Corporate Tax Rate and Reality

Respectfully submitted by Lawrence Rafferty (rafflaw)-Guest Blogger

While we have discussed the fairness of the taxes paid and not paid by large corporations in the past, the alleged high corporate tax rate is once again in the news.  It seems that after contraception the Right’s most consistent accusation is that the corporate tax rate is way too high for corporations to compete in the world market. The facts seem to differ from those claims however.

“Corporations are lobbying for lower corporate rates and an exemption for profits they shift offshore. McIntyre, however, says “Our study provides proof that too many corporations are already being coddled by our tax system.” Findings in the report include:
 The average effective tax rate for all 280 companies in the study over the three year period was 18.5 percent; for the period 2009-2010 it was 17.3 percent, less than half the statutory rate of 35 percent.
 78 of the companies enjoyed at least one year in which their federal income tax was zero or less.
 30 companies enjoyed a negative income tax rate over the entire three year period on their combined pre-tax profits of $160 billion.
 Total tax subsidies given to all 280 profitable corporations amounted to $222.7 billion from 2008-2010.
 Wells Fargo tops the list of 280 U.S. corporations receiving the most in tax subsidies, getting nearly $18 billion in tax breaks from the U.S. treasury in the last three years.
 Pepco Holdings had the lowest effective tax rate of all the companies in the study, at negative 57.6 percent over the three year period.”  Citizens for Tax Justice 

If I understand those numbers correctly, large corporations are paying about half of the rate that they claim is too high.  Another example of how little these corporations are paying was recently discussed in a Crooks and Liars article on General Electric. “General Electric is a prime example of this trend. Despite being highly profitable and subject to a theoretical tax rate of 35 percent, GE paid only a 11.3 percent tax rate in 2011. And that number was the most they paid in more than a decade. In 2010, they actually paid no taxes and got a net tax benefit of $3 billion. For the 10 year period prior to that, their effective average tax rate was 2.3 percent.” Cooks and Liars

Recently, President Obama proposed a reduction in the corporate tax rate to 28 percent for many corporations while claiming to reduce or eliminate many tax loopholes. “President Obama will ask Congress to scrub the corporate tax code of dozens of loopholes and subsidies to reduce the top rate to 28 percent, down from 35 percent, while giving preferences to manufacturers that would set their maximum effective rate at 25 percent, a senior administration official said on Tuesday.  Mr. Obama also would establish a minimum tax on multinational corporations’ foreign earnings, the official said, to discourage “accounting games to shift profits abroad” or actual relocation of production overseas.”  New York Times

In light of the low actual rates paid already by these corporations, I don’t understand why the rate even needs to be reduced.  When General Electric pays an average of only 2.3% over ten years, what will they pay under Obama’s proposal?  I think the proposal to set a minimum tax is good in theory, but the devil is in the details.  I will believe it when I see it.

When politicians are screaming that corporations are people and should be allowed to deny their employees any insurance coverage for services that they have religious objections to, shouldn’t we make sure that they pay tax rates that Real people pay? How many workers were laid off or terminated while these profitable companies paid very little, if any, taxes?  What are your thoughts?
(Disclosure: The author owns a small amount of shares in General Electric stock.)


133 thoughts on “Corporate Tax Rate and Reality”

  1. Apple Announces Dividend, Share Buyback

    By Matthew Yglesias

    | Posted Monday, March 19, 2012, at 9:14 AM ET

    The Apple announcement turns out to be pretty straightforward—a modest dividend and a modest share repurchase program. From the press release:

    Subject to declaration by the Board of Directors, the Company plans to initiate a quarterly dividend of $2.65 per share sometime in the fourth quarter of its fiscal 2012, which begins on July 1, 2012.

    Additionally, the Company’s Board of Directors has authorized a $10 billion share repurchase program commencing in the Company’s fiscal 2013, which begins on September 30, 2012. The repurchase program is expected to be executed over three years, with the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.

    They note that this will lead to about $10 billion per year in dividend payouts which they say will be among the highest in the country. Apple’s aggregate cash balance should still grow under this program, but a lot of that cash will continue to be held abroad. Apple doesn’t want to “repatriate” those foreign profits because in order to do so they would have to pay corporate income tax on the money. Like a lot of firms, they’re hoping that Republicans will someday soon either enact a corporate income tax cut or a temporary “repatriation holiday” which will let them move it to the US cash free.

  2. Hehe. I should have addressed my last post to Mike. Not myself. Poor copy/paste.


    “Their greed was only matched by their willingness to do anything to make millions in profits.”

    Give me a break.

    “Greed” means you want more for yourself. Fine. If you obtain it legally, without force or privilege — say, by buying a business and making it more efficient, or shifting resources to where consumers prefer them — that is a good thing. “Creative destruction” makes America richer.”

    “The real evil bankers are the government cronies, like those at Fannie Mae and Freddie Mac. They took our money by force, our taxes, then paid themselves fat salaries and promised us that none of our money was at risk. And then they squandered more than $100 billion, betting that housing prices would always rise and few people would default.

    I resent them and their backers in government.”

    “But in a real free market — no government privileges or barriers to competition — capitalism is great. It’s the only system with a moral core because it’s based on freedom, not force.”

  4. Jack,

    I think we are talking past each other (and trying to say the same thing many times, I may have gotten sloppy). Let me try taking a step back. Corporations can ULTIMATELY only do one thing with profit, and that’s to distribute it to investors. You have Assets + Liabilities = Owners Equity. Within owners equity, the profit either remains in retained earnings or is distributed. Retained earnings can be used for reinvestment purposes, stock buyback, etc. In can also be used to build a cash reserve. But holding onto cash just for the sake of it is terrible business. Any board trying to do that will get the iron boot out the door. This is kind of what happened to Microsoft. For years they didn’t pay out dividends, but the investors finally started getting ill-tempered so management started paying (although the dividend is still small which is typical in tech). But whether the company reinvests, builds a cash reserve, etc., the whole purpose is to make more money for the investors.

    There’s one other side of this that you can’t forget. Even where a corporation holds onto money rather than distributing it for whatever reason, the company has more assets meaning it is more valuable. And what happens to companies that become more valuable? Stock prices go up, which lead to capital gains of investors. Now, how capital gains should be taxed is a completely different issue. Frankly, the tax policy needs to be revised with capital gains. But this all goes to shows that be it dividends or capital gains, the government can get 100% of their wanted taxes from investors by skipping corporations completely.

    Lastly, if a company is a cash cow that isn’t paying out, they’ll get raided by a private equity group, etc. If a massive amount of the assets aren’t being put to use, there will be a hostile takeover because the group knows it can make more money by managing the company than by allowing current management to continue. And of course, that leads to profits and capital gains, etc. which can be taxed. This is one of the good things of such funds – they scare inefficient managers.

    Swarthmore mom,

    The reason that article is rather ridiculous is because Romeny is the only GOP candidate for any sort of progressive tax. So why do rich people like it? What I think is more indicative is not wealth, but education. As John King noted, Santorum did well in areas of Ohio which are notorious for “troubled” education systems. [Frankly, I can’t believe he basically said that Santorum voters are dumb, but he did.] Smart people that actually understand the basic principles of management consulting actually see that his business acumen (which has netted him a ridiculous amount of money) grossly outshines anything any of the other candidates have to offer, including Obama. In a macro, global economy, we need to compete, and we need to win.

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