The Myth of High Corporate Taxes

The Myth of High Corporate Taxes March 1, 2012

As President Obama proposes to lower corporate taxes while closing many of the accounting gimmicks used to avoid them currently — a plan doomed to fail in Congress — Citizens for Tax Justice reports that General Electric, one of the most richest companies in the country, had an effective tax rate of less than 3% for the past decade.

General Electric’s (GE) annual SEC 10-K filing for 2011 (filed February 24, 2012) reveals that the company paid at most 2.3 percent of its $81.2 billion in U.S. pretax profits in federal income taxes over the last 10 years.

Following revelations in March 2011 that GE paid no federal income taxes in 2010 and in fact enjoyed $3 billion in net tax benefits, GE told AFP (3/29/2011), “GE did not pay US federal taxes last year because we did not owe any.” But don’t worry, GE told Dow Jones Newswires (3/28/2011), “our 2011 tax rate is slated to return to more normal levels with GE Capital’s recovery.”

As it turns out, however, in 2011 GE’s effective federal income tax rate was only 11.3 percent, less than a third the official 35 percent corporate tax rate…

GE is one of 280 profitable Fortune 500 companies profiled in “Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010.” The report shows GE is one of 30 major U.S. corporations that paid zero – or less – in federal income taxes in the last three years.

We hear conservatives claim constantly that American corporate taxes are higher than the rest of the world, but that is only if you look at marginal rates, which are irrelevant. The only thing that matters is the effective rate, the actual taxes they pay. In reality, the United States has the second lowest real corporate tax rate of all the OECD countries, and the third lowest total corporate tax revenue as a percentage of GDP.

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  • busterggi

    Now Ed, you know that people pay taxes, not corporations.

    Its not as if corporations were people.

  • gesres

    My understanding is that it depends on the industry. Retailers, for instance, tend to pay in the 35% range.

  • Yoritomo

    I think you misrepresent the numbers: It’s the second lowest corporate income tax revenue as a percentage of GDP, and the third lowest total tax revenue (including private income tax, VAT and whatever else is taxed) as percentage of GDP. I can’t find anything on the real corporate tax rate.

    Of course your point is still valid.

  • Michael Heath

    Has anyone seen any articles which calculates whether the President’s tax reform proposal of corporations nets out to an effective increase or decrease in corporate taxe rates along with tax revenue from corporations?

    We should never ignore the fact an effective tax rate change may impact GDP, for better or worse. So it’s imperative to understand how changes impact effective rates and tax revenue – the latter of which is also a function of GDP which can be impacted by tax scheme changes.

    In a world where Americans pretty much object to VATS and federal consumption taxes, the next best option to me seems to be to:

    1) Cut the overall effective business tax rate (not just corporate taxes)

    2) Smarter application of subsidies, end coal subsidies, increase green tech subsidies; along with increased tax revenues which greatly reduce negative external costs – such as using coal to generate electricity.

    3) Increase taxes on top earners

    4) Dividend taxe rates which match marginal income tax rates.

    5) Eradicate income falsely though currently legally posing as capital gains.

    6) Significantly cut the capital gains tax rate.

    6) Sufficiently high effective rates on top earners (individuals) to not only eradicate the deficit, but allow smart federal investments which growth federal revenues by growing GDP. This would suppress the need to demand ever-higher marginal rates. This increased spending would focus on initiatives like energy and information infrastructure rather than spending money on wars in places like Iraq, significant cuts in Defense spending, and higher rates on top earners to fund Social Security and Medicare.

  • unbound

    Michael Heath – You’ve listed an interesting hodge-podge of recommendations. Unfortunately, 3 and 6 (first one) actually conflict in many cases. Point by point:

    1 – For what reason? It will not increase hiring of individuals / increase individual salaries to improve the economy or improve what the corporations are willing to spend. It only results in more money to the already wealthy.

    2 – I agree 100%. If solar had the subsidies that gas, coal and oil enjoy, solar would already be cheaper.

    3 – Agreed.

    4 – Agreed.

    5 – I don’t follow what this is.

    6 (1) – For what reason? Long-term capital gains are already set to 15% (hence why Mitt Romney’s tax rate is pretty close to this). Same general issue as 1 above…it doesn’t accomplish anything towards the general economy; it only benefits the already wealthy.

    6 (2) – Sounds rather complex and would likely end up with a ton of loopholes for the wealthy to slip through.

  • Chevron: $0 in taxes

    Boeing: $0 in taxes

    Apple offshored most of its revenue to Ireland and managed to pay something around 4-5% iPods, apparently, are an Irish product. Did you know that? That’s why it says “designed by apple in California” on them.

    GE is not the worst offender by a long shot.

    Obama’s playing the “lie about taxes” game because the other guys are also engaging in unrestrained lying. I suppose the idea is that we’ll appreciate him for being a little closer to the truth? I don’t.

  • My understanding is that it depends on the industry. Retailers, for instance, tend to pay in the 35% range.

    Because they can pass that on to their customers.

  • I know you guys don’t care about my love-life, but I have repeatedly asked Exxon-Mobil for its hand in marriage. So far, I haven’t even gotten the courtesy of a reply. But my ardour remains firey and I’ll persist! (Nay sayers need not comment that I am only interested in the dowry, that’s a churlish suggestion!)

  • flex

    A couple of articles about Obama’s proposal:

    http://jaredbernsteinblog.com/corporate-tax-reform-be-careful-what-you-wish-for/

    http://www.washingtonpost.com/business/economy/obama-to-propose-lowering-corporate-tax-rate-to-28-percent/2012/02/22/gIQA1sjdSR_story.html

    Not that anyone believes that the proposal will be seriously considered by congress. After all, while it lowers the tax rate it closes a lot of loopholes and establishes a minimum tax on foreign earnings. The best estimate is that closing the loopholes would raise more taxes than are lost in lowering the rate. The scare-mongers are already claiming that adding a minimum tax on foreign earnings will drive companies to re-locate overseas.

  • Tualha

    “most richest”? :p

  • Tualha

    You don’t want to marry Exxon-Mobil, it’s always spilling things all over the place and making a mess. Everyone from that family does, really.

  • dogmeat

    Because they can pass that on to their customers.

    Actually Marcus, it’s quite difficult for any business to pass all of their taxes on to their customers. All it takes is for one business to not do so, and customers will flock to that store. The normal equilibrium that is established is roughly a 50/50 split between business and consumer.

    One big reason many manufacturing companies pay lower taxes is related to subsidies in their industries. For example GE both suffered market losses in earlier years that they were able to spread over multiple years *and* produced alternative energy platforms for which there were government subsidies that GE was able to use to reduce their taxes for the given year.

    We have to be careful to distinguish between undesirable and desirable reductions in corporate taxes. For example I would argue that the oil and coal industry subsidies should be transferred to alternative energy platforms to aid in the development and improvement of those systems. I don’t foresee it happening until a disturbingly frosty day in July, at best.

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