Recent News about Tax Giveaways for Corporations

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On Friday, May 4, the New York Times ran a letter from CTJ’s director, Robert McIntyre, responding to a recent Times article describing Apple’s tax dodging. McIntyre explains,

“In its latest annual report, Apple said that as of last September, it had a staggering $54 billion parked offshore (since grown, as the Times points out, to $74 billion).  Almost all of this huge hoard is accumulated in tax havens and has never been taxed by any government. More to the point, most of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore to avoid its United States tax responsibilities.

“There’s a simple way to curb this kind of corporate tax dodging, of which Apple is only one prominent example: repeal the tax rule that indefinitely exempts offshore profits from United States corporate income tax. If those profits were taxable (with a credit for any foreign taxes paid), then Apple alone would have paid an additional $17 billion in federal income taxes over the past decade. That would have tripled the federal income taxes that Apple actually paid.

“Congressional scorekeepers estimate that ending the offshore corporate tax exemption would increase overall federal revenues by about $600 billion over the next decade. That’s money that could be put to good use in these times of strained budgets.”

Postscript: In our major study of corporate tax rates last November (Corporate Taxpayers & Corporate Tax Dodgers), we reluctantly included figures on Apple that reported the company’s 2008-10 effective federal tax rate on its reported U.S. profits to be 31.3%. In our notes we pointed out, “For better or worse, we did, with grave reservations, include some potential “liar companies” that we highly suspect made a lot more in the U.S., and less overseas, than they reported to their shareholders (e.g., Apple . . . ). We urge our readers to treat these companies’ true “ef­fec­tive U.S. income tax rates” as possibly much lower than what we reluctantly report. We will be working more on this issue.”

Since then, we have spent quite a bit more time studying Apple’s annual reports. As our letter to the New York Times above notes, at the end of Apple’s 2011 fiscal year, it had accumulated $54 billion in cash offshore, almost all of it in tax havens, and almost all untaxed by any government. Since Apple’s profits stem mainly from its U.S.-created technology, most, if not all, of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore.

If we treat all of the untaxed portion of Apple’s offshore profits as really U.S. profits that were artificially shifted to offshore tax havens, then Apple’s U.S. tax rate is much lower than Apple reports. Under this approach, Apple’s 2008-10 effective federal tax rate comes to only 13.4%, and its effective federal tax rate over the last six years (2006-11) was only 12.1%. (Likewise, Apple’s revised effective state tax rate in 2008-10 was only 3.6%, instead of the 8.0% we reported in our state corporate tax study issued last December.)

This alternative calculation is not necessarily perfect, since some of the profits Apple booked in tax havens may have been shifted from foreign countries in which it actually does real business (such as countries in Europe). But even if only three-quarters of the untaxed tax-haven profits are really U.S. profits, then Apple’s actual 2006-11 federal tax rate is still only 14%, less than half of the 31% tax rate that Apple’s annual reports indicate.

A table showing the alternative calculations for Apple’s effective tax rate is at the bottom of this page.

Post-postscript: How do we know that Apple paid no tax to any government on almost all of its offshore cash hoard? Surprisingly, Apple actually tells us, although it takes a close reading of Apple’s annual reports and a knowledge of U.S. tax laws to understand.

The key is this: the U.S. indefinitely exempts U.S. companies from tax on the profits of their offshore subsidiaries. Only if a foreign subsidiary pays a dividend to its U.S. parent are those profits taxable. If the subsidiary has already paid income tax to foreign governments, the parent company gets a “foreign tax credit” against its U.S. tax for that foreign tax.

So here’s what Apple reveals in it annual reports: Apple says that if it told its foreign subsidiaries to pay Apple the whole $54 billion offshore amount as a dividend, then Apple would owe $17 billion in U.S. federal income taxes. That reflects a $19 billion tax at 35 percent, less a $2 billion foreign tax credit (the sum of all the foreign income taxes that Apple has ever paid). Which means, with a little more arithmetic, that about 90 percent of the $54 billion in accumulated offshore profits has never been taxed by any government.

Read the PDF of this Report. 

Last November, Citizens for Tax Justice and the Institute on Taxation and Economic Policy issued a major study of the federal income taxes paid, or not paid, by 280 big, profitable Fortune 500 corporations. That report found, among other things, that 30 of the companies paid no net federal income tax from 2008 through 2010. New information for 2011 shows that almost all these 30 companies have maintained their tax dodging ways.

In fact, all but four of the 30 companies remained in the no-federal-income-tax category over the 2008-11 period.

Over the four years:

  • 26 of the 30 companies continued to enjoy negative federal income tax rates. That means they still made more money after tax than before tax over the four years!

 

  • Of the remaining four companies, three paid fouryear effective tax rates of less than 4 percent (specifically, 0.2%, 2.0% and 3.8%). One company paid a 2008-11 tax rate of 10.9 percent.

