U.S. Corporations Paying Fraction of Statutory Income Tax Rate

Thirty large and profitable U.S. corporations paid no income taxes in 2008 through 2010. Furthermore, many Fortune 500 companies paid a fraction of the statutory U.S. corporate income tax rate during that time.

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According to a study of 280 U.S. corporations, all of which are Fortune 500 companies, the average tax rate for some of the nation’s strongest businesses was just 18.5%, almost half of the statutory U.S. corporate income tax rate of 35%. Pepco Holdings (NYSE:POM), a Washington, D.C.-area power company, had the lowest effective tax rate, at negative 57.6%.

Citizens for Tax Justice and the Institute on Taxation and Economy Policy put together the data. Their report identified General Electric (NYSE:GE), Paccar Inc. (NASDAQ:PCAR), PG&E Corp. (NYSE:PCG), Computer Sciences Corp. (NYSE:CSC), and NiSource Inc. (NYSE:NI) as being among the thirty companies paying no taxes during the three-year period, during which all of the 280 corporations studied by the two think tanks were profitable.

Despite the seeming inconsistency, the report acknowledged that corporations can rightly say that the loopholes that collectively saved them billions of dollars were perfectly legal. “But that does not mean that low-tax corporations bear no responsibility…The laws were not enacted in a vacuum; they were adopted in response to relentless corporate lobbying, threats and campaign support,” the report said.

But corporations are still pressing Capitol Hill for more tax breaks, including a tax holiday allowing them to repatriate overseas profits at a reduced tax rate. Meanwhile, the congressional “super committee” tasked with finding at least $1.2 trillion in additional budget savings by the day before Thanksgiving is so far deadlocked, with Republicans refusing tax hikes and Democrats defending social programs.

Suggesting a solution, the report refers back to the 1986 tax reform pushed through by President Ronald Reagan, a Republican, who approved the largest tax increase in U.S. history, largely by ending tax breaks while cutting individual tax rates. “Reagan solved the problem” much like that Congress is currently facing “by sweeping away corporate tax loopholes,” said the report, which was co-authored by Citizens for Tax Justice chief Robert McIntyre. His research twenty-five years ago played a key role in convincing Reagan that reform was needed.

One of the biggest tax breaks enjoyed by corporations is accelerated depreciation, which lets them write off equipment faster than it actually wears out. Deductions on executive stock options, tax breaks for research and development, and tax breaks for making products in the U.S. rather than overseas all save corporations money. Offshore tax shelters also play a role.

Before the Reagan reform, the average effective corporate tax rate was about 14%, afterward climbing to 26.5% in 1988. But as companies found their way around the reforms, the effective rate fall back down to about 17% by 2002-2003. However, this time around, taming corporate tax breaks alone won’t solve the problem. Such breaks cost the government about $102 billion in lost revenue a year, only a fraction of the estimated $1.3 trillion federal deficit.

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Tax breaks that benefit individuals far outweigh corporate loopholes in terms of lost revenues. The mortgage interest tax deduction along is worth $104 billion. Still, the report maintains that, “If we are going to get our nation’s fiscal house in order, increasing corporate income taxes should play an important role.”