Because of its unique complexity, there are really no fair analogies that describe the U.S. corporate tax mechanism. The wealthiest nation on the planet and the historic champion of capitalism and democracy has managed to produce a preposterously dense tax code that represents the bottom left-hand corner of a graph plotting its effectiveness.
With a top corporate tax rate of 35 percent, the U.S. taxes its companies more than any other developed economy. This, as the GOP highlighted during the last presidential election, amounts to a competitive handicap. With other nations taxing businesses more commonly at about 25 percent, foreign competitors retain more profit per dollar earned than companies based in the U.S.
In an ideal world, this tax rate would at least have the saving grace of pumping money through the government and ostensibly back into infrastructure and education — societal building blocks, that sort of thing. But the clumsy evolution of the global economy and the highly-competitive nature of the international markets foils this ideal-world scenario…
Instead, in order to maximize profits and total return to shareholders, corporations engage in international tax gamesmanship, ricocheting income from nation to nation. The name of the game is “avoid paying the U.S. corporate tax by all means possible” and accountants at Dow 30 companies are very good at their jobs.
The Washington Post recently took a crack at illuminating America’s crazy corporate tax system. The publication did an analysis of data from Capital IQ and public records — namely the current tax provisions reported by Dow 30 companies — and demonstrated that, by and large, U.S. multinational companies are paying less in taxes now than in the late 60s and 70s. The publication reports that the tax rate for 22 of the Dow 30 members has dropped more than 10 points between the oldest year for which data are available and the most-recent year.
There are a couple of details to hash out before continuing. Publicly-available tax provision data is not granular enough to audit effectively, according to the Washington Post. The taxes that a company reports “is essentially an accountant’s estimate rather than the exact amount paid to the Internal Revenue Service.” The Post’s analysis divided the tax figure by a company’s worldwide profits to get a sense for the relationship between a company’s taxes and its income.
There are also some changes in the business and tax environment that need to be considered. The top corporate tax rate was 48 percent in 1971, 13 points higher than it is now. This adds to the fact that more and more U.S. companies are simply doing more organic business overseas — at least 14 of the Dow 30 earned more money overseas last year than they did in the U.S.
But these factors alone don’t account for dramatic reduction in taxes that companies pay. A Congressional Research Service report showed that in 2008, U.S. multinationals reported 43 percent of their overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland. According to the same report, profits recorded in Bermuda rose from 260 percent of GDP in 1999 to more than 1,000 in 2008.
Using the Washington Post’s methodology, Pfizer’s (NYSE:PFE) share of income paid in taxes fell by 27.9 percentage points between 1969 and 2012. United Technologies’s (NYSE:UTX) fell by 41.5 points for the same period. However, not all companies enjoyed this reduced tax burden. Using the same methodology, American Express’s (NYSE:AXP) share of income paid in taxes increased by 9.2 percentage points between 1978 and 2012, while JPMorgan’s (NYSE:JPM) increased by 5.5 points between 1992 and 2012.