 

  • In total, 2008-11 federal income taxes for the 30 companies remained negative, despite $205 billion in pretax U.S. profits. Overall, they enjoyed an average effective federal income tax rate of –3.1 percent over the four years.

“These big, profitable corporations are continuing to shift their tax burden onto average Americans,” said Citizens for Tax Justice director Bob McIntyre. “This isn’t fair to the rest of us, it makes no economic sense, and it’s part of the reason our government is running huge budget deficits.”

The Size of the Tax Subsidies:

Had these 30 companies paid the full 35 percent corporate tax rate over the 2008-11 period, they would have paid $78.3 billion more in federal income taxes. Or put another way, over the four years, the 30 companies received more than $78 billion in total tax subsidies. Wells Fargo alone garnered $21.6 billion in tax subsidies over the four years, followed by General Electric ($10.6 billion), Verizon ($7.7 billion), and Boeing ($6.0 billion).

Taxes in 2011:

In 2011 alone, 24 of the 30 companies paid effective tax rates of less than 4 percent, including 15 that paid zero or less in federal income taxes in that year. For all 30 companies, the average 2011 effective federal income tax rate was a paltry 7.1% — only a fifth of the statutory 35 percent federal corporate tax rate.

The Bottom Line:


The information on these 30 companies helps illustrate why overall federal corporate income tax collections are so low. The Treasury Department reports that corporate taxes fell to only 1.2 percent of our gross domestic product over the past three fiscal years. That’s lower than at any time since the 1940s except for one single year during President Reagan’s first term. By comparison, corporate taxes averaged almost 4 percent of our GDP during the 1960s.

“Getting rid of corporate tax subsidies that cause such widespread tax avoidance ought to be a key part of any deficit-reduction program,” said McIntyre. “As a bonus, revenue-raising corporate tax reform would make it much easier to fund the investments we need to improve education and repair our crumbling roads and bridges — things that would actually help businesses and our economy grow.”

Note: The 30 no-tax corporations over the 2008-10 period reported in CTJ’s November 2011 report included Computer Sciences, which had a negative 18.3% tax rate over the three years. Computer Sciences has an odd fiscal year, and will not file its financial statements until this summer. However, in entering 2011 data for Apache, we discovered that we had missed a well-hidden entry in Apache’s financial statements for excess stock option tax benefits. Including these tax benefits lowered Apache’s effective 2008-10 tax rate from +0.6% to –1.5%. As a result, we have included Apache in the 2008-10 notax list for this updated report.

For more charts and appendixes read the PDF here.

The U.S. Has a Low Corporate Tax

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The U.S. Has a Low Corporate Tax: Don’t Believe the Hype about Japan’s Corporate Tax Rate Reduction

America has one of the lowest corporate income taxes of any developed country, but you wouldn’t know it given the hysteria of corporate lobbying outfits like the Business Roundtable. They say that because Japan lowered its corporate tax rate by a few percentage points on April 1, the U.S. now has the most burdensome corporate tax in the world.

The problem with this argument is that large, profitable U.S. corporations only pay about half of the 35 percent corporate tax rate on average, and most U.S. multinational corporations actually pay higher taxes in other countries. So the large majority of Americans who tell pollsters that they want U.S. corporations to pay more in taxes are onto something.

Large Profitable Corporations Paying 18.5 Percent on Average, Some Pay Nothing

Citizens for Tax Justice recently examined 280 Fortune 500 companies that were profitable each year from 2008 through 2010, and found that their average effective U.S. tax rate was just 18.5 percent over that three-year period.[1]

In other words, their effective tax rate, which is simply the percentage of U.S. profits paid in federal corporate income taxes, is only about half the statutory federal corporate tax rate of 35 percent, thanks to the many tax loopholes these companies enjoy. 

Thirty of the corporations (including GE, Boeing, Wells Fargo and others) paid nothing in federal corporate income taxes over the 2008-2010 period.

You might think that these companies simply had some unusual circumstances during the years we examined, but we find similar tax dodging when we look at previous years and the new data for 2011.

For example, GE’s effective tax rate for the 2002-2011 period (the percentage of U.S. profits it paid in federal corporate income taxes over that decade) was just 2.3 percent.[2] Boeing’s effective federal tax rate over those ten years was negative 6.5 percent, (meaning the IRS is actually boosting Boeing’s profits rather than collecting a share of them).[3]

U.S. Multinational Corporations Pay Higher Taxes in Other Countries

Some corporations complain that their effective tax rates are higher than we have concluded, but they are talking about their worldwide tax rates, including the taxes paid to foreign governments on profits they generate in other countries.[4] Including the foreign taxes paid makes the effective tax rate appear higher in many cases because these companies actually are being taxed at higher effective rates in the other countries where they do business.

