T09-0202: Tax Unites with Zero or Negative Tax Liability, 2009-2019, April 14, 2009. http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=2276&DocTypeID=7

[2] Declan McCullagh, “The Income Tax System is Broken,” CBS News, April 15, 2009. http://www.cbsnews.com/2100-503363_162-4945874.html

[3] Tax Policy Center: Table T09-0334: Distribution of Tax Units with Zero or Negative Individual Income Tax Liability by Cash Income Level, June 19, 2009. http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=2409

[4] David Corn, “SECRET VIDEO: Romney Tells Millionaire Donors What He REALLY Thinks of Obama Voters,” Mother Jones, September 17, 2012. http://www.motherjones.com/politics/2012/09/secret-video-romney-private-fundraiser

[5] Economists generally agree that the part of the payroll tax that is paid directly by employers is a portion of the employee’s income that would have been paid to the employee (in the form of higher wages or benefits) but is instead paid to the federal government as taxes.

[6] Some analysts do not attribute pretax corporate profits to investors, even though they do count corporate income taxes as ultimately paid by investors in computing effective tax rates. These analysts assume that all corporate profits eventually show up in individuals’ incomes, either as taxable dividends (which we do subtract from pretax corporate profits) or taxable capital gains. We believe that this assumption is unwarranted. since most individual capital gains show up either in retirement benefits, on which the effective individual tax rate is zero or less or are never realized or reported (in part due to the rule that exempts capital gains on inherited assets from tax forever). Contributions to retirement funds (pensions, 401k’s, etc.) are not taxable as earnings when the contributions are made, thus avoiding both income and payroll taxes. Distributions during retirement are taxable. But, assuming a constant tax rate, this is the mathematical equivalent of taxing the contributions when made and exempting the distributions from tax. (This is why analysts treat tax-deductible IRA contributions as the equivalent of “Roth IRAs,” where the contributions are not deductible, but the distributions are tax-exempt.) In fact, since tax rates on retirement distributions from pensions, 401k’s, etc. are likely to be taxed at a lower tax rate than the tax rate avoided by the tax exemption for contributions, the actual tax rate on retirement income is likely to be negative.

92 Fortune 500 Corporations Boosted Their Offshore Stash by Over $500 Million Each

In recent years, multinational U.S.-based corporations have systematically accumulated staggering amounts of profits offshore. Much if not most of these profits were actually earned in the United States but have been artificially shifted to foreign tax havens to avoid U.S. corporate income taxes.

Ten particularly aggressive companies report that their offshore profit holdings have grown by more than $5 billion each in just the past year. Apple Inc. reports adding $28 billion in offshore cash in the past year, while Microsoft’s offshore stash increased by $16 billion.1 Other Fortune 500 companies adding at least $5 billion offshore in the past year include Pfizer, Merck, Google,2 Abbott Laboratories, Johnson & Johnson, Citigroup, IBM, and General Electric. These ten companies increased their offshore profit holdings by a total of $107 billion in just the past year.

In the same year, 92 Fortune 500 corporations each boosted their reported offshore profit holdings by at least $500 million. In total, these 92 corporations added an additional $229 billion to their offshore profit hoards in 2012 alone. (See table on p. 4 and 5 of PDF)

Under current law, so-called “foreign” corporate profits are not subject to U.S. tax unless and until the profits are repatriated into the United States. According to the congressional Joint Committee on Taxation, this indefinite deferral of tax on profits ostensibly earned or shifted overseas will cost the federal government about $600 billion over the upcoming decade.3

But lobbyists for the multinationals are urging Congress to go even further, by permanently exempting from U.S. corporate income taxes all profits that U.S. corporations manage to have treated as “foreign.” Such a change would make it even more profitable for multinational corporations to shift jobs and profits out of the United States, and could cost the U.S. government hundreds of billions of dollars in additional lost revenues.

Over the Past Four Years, 48 Corporations Added $518 Billion to their Offshore Profit Hoards

Showing that 2012 is not an exception, over the past four years, 48 corporations each added at least $3 billion to their offshore profit hoards. The total that these 48 companies added over four years was $518 billion.

