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U.S. CORPORATE 'EFFECTIVE' RATES

September 10, 2008

The Government Accountability Office has issued a report on the effective tax rates of large U.S. corporations. The report uses data from Schedule M-3, which came into use for 2004 tax returns of corporations with assets over $10 million. The report seems to finger offshore operations and transfer pricing as the main ways big corporations keep their U.S. taxes down.

From the report:

We estimate that the weighted average U.S. effective tax rate on the domestic income of large corporations with positive domestic income in 2004 was 25.2 percent. There was considerable variation in tax rates across corporate taxpayers, with about one-third of the taxpayers having effective rates of 10 percent or less and a quarter of the taxpayers having rates over 50 percent. U.S. tax credits had a relatively small effect on these effective rates.

The lucky 1/3 with 10% rates seem to be largely those with the ability to shift income to low-tax countries. But while some companies have low effective rates, many - one in four - just get clobbered by effective rates over 50%.

It's interesting that tax credits don't seem to play a big part in the effective rate of tax, contrary to assertions like this from members of the left side of the tax policy spectrum, like Linda Beale:

That's because the statutory rate of 35% is only on paper. Corporations engage in aggressive tax planning that cheats the system, and they take advantage of a bountiful number of lucrative loopholes built into the system under the four decades of Reagan-style corporate favoritism and deregulation, including items such as accelerated depreciation, various expensing provisions that let corporations deduct before they really have an economic cost, and the lucrative research & development credit that lowers taxes dollar-for-dollar for R&D expenditures that corporations have to do anyway (so they do not serve as an incentive to greater development) and that corporations have often already done prior to the enactment of the one-year "extensions" of the credit that have been taking place as transitions to no-credit for years.

The statory rate may be "on paper" for the lucky 1/3, but it's brutal for the unfortunate quarter, and real enough for those in-between.

What are the policy implications? Transfer pricing is certainly an issue, but it's unlikely that intercompany pricing can be policed effectively. Lower corporate rate would reduce the incentive to shift income, but even a 25% rate is a lot higher than the effective rates for our trading partners. An integrated tax system that would only impose a single level of tax on corporate income would be nice, but that seems like a pipe dream.

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