This is extremely telling, because the entire argument of the corporate lobbyists is that the U.S. corporate income tax is more burdensome than any other corporate tax in the world. Besides, if the problem that corporations are complaining about is actually the high taxes they pay to foreign governments, how could Congress possibly provide any remedy for that? Clearly, what corporations pay in U.S. taxes is what’s relevant to the corporate tax debate before Congress.

Of the 280 corporations CTJ examined, 134 had significant foreign profits, meaning at least 10 percent of their worldwide pre-tax profits were generated outside the U.S. We found that, for 87 of these companies (about two-thirds of the companies with significant foreign profits), the effective corporate tax rate paid on U.S. profits was lower than the effective corporate tax rate paid to foreign governments on foreign profits.[5]

Of course, there are some countries that have extremely low corporate tax rates (rates of zero percent or not much higher than zero). These countries are known as tax havens, and they typically are not places where much actual business is done. Think of places like the Cayman Islands or Bermuda.

U.S. corporations engage in various dodgy accounting gimmicks to make it appear that their U.S. profits are generated by their subsidiaries in these tax havens so that they won’t be taxed. (Often these subsidiary companies consist of nothing more than a post office box a few blocks from the beach.) Eliminating the loopholes that allow these dodgy accounting gimmicks should be one of the major goals of tax reform.

Majority of Americans Are Right: Congress Should Raise Revenue by Closing Corporate Loopholes

The U.S. corporate income tax certainly needs to be reformed, but not in the way that corporate lobbyists are calling for. Congress should eliminate corporate tax loopholes and use most of the revenue savings to fund public investments and address the budget deficit.[6]

Unfortunately, most proposals to close corporate tax loopholes (including President Obama’s) would give all the resulting revenue savings back to corporations in the form of new breaks.[7] President Obama proposes a “revenue-neutral” corporate tax reform which would close loopholes and reduce the corporate tax rate to 28 percent, while some Republicans have proposed to reduce the corporate tax rate to 25 percent (even if that reduces revenues).

Most Americans want corporations to pay more overall in taxes than they do today. From 2004 through 2009, the Gallup Poll asked survey respondents if corporations pay their “fair share” in taxes, or if they pay “to much,” “too little,” or they’re “unsure.” Each year, anywhere from 67 percent to 73 percent of respondents said corporations pay “too little.”

In October of last year, a CBS/New York Times survey asked, “In order to try to create jobs, do you think it is probably a good idea or a bad idea to lower taxes for large corporations?” and 67 percent responded that this was a “bad idea.”

It is unclear why lawmakers have ignored their constituents’ desire for a revenue-positive reform of the federal corporate income tax. One reason may be misunderstandings about who is ultimately affected by corporate income taxes. Several empirical studies have concluded that they are ultimately borne mostly by owners of corporate stocks and business assets, who are concentrated among the richest one percent of Americans.[8]

Corporate lobbyists have argued that American workers ultimately bear the cost of corporate income taxes, because the taxes cause companies to move operations out of the United States. Even if one is unconvinced by the empirical studies leading to the opposite conclusion, common sense would suggest that corporations would not be lobbying to have corporate income taxes reduced if they didn’t believe their shareholders were the people ultimately paying them.

Whatever the reason for lawmakers’ qualms about raising corporate tax revenue, the debate over the budget deficit will force lawmakers to make a choice: Should we cut spending on things like education, infrastructure, environmental protection, and Medicaid and Medicare while doing nothing to raise corporate tax revenue? What does more to help the economy, these public investments or reductions in the corporate taxes that are ultimately paid by stockholders? The answers to these questions are pretty obvious for most Americans.

 

 


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

[2] Citizens for Tax Justice, “General Electric’s Ten Year Tax Rate Only 2.3 Percent,” February 27, 2012. http://www.ctj.org/taxjusticedigest/archive/2012/02/press_release_general_electric.php 

[3] Citizens for Tax Justice, “Obama Promoting Tax Cuts at Boeing, a Company that Paid Nothing in Net Federal Taxes Over Past Decade,” February 16, 2012. http://www.ctj.org/pdf/boeing2012.pdf

[4] For example, GE has lately responded to news about its low U.S. effective tax rate by simply stating that its worldwide effective tax rate is 29 percent. See Citizens for Tax Justice, “GE Tries to Change the Subject,” February 29, 2012. http://www.ctj.org/pdf/gedistraction.pdf. Large oil companies also complain about their high tax rates but almost always cite their worldwide tax rate, not their U.S. tax rate. See Kim Dixon, “Analysis: Gas Price Spike Revives Fight Over Energy Taxes,” Reuters, March 26, 2012. http://www.reuters.com/article/2012/03/26/us-usa-tax-bigoil-idUSBRE82P0DX20120326

