The Facts About U.S. Corporate Taxes

You might have heard how the U.S. has just become "number one" in corporate taxation. The campaign to make this event news was led by the Business Roundtable, an association of CEOs that advocates for a lower corporate rate and a more "competitive" tax system. They cleverly used the day that Japan lowered its corporate tax rate by a few percentage points as an opportunity to complain, anew, about the U.S. corporate tax rate, which, as of Sunday, became the highest in the developed world.

But it's the highest on paper only. In practice, the true U.S. corporate tax rate is barely half of the 35 percent nominal rate. A major study by Citizens for Tax Justice last November found that the biggest and most profitable Fortune 500 corporations paid only 18.5 per percent in federal income taxes on their U.S. profits from 2008 through 2010. Many companies paid little or nothing.

Let's take some examples. The Business Roundtable's executive committee is chaired by Boeing CEO, James McNerney. Over the last 10 years, Boeing has only paid federal income taxes in two years (in 2002 and 2007) and has gotten tax refunds from the U.S. Treasury all the others. Boeing's average federal tax rate in the last decade? Negative 6.5 percent.

GE's Jeffery Immelt is also on that executive committee. His corporation famously paid no taxes last year and, in the last ten years, has averaged a federal income tax rate of 2.3 percent on its $83 billion in U.S. profits.

It wasn't always this way. Back in the prosperous 1960s, corporate taxes averaged almost 4 percent of our gross domestic product. But over the past three fiscal years, federal corporate income taxes plummeted to only 1.2 percent of GDP. That's the lowest sustained share in seven decades.

Confronted by this data, corporations often point to their worldwide tax bills, which combine U.S. profits and taxes with foreign profits and taxes. But that's mixing apples and oranges. In fact, if you look into the foreign taxes paid by U.S. companies, you'll make an interesting discovery. Despite the common corporate claims that U.S. taxes are higher than taxes in other developed countries, it turns out that most U.S. multi-national corporations are actually paying higher taxes to foreign governments on the profits they earn there than they pay to the U.S. on the profits they earn here.

The reason for the extraordinarily low U.S. corporate tax payments, of course, is that our corporate tax code is riddled with loopholes and tax breaks, most of them indefensible. These include rules that let companies shift their profits, on paper, to low-tax foreign tax havens, and thereby avoid their U.S. tax responsibilities. The price tag for these subsidies is slated to approach $2 trillion over the next 10 years.

Given their huge cost, you might think that eliminating corporate tax subsidies would be high on the list among the ways we could cut our nation's long-term budget deficits. And in fact, the American general public does think so. But such is the power of corporate money and corporate lobbying in our nation's capital that every Republican presidential candidate and virtually every GOP member of Congress thinks we need to reduce corporate tax payments even further. And some Democrats in Congress feel the same way. Another recent CTJ study found that 98 percent of sitting members of Congress have accepted campaign money from the thirty most notorious tax avoiding companies.

There's a price to pay for letting the corporate income tax dwindle. It inevitably means higher taxes or reduced public services (or both) for the rest of us. This simple arithmetic isn't just a theory. Japan may be shaving a few points off its corporate tax rate, but it not only coupled that with curbs on corporate loopholes, but also added a new surtax on personal income taxes.

Getting rid of useless or harmful corporate tax breaks ought to appeal to anyone who believes in free markets. As a bonus, it would make it much easier to fund the investments we need to improve education and repair our crumbling roads and bridges -- things that would actually help businesses and our economy grow.

Robert McIntyre is Director of Citizens for Tax Justice and the Institute on Taxation and Economic Policy. His research on corporate and individual taxation has been shaping policy for 30 years.