Do rich companies pay little/no corporate income taxes in the United States?

Question

It's a fairly common "fact" that if you make enough money, that you can hire lawyers who can hide all of your money, so that you end up paying little to no tax. Is this true?

Answer 1

Yes, some "rich" (meaning big and usually multinational) companies pay taxes that are significantly lower than predicted by their theoretical income tax rate for their income bracket. Examples include (from Forbes):

• The most egregious example is General Electric ( GE - news - people ). Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.... In 2008 GE's effective tax rate was 5.3%; in 2007 it was 15%. The marginal U.S. corporate rate is 35%.

• Valero was zero. One can be tempted to spin a conspiracy theory out of that one...

• Verizon's was 10.5%

• HP's rate was 18.6%. Not zero, but not 35% either.

• IBM was 25%, Procter & Gamble 26.3%

• Boeing was 23% (due R&D credits, mostly)

• Several more companies (Bank of America, Citibank, Ford) on Forbes's list in the article has very low rates explicitly related to gigantic losses in the last couple of years.

• However a vast majority of the rest of the list (25 top US companies as Forbses titled it) was in close-to-maximum 30+% range, with the usual tax-loving-people's favorite whipping boys (oil companies) rates in 40+%.

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As far as the explanation of how that happens, an income tax code contains an enormous amount of ways for a large multinational to reduce taxes owed.

Among the most impactful general principles as far as this question are the ones dealing with:

• Carryforward of past losses. In GE's specific case, it was large losses in its financial subsidiary during the bank meltdowns and writing off the fact that they closed 20 US factories between 2007 and 2009.

• assorted accounting rules allowing you to time-shift profits (see the discussion of cash vs. accrual basis here) to whenever you will pay the least amount of taxes.

• Geographical shifting - e.g. accounting so that your profits are earned outside of USA (offshore). The article linked in another answer posits that this provided a large portion of tax savings, though it didn't document that statement.

  A very detailed laymans-terms explanation is in this Bloomberg article: "Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes"

• numerous other loopholes and deductions to pay less taxes. This is due to two factors:

  • the influence of lobbyists on politicians who write the tax-affecting laws.

    As an example, "GE became the nation's top corporate spender on lobbying, spending more than $238 million on lobbyists over the past 12 years, according to the Center for Responsive Politics" (ABC news).

    To back the article up, here's the hard #s for lobbying: 2008 - $18 million; 2009 - $26.4mm, 2010 - about $40mm (source: http://www.opensecrets.org/lobby/clientsum.php?year=2010&lname=General+Electric). Obviously, not all lobbying money relates to tax code, but it's hard to imagine that some of it doesn't influence it in some ways, sometime via specific regulation that changes how tax code could be applied (e.g. what is considered "clean" technology).

    And for political contributions: In 2010, GEPAC raised just over $1.4 million from more than 4,000 employees and contributed $1,276,950 to federal and $126,250 to state candidates in the United States (GE's own data). Non-GE numbers come from opensecrets (Center for Responsible Politics) again: $2.5mm in 2010 and a whopping $3.6mm in total political donations in 2008.

  • the fact that US government uses taxes as an instrument of social control (e.g. tax deductions for "clean" technology consumption AND capital investment, both of which GE can play). This factor is of course related to lobbying one above.

Answer 2

Two out of every three United States corporations paid no federal income taxes from 1998 through 2005, according to a report released Tuesday by the Government Accountability Office, the investigative arm of Congress.

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In 2005, one in four large United States corporations paid no taxes on revenue of $1.1 trillion, compared with 66 percent in the overall pool.

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In 2004, a G.A.O. study said that 7 in 10 of all foreign corporations doing business in the United States, or foreign-controlled corporations, paid no taxes from 1996 through 2000, compared with 6 in 10 United States corporations.

http://www.nytimes.com/2008/08/13/business/13tax.html?_r=1

The story also includes a quote from a fella from the Tax Foundation, an organization well-known to peddle corporate propaganda about taxes, about how the untaxed corporations are just simply the corporations that lost money, making no profit, and thus paying no taxes. Although such examples certainly do exist, the statement is false, as is most everything that you hear out of the Tax Foundation.

In fact, a NYTimes author, in a blog post, linked a mash-up of articles rebuffing the Tax Foundation, and I found this in that mash-up:

the actual tax rates paid by US corporations are extraordinarily low, around 6%.

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Remember the latest GAO report (reported elsewhere on ataxingmatter) that shows that two-thirds of US corporations pay no federal income tax. That's not just the ones that are losing money, but also many corporations that have record high profits (including some Big Oil companies) that end up paying next to nothing in taxes.

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As a result, the US is actually a corporate tax haven, with the lowest effective corporate tax rates of almost all the countries that participate in the OECD. That's a little fact that the Tax Foundation apparently doesn't want the American public to understand, since all its hype is in terms of statutory rates and not in terms of effective tax rates.

http://economistsview.typepad.com/economistsview/2008/08/the-greek-menac.html

Just to give an example, one way to avoid paying corporate income tax is to provide goods & services, for pennies on the dollar, to a subsidiary operating in a foreign country that doesn't tax them. By doing so, you erase your domestic profits by sending it to a foreign subsidiary in the form of goods & services, which they then use to make even larger profits, which they then send back to you, untaxed.

Answer 3

Stories like General Electric Paid No Taxes In 2010 are common in America. I can remember reading similar stories over the years. It would be surprising if only GE pays no tax - otherwise, how would other giant companies compete with GE?