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

[6] A CTJ fact sheet explains why corporate tax reform should be revenue-positive. Citizens for Tax Justice, “Why Congress Can and Should Raise Revenue through Corporate Tax Reform,” November 3, 2011. http://ctj.org/pdf/corporatefactsheet.pdf. A longer CTJ report has more detail. Citizens for Tax Justice, “Revenue-Positive Reform of the Corporate Income Tax,” January 25, 2011, http://www.ctj.org/pdf/corporatetaxreform.pdf

[7] Citizens for Tax Justice, “President Obama’s ‘Framework’ for Corporate Tax Reform Would Not Raise Revenue, Leaves Key Questions Unanswered,” February 23, 2012. http://ctj.org/ctjreports/2012/02/president_obamas_framework_for_corporate_tax_reform_would_not_raise_revenue_leaves_key_questions_una.php

[8] Jennifer C. Gravelle, “Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis,” Congressional Budget Office, May 2010, http://www.cbo.gov/ftpdocs/115xx/doc11519/05-2010-Working_Paper-Corp_Tax_Incidence-Review_of_Gen_Eq_Estimates.pdf; Gravelle, Jane G. and Kent A. Smetters. 2006. “Does the Open Economy Assumption Really Mean That Labor Bears the Burden of a Capital Income Tax.” Advances in Economic Analysis & Policy vol. 6:1.

This presentation was given to participants of the Ecumenical Advocacy Days, an event that brings the perspectives of faith-based organizations to Capitol Hill. The presentation explains federal tax issues that are being debated today.

Read the presentation.

Recent polls show a large majority of Americans, including small business owners, are convinced that profitable corporations are not paying enough in taxes. Citizens for Tax Justice and U.S. PIRG’s Loopholes for Sale pursues the intersection of corporate campaign contributions to members of Congress and the absence of Congressional action to close corporate tax loopholes and raise additional revenue from corporate taxes.

The report includes the following findings:

  • 280 profitable Fortune 500 companies collectively received $223 billion in tax breaks between 2008 and 2010 while contributing $216 million to Congressional candidates over the last four election cycles.

  • The thirty most aggressive tax dodging corporations—dubbed the “Dirty Thirty”— collectively paid a negative tax rate between 2008 and 2010 while spending $41 million on Congressional campaign contributions.

  • Of the 534 current members of Congress, 524(98 percent) have taken a campaign contribution from one or more of these thirty corporations since the 2006 election cycle.


Full Report Here

Read Our Press Release With Key Findings

Check Out the Special Report Landing Page


Policy Options to Raise Revenue

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This report describes eleven options for Congress to raise revenue by reforming our tax system, including taxing capital gains the same as other income, ending corporations' ability to "defer" paying taxes on offshore profits, enacting the "Buffett Rule," ending tax subsidies for oil and gas companies, and several other sensible reforms.

Read the report.


GE Tries to Change the Subject

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In response to CTJ's recent finding that GE had an effective federal corporate income tax rate of two percent over ten years, GE’s press office issued a short statement designed to divert attention from its tax-avoiding ways. GE has nothing to say to contradict the figures we cite from its own annual reports.

Read the report.

Read the PDF of this report.

The Obama administration has proposed a “framework” for corporate tax reform. Unfortunately, it is designed to be “revenue-neutral,” meaning it would not raise needed revenue to fund public investments, protect important programs such as Social Security and Medicare, or address the budget deficit.

The President’s framework calls on Congress to enact reforms that would, by themselves, raise a little over a trillion dollars over a decade. But all of that revenue would be given back to corporations in the form of new tax cuts.

The President’s plan also fails to answer key questions. First, exactly which tax loopholes would be closed to offset the costs of the proposed new tax cuts and to prevent the corporate tax overhaul from becoming revenue-negative? Second, is the President really proposing to lower taxes for domestic manufacturers like Boeing that have already been allowed to avoid corporate taxes for years? Third, how does the President’s plan for addressing offshore corporate tax avoidance differ from Congressional Republicans’ plan to impose a tiny “minimum tax” on offshore profits after exempting them from the rest of the corporate tax?

Framework Does Not Attempt to Raise Needed Revenue

“The President’s Framework for Business Tax Reform” released by the Treasury Department on February 22 would not attempt to raise additional revenue from corporations to finance public investments or deficit reduction.

The framework would close corporate tax loopholes, but would use the revenue saved to pay for new tax breaks for corporations, including a reduction in the statutory corporate income tax rate from 35 percent to 28 percent. The net result, according to the President, would be no net increase or decrease in corporate tax revenue.

A “revenue-neutral” corporate tax reform should not be enacted.[1] The first goal of corporate tax reform should be to increase the overall amount of tax revenue collected from U.S. corporations, which today pay very low effective tax rates.[2] (Effective tax rates are the percentage of profits that corporations actually pay in corporate income taxes.)