Some companies, of course, had even higher additions to their offshore profit hoards over the past four years. Apple Inc. topped the four-year list, adding $65 billion to its offshore holdings of cash and marketable securities. Fourteen other corporations also added at least $10 billion to their offshore profit holdings over the last four years. These were: Microsoft, Pfizer, General Electric, Merck, Google, Abbott Laboratories, IBM, Cisco Systems, Hewlett-Packard,4 Johnson & Johnson, Citigroup, Procter & Gamble, Oracle and PepsiCo. (See table on p. 6. of PDF)

Offshoring is Much More Widespread

The offshoring phenomenon goes well beyond the group of companies just highlighted. A December 2012 CTJ report shows that almost 300 Fortune 500 corporations have disclosed holding at least some profits overseas, and that these companies collectively held over $1.6 trillion offshore at the end of 2011.5

Of this group, 47 corporations indirectly disclosed how much U.S. tax they would owe if their $384 billion in offshore profit holdings were subject to U.S. corporate income tax. Just for these companies, the taxes due would total $105 billion. These figures strongly indicate that most of those profits have been shifted out of the U.S. into foreign tax havens where the companies do no actual business.6

Michigan Senator Carl Levin recently observed that such practices may be legal, but they shouldn’t be; ending the practice of deferral would render artificial profit shifting illegal and would restore significant revenues to the U.S. Treasury.
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1 A recent Senate Permanent Subcommittee on Investigations hearing revealed that Microsoft shifted 47 percent of the profits earned on products developed and sold in the U.S. to subsidiaries in foreign tax havens. http://www.hsgac.senate.gov/subcommittees/investigations/media/subcommittee-hearing-to-examine_billions-ofdollars-in-us-tax-avoidance-by-multinational-corporations-

2 Google, Starbucks, and Amazon were recently called before a U.K. Parliament committee to answer charges that they were dodging U.K. taxes by artificially shifting profits to tax haven countries. See Rajeev Syal and Patrick Wintour, “MPs attack Amazon, Google and Starbucks over tax avoidance,” The Guardian, December 2, 2012 available at http://www.guardian.co.uk/business/2012/dec/03/amazon-google-starbucks-tax-avoidance.

3 See Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017, Feb. 1, 2013 (JCS-1-13), page 30. The JCT report estimates that “deferral of active income of controlled foreign corporations” will cost $265.7 billion over the 2013-17 period. Extrapolating out the following five years brings the 10-year cost to more than $600 billion. https://www.jct.gov/publications.html?func=startdown&id=4503

4 Hewlett-Packard was also the target of a recent Senate Permanent Subcommittee on Investigations probe. See http://www.hsgac.senate.gov/subcommittees/investigations/media/subcommittee-hearing-to-examine_billions-ofdollars-in-us-tax-avoidance-by-multinational-corporations-.

5 Citizens for Tax Justice, “Fortune 500 Corporations Holding $1.6 Trillion in Profits Offshore,” December 13, 2012, page 10. http://ctj.org/pdf/unrepatriatedprofits.pdf

6 Eli Lilly, for example, reported that it would owe the full 35 percent U.S. corporate tax if it “repatriated” all of the $20.6 billion it had parked overseas at the end of 2011. But since the U.S. gives a credit for any income taxes paid to foreign governments that means that Eli Lilly has paid no income tax to any government on its offshore income. Which, in turn, means that the profits must have been artificially shifted from where they were actually earned into tax-free havens. Overall, the 47 corporations that disclosed what they would owe if they repatriated their offshore profits said that they would pay a U.S. tax of 27 percent. That implies that more than three-quarters of the profits (27%/35%) have never been taxed by any government. See Citizens for Tax Justice, “Which Fortune 500 Companies Are Sheltering Income in Overseas Tax Havens,” Oct. 17, 2012. http://ctj.org/ctjreports/2012/10/which_fortune_500_companies_are_sheltering_income_in_overseas_tax_havens.php

1) Congress did nothing during the New Year and allowed the “fiscal cliff” to take effect.

2) Congress extended all tax cuts in effect in 2012 and delayed all tax increases that were scheduled to go into effect.

3) Congress enacted the American Taxpayer Relief Act, which extended most, but not all tax cuts. This is the law that was actually enacted.

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