Last week the Government Accountability Office (GAO) released a study examining the amount of tax that large U.S. corporations paid. The news “reporting” was spin at its worst. The New York Times stated, “The biggest, most profitable American companies paid only a fraction of the taxes they would owe under the official corporate rate, according to a [GAO] study. ... Using allowed deductions and legal loopholes, large corporations enjoyed a 12.6 percent tax rate, far below the 35 percent tax that is the statutory rate imposed by the federal government on corporate profits.”
With no analysis politicians jumped on board. Senator Bernie Sanders of Vermont said in part, “…this report clearly shows that many multi-national corporations are currently paying very little in taxes.” Senator Carl Levin of Michigan claimed that “…some U.S. corporations use unjustifiable loopholes and offshore gimmicks to avoid paying Uncle Sam.” These statements were made as a way to argue against rationalizing corporate marginal taxes, to bring them in line with global competitors, all of which have lower marginal tax rates.
The lack of context, analysis and of complete reporting is jaw dropping. Immediately, the Tax Foundation found methodology problems as detailed here.
Additionally, the New York Times should have made clear the difference between marginal rates and effective rates. Of course the effective rate is not equal to the marginal rate and never will be—that is just simple math. For more on the difference between marginal and effective rates read here.
The U.S. undisputedly has the highest marginal taxes in the world. That means that if a company is looking to legitimately reduce its tax burden—that is, save money that otherwise comes right off the bottom line—it could do better locating anywhere in the world but the U.S.
But this study looked at effective taxes, that is, the actual amount of taxes paid. The study, and the comments, fixated on the effective rate of 12.6 percent to make an argument about marginal rates, but they could not even report the effective rate correctly, leaving out many taxes that corporations must pay. When foreign, state and local corporate income taxes are included, the effective rate increased by more than a third, to 16.9 percent.
Politicians have created the labyrinth of rules, exceptions, exclusions and credits we call the U.S. tax code, and yet whine when companies follow their rules. If they spent as much time studying and understanding the tax code and demonstrating that they can accurately present the facts, then we might have a chance to accomplish reform.
July 10, 2013