CTJ recently studied most of the Fortune 500 companies that have been profitable in each of the last three years and found that their average effective tax rate during that period was just 18.5 percent.[3] Thirty of the corporations had net negative tax rates (meaning they received money from the Treasury) over the three-year period.

Corporations claim that they are overly burdened by the U.S. corporate income tax, which has a statutory rate of 35 percent. But CTJ’s data demonstrate that most profitable corporations have effective tax rates that are far lower because of the tax loopholes they enjoy.

Which Tax Loopholes Would Be Closed?

The President’s framework is very short on details about which corporate loopholes he wants to close to offset the costs of the tax breaks it includes. In other words, it’s not even clear how a corporate tax reform based on the President’s framework would avoid becoming revenue-negative.

The President has proposed to reduce the statutory corporate tax rate from 35 percent to 28 percent, make certain temporary tax breaks, including the research and experimentation credit, permanent, and add some new business tax breaks.  In total, these tax cuts would cost us about $1.2 trillion over the next 10 years.[4]

Only about a fourth of the revenue-raising provisions needed to offset this cost have been specified by the administration. This $0.3 trillion in tax increases on corporations and other businesses has been proposed in detail as part of President Obama’s most recent budget proposal, which was released about a week earlier. [5] (Most of these tax increases are also described as examples of revenue-raisers in the framework.)

These revenue-raising provisions generally are good policy. For example, the framework and the budget plan would eliminate the “last in, first out (LIFO)” method of manipulating inventory accounting, the many tax subsidies for oil and gas companies, the provisions that allow insurance to be used as a tax shelter, and the “carried interest” loophole that allows wealthy fund managers to pretend they have low-tax capital gains income.

The framework and the budget plan also include some limited proposals to reduce abuses of the rule allowing U.S. corporations to “defer” U.S. corporate taxes on their offshore profits. For example, they would limit deferral of taxes on profits from “intangible” assets in tax havens where no real business is being conducted. They would also end the corporate practice of taking deductions right away against U.S. taxes for expenses related to offshore profits even as they defer U.S. taxes on those profits.

The framework only gives vague suggestions about where the other three-fourths of revenue offsets would come from. The framework hints at other ways in which Congress might find the other $0.9 trillion of revenue needed to offset the tax cuts it proposes. The possibilities include “addressing depreciation schedules” without explaining how, “reducing the bias toward debt financing” without specifying how much, and “establishing greater parity between large corporations and non-corporate counterparts.”

Each of these could be good ideas — if only the administration would lead with strong, detailed proposals. For example, “addressing depreciation schedules” could be a major improvement. Depreciation is basically the deduction a business takes against its taxable income for purchases of buildings or equipment, and since these things do not immediately lose their value (the way inventory might) the deductions are taken over a period of years. If the rules required “economic depreciation,” then companies would take these deductions as the equipment or buildings actually wear out, but in most cases the current rules allow them “accelerated depreciation” which allows them to take these deductions over a much shorter period of time. This provides a huge benefit to businesses that can even wipe out their profits for tax purposes. 

The framework explains that “accelerated depreciation may be a less effective way to increase investment and job creation than reinvesting the savings from moving towards economic depreciation into reducing tax rates.” This is rather surprising coming from an administration that has proposed and enacted its share of depreciation breaks, including allowing companies to “expense” or deduct 100 percent of their investments in a single year.

To take another example, “establishing greater parity between large corporations and their large non-corporate counterparts” could greatly improve and simplify our tax system. This basically refers to the need to address businesses that are large companies but are not organized as the type of corporations that pay the corporate income tax. These businesses are often called “pass-through” entities because the profits pass through to the individual owners and are therefore subject to the personal income tax but not the corporate income tax.

The framework refers to options put forth previously by President George W. Bush’s Advisory Panel on Tax Reform and President Obama’s Economic Recovery Advisory Board. The options explored by the latter include some that are very straightforward but rather limited in scope (like treating any publicly traded company as a corporation that is subject to the corporate income tax) while others would be more far-reaching and more complex.

Determining which businesses must pay the corporate income tax will be important because many pass-through entities are very large companies — like Bechtel, the Tribune Company, many of the top lobbying firms, law firms and hedge funds. It’s difficult to believe that members of Congress will take on these behemoths without more explicit direction from the administration.

Is the President Really Proposing New Breaks for Manufacturers Who Already Avoid Taxes?

The President argues that companies that create jobs in the U.S. deserve tax breaks. However, his decision last week to hold up the aerospace and defense corporation Boeing as a company deserving lower taxes — despite its years and years of completely avoiding corporate taxes — raises more questions than it answers.

Last week, President Obama told a crowd at a Boeing plant in Washington State that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.”

Over the past ten years, Boeing has paid nothing in net federal income taxes, despite $32 billion in pretax U.S. profits. On the contrary, Boeing has actually reported more than $2 billion in negative total federal taxes over that period. Only twice in the last 10 years has Boeing reported a positive federal income tax liability. In each of the other eight years, including the last four, Boeing’s federal income taxes were negative.[6]

The President’s framework would reduce the nominal corporate tax rate for profits from domestic manufacturing to 25 percent.

This would be accomplished by changing the existing tax deduction for domestic manufacturing. The existing deduction allows companies to reduce their income for tax purposes by 9 percent of any income that comes from manufacturing in the U.S. With the current statutory corporate tax rate of 35 percent, this break reduces the effective corporate tax rate for profits from domestic manufacturing to 31.5 percent (at most).

Currently, only about two-thirds of the existing deduction for domestic manufacturing goes towards companies that the IRS characterizes as “manufacturing” companies. The other third goes towards information technology, mining, construction, utilities and many other types of companies.[7] (The 2004 law creating the deduction defined “manufacturing” quite loosely.) Apparently, this is what would change under the framework’s proposal to “focus the deduction more on manufacturing activity.”

The framework would “expand the deduction to 10.7 percent” for those companies that would still be allowed to receive it. This would lower the effective corporate tax rate for profits from domestic manufacturing from 28 percent (the statutory corporate tax rate under the framework) to 25 percent (at most). The deduction would be even more generous for “advanced manufacturing.”

Obviously, companies like Boeing, General Electric and Honeywell that have negative tax rates on their U.S. corporate profits do not need more breaks to encourage them to base their operations domestically rather than abroad.

In fact, CTJ’s recent study of Fortune 500 corporations found that about two-thirds of the corporations with significant offshore profits actually paid lower taxes on their U.S. profits than they paid to foreign governments on their foreign profits.[8] These companies already enjoy loopholes that enable them to pay lower taxes in the U.S. than they pay abroad. For these companies, taxes are apparently not the reason why they choose to conduct some of their business offshore.

Of course, there is a serious problem with some countries that have no corporate income tax at all, or an extremely low corporate income tax. These countries are offshore tax havens like the Cayman Islands or Bermuda. There is no way the U.S. can “compete” with these countries by lowering its tax rate. How the framework deals with this problem is the next question to be addressed.

How Would the International Tax Rules Differ from those Proposed by Congressional Republicans?

The administration will have to take a much firmer stance on how Congress should reform the international corporate tax rules that currently facilitate corporations shifting jobs and profits offshore. The administration must firmly oppose any move to a “territorial” tax system, which essentially would exempt U.S. corporations’ offshore profits from U.S. taxes.

The President’s framework does reject a “pure territorial system,” but since no country in the world has a truly “pure territorial system,” this does not offer much guidance.

A territorial system would increase the existing incentives for U.S. corporations to move their operations offshore or use accounting gimmicks to make their U.S. profits appear to be “foreign” profits generated in offshore tax havens.[9]

The “minimum tax” on offshore profits proposed as part of the framework may not remedy this problem at all, especially given that the administration has not even specified a rate for a minimum tax.

Indeed, the President’s framework might even be compatible with the corporate tax overhaul proposed by Dave Camp, the Republican chairman of the House Ways and Means Committee. Camp has put forward broad outlines of a plan that would enact a territorial tax system but would effectively impose a tiny 1.25 percent tax on offshore profits of U.S. corporations. Hopefully, this is not the minimum tax the administration has in mind.

Of course, the President may be contemplating a much higher “minimum” tax rate on offshore profits. This could reduce or even eliminate the incentives for corporations to shift jobs and profits offshore. But at this point, we just don’t know.

 


 

Appendix: Why Did Some News Reports Say the President’s Corporate Tax Framework Would Raise Revenue?

Some media outlets have reported that the President’s corporate tax reform “framework” would raise $250 billion over a decade. This is incorrect. The administration asserts that the combination of closing corporate tax loopholes and reducing the corporate tax rate will yield $250 billion over a decade — but then proposes to use all of this $250 billion to pay for additional tax breaks that mostly go to businesses. These tax breaks are called the “tax extenders” by Congressional insiders and lobbyists because they are temporary tax breaks that Congress extends every couple of years after they have expired. Making these breaks a permanent part of the tax code, as the administration proposes, does nothing to make our corporate income tax simpler, more efficient, or more adequate to meet our pressing budget needs.*

The confusion arises from the administration’s argument (made explicit on page 18 of the “framework”) that making these tax breaks permanent and offsetting the costs by closing corporate tax loopholes is fiscally responsible compared to Congress’s current practice of periodically extending these tax breaks without offsetting their costs at all. This sets the bar for fiscal responsibility absurdly low. Using revenue savings from corporate tax reform to finance unnecessary tax breaks for corporations and other businesses does not improve our nation’s fiscal health.

* The largest of the “tax extenders” is the research credit, a tax break that is supposed to, but has not been proven to, encourage research. See Martin A. Sullivan, “Time to Scrap the Research Credit,” Tax Notes, February 22, 2010.

 


[1] Last year, 250 organizations, including organizations from every state in the U.S., joined Citizens for Tax Justice in urging Congress to enact a corporate tax reform that raises revenue. Letter to Congress, May 18, 2011, http://www.ctj.org/pdf/corptaxletter.pdf These organizations believe that it’s outrageous that Congress is debating cuts in public services like Medicare and Medicaid, allegedly to address a budget crisis, and yet no attempt will be made to raise more revenue from profitable corporations.

[2] A CTJ fact sheet explains why corporate tax reform should be revenue-positive. Citizens for Tax Justice, “Why Congress Can and Should Raise Revenue through Corporate Tax Reform,” November 3, 2011. http://ctj.org/pdf/corporatefactsheet.pdf

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

[4] The largest portion of this cost would come from reducing the corporate tax rate. The Congressional Budget Office estimates that the corporate income tax will collect $4.36 trillion over the next decade. See Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2012 to 2022,” January 31, 2012. http://www.cbo.gov/doc.cfm?index=12699 Reducing the corporate income tax rate from 35 percent to 28 percent would reduce corporate tax revenue by $872 billion. (35-28)/35*4,360 = 872.

[5] President Obama’s most recent budget plan would raise $350 billion over a decade through business tax reforms. See Citizens for Tax Justice, “President Obama’s 2013 Budget Plan Reduces Revenue by Trillions, Makes Permanent 78 Percent of Bush Tax Cuts,” February 14, 2012, page 4. http://www.ctj.org/pdf/obamabudgetfy2013.pdf If the corporate income tax rate is just 28 percent (as proposed under the President’s framework), these reforms will raise less revenue than they would under the current rate of 35 percent. Under a 28 percent rate, they would raise $280 billion over a decade, roughly 0.3 trillion dollars over a decade. 28/35*350 =280.

[6] Citizens for Tax Justice, “Obama Promoting Tax Cuts at Boeing, a Company that Paid Nothing in Net Federal Taxes Over Past Decade,” February 17, 2012. http://www.ctj.org/pdf/boeing2012.pdf

[7] Nicholas Johnson and Ashali Singham, “States Can Opt Out of the Costly and Ineffective ‘Domestic Production Deduction’ Corporate Tax Break,” January 14, 2010, page 4. http://www.cbpp.org/files/7-29-08sfp.pdf

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

[9] A CTJ fact sheet explains why Congress should reject any proposal to exempt offshore corporate profits from U.S. taxes. 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

On February 17, the President plans to visit a Boeing plant in Washington state to tout his proposed new tax breaks for American manufacturers. This is an odd setting to discuss new tax cuts, because over the past 10 years (2002-11), Boeing has paid nothing in net federal income taxes, despite $32 billion in pretax U.S. profits.

Read the fact sheet.

Photo of Boeing Plant via Jeff McNiell Creative Commons Attribution License 2.0

Read the PDF of this report.

Facebook announced this month that it plans to give its co-founder and controlling stockholder, Mark Zuckerberg, a $2.8 billion cash windfall. Amazingly, Zuckerberg’s bonanza will cost Facebook absolutely nothing. Well, actually, a lot less than nothing, since it will help save Facebook, Inc. a staggering $3 billion in federal and state corporate income taxes.

      These tax breaks are expected not only to wipe out all of Facebook’s federal and state income taxes for 2012, but also to generate a $0.5 billion tax refund of taxes the company paid in the past.

      According to Facebook’s SEC filing (in connection with its upcoming initial public stock offering), the company has issued options to favored employees which will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million of these shares (worth $4.8 billion) are owned by Zuckerberg. The company indicates that it expects all of the 187 million vested options to be exercised in 2012.

      Under current tax law, exercise of all of the options will generate $7.5 billion in tax deductions for Facebook, which will produce $3 billion in federal and state tax reductions for the company. According to Facebook:

“we estimate that this . . . option exercise activity would generate a corporate income tax deduction [that] exceeds our other U.S. taxable income [and] will result in a net operating loss (NOL) that can be carried back to the preceding two years to offset our taxable income for U.S. federal income tax purposes, as well as in some states, which would allow us to receive a refund of some of the corporate income taxes we paid in those years. Based on the assumptions above, we anticipate that this refund could be up to $500 million.”

As for the future, Facebook adds:

“Any portion of the NOL remaining after this carryback would be carried forward to offset our other U.S. taxable income generated in future years, which taxable income will also be reduced by deductions generated from new stock award settlement and stock option exercise activity occurring in those future years.”

      Senator Carl Levin, who has proposed to limit the stock option tax loophole, told the New York Times, “Facebook may not pay any corporate income taxes on its profits for a generation. When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden. It isn’t right, and we can’t afford it.”

      Whatever one may think about the propriety of Zuckerberg’s huge personal gain, at least he will have to pay federal and state income taxes (at ordinary tax rates) when he exercises his $4.8 billion worth of stock options. Certainly, we need not pity him for his big tax bill, since even after paying his taxes, he’ll still end up with $2.8 billion.

      But the $3 billion in accompanying tax breaks that will go to Facebook, Inc. are another story. As Senator Levin points out, those corporate tax breaks are unjustified.

      A little history is helpful here. Prior to 2006, the rules governing how corporations treated stock options for shareholder-reporting purposes were in complete conflict with how stock options were treated for corporate tax purposes. The Financial Accounting Standards Board (FASB) thought that options should not reduce corporate profits reported to shareholders, while IRS allowed companies to deduct the full value of exercised options. Since corporations are eager to report as high as possible “book” profits to their shareholders and as low as possible taxable profits to the IRS, this was the ideal world from the point of view of corporations.

      It seemed obvious to logical observers that one of these approaches had to be wrong. Yet each agency had an argument for its position, because each addressed the issue from a very different perspective:

      a. FASB’s pre-2006 rule that stock options are not a real cost to corporations reflected first, the fact that the options have zero cash cost to the companies, and second that options neither decreases a company’s assets nor increased its liabilities. All in all, a seemingly airtight case.

      b. In contrast, the IRS concluded (and continues to conclude) that because exercised options are treated as taxable wages to employees, “symmetry” requires that they be treated as tax-deductible wages for employers.

      In CTJ’s view, FASB’s pre-2006 position (no book expense) was right,[1] and the IRS’s position (employer tax deduction) is wrong.

      While the IRS is wrong about stock options, its “symmetry” argument was not pulled out of the air. The tax code often does try to match income received by workers with a corresponding deduction for employers. But that’s not always the correct answer (or what the tax code specifies).

      For example, if an airline allows its workers to fly free or at a discounted price on flights that aren’t full (for vacations, etc.), then the workers ought to be taxed on that fringe benefit, even though the airline incurs no measurable cost in providing it. But no one has ever suggested that airlines should get a tax deduction (beyond actual cost) for letting their employees fly for free or at a discounted price.

      In the case of stock options, there is a clear economic benefit to the employees (if the stock goes up in value), but a zero cost to the the employer. So it’s more reasonable to conclude that while employees should be taxed on stock option benefits (“all income from whatever source derived” as the tax code states), employers should only be able to deduct their cost of providing those benefits, which is zero.

      A final argument, made by some economists, is that a corporate write-off for stock options (book and tax) is appropriate because of the theoretical cost to a company’s shareholders when new stock is issued at a discounted price to employees. For example, suppose a company has 100 shares of stock outstanding, worth $10 a share. If the company gives its CEO 100 shares of newly issued stock for free, then the value of the other 100 shares ought to fall to only $5 a share.

      But in real life, this potential “dilution” effect on stock prices to shareholders is typically quite minor. In the case of stock options, any dilution “cost” is even smaller, if not nonexistent, since the “cost” occurs only when the price of the stock has gone up!

      Most important, just because a company does something that has a cost to its shareholders does not mean that it should or does generate either a book expense or a tax deduction for the company. For example, suppose a company’s stock is selling at $10 a share. The company, in need of more cash, issues a large block of new stock at $9 a share to attract a prominent new investor (say Warren Buffett). The pre-existing shareholders are theoretically hurt by this discount, but it doesn’t generate a book cost to the company or a tax deduction

      The bottom line is that there’s something obviously wrong with a tax loophole that lets highly profitable companies make more money after tax than before tax. What’s about to happen at Facebook offers a perfect illustration of why non-cash “expenses” for stock options should not be tax deductible — or book deductible either.

Photo of Facebook Logo via Dull Hunk and photo Mark Zuckerberg via KK+ Creative Commons Attribution License 2.0


[1]Unfortunately, in 2006, FASB responded to political pressure and muddied its previously-correct  position. Starting it 2006, FASB required companies to book an expense in calculating profits reported to shareholders for the estimated future value of stock options to their recipients. This new book write-off is calculated when the options are issued, well before the true value at exercise can possibly be known. Not surprisingly (since corporations want to report high profits to their shareholders), these book write-off estimates are always wrong, and are generally much lower than the tax-deductible amount.

        This new financial treatment of options is widely derided by stock analysts. Indeed, companies for which options are significant go to great pains to encourage investors and analysts to ignore these non-cash “expenses” in evaluating the companies’ earnings — often offering an alternative earnings report that ignores them.

CTJ Reports



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