Avoiding Corporate Taxes - An American Pastime

We repeatedly hear about America's uncompetitive 35 percent corporate tax rate and how it is harming the economy and stifling domestic economic growth and international competitiveness.  A recent study, "The Sorry State of Corporate Taxes" by Citizens for Tax Justice (CTJ) shows us that the headline corporate tax rate is for corporations (i.e. suckers) that haven't sharpened their pencils sufficiently.  The study looks at the profits and U.S. income taxes paid by the 288 Fortune 500 corporations that have been consistently profitable over the years between 2008 and 2012 and excludes all companies that had even a single unprofitable year over the five year period.

The study found the following:

1.) The 288 corporations in the study paid an average of 19.4 percent corporate tax between 2008 and 2012, slightly more than half the headline rate of 35 percent.

2.) A total of 62 companies paid an average effective tax rate of 33.6 percent over the five year period on their U.S. pre-tax profits.

3.) A total of 67 companies or just under one-quarter of the total paid an average effective tax rate of 1.5 percent over the five year period on their U.S. pre-tax profits with rates ranging from zero to 10 percent.

4.) A total of 26 companies or just under 10 percent of the total paid an average effective tax rate of negative 5.1 percent over the five year period on their U.S. pre-tax profits.

5.) A total of 111 companies paid zero or less in federal taxes in at least one year between 2008 and 2012 with 55 companies having multiple zero tax years.  In the years that they paid no taxes, the 111 companies received tax rebate checks totalling $28 billion even though they earned $227 billion in pre-tax U.S. profits.

Here is a chart showing the 26 companies that paid no total income tax whatsoever in the years between 2008 and 2012:

On total profits of $169.504 billion, these 26 companies received tax rebates of $8.676 billion.  Pepco Holdings, a mid-Atlantic energy delivery company headquartered in Washington, D.C., had the lowest tax rate among the 288 companies in the study, coming in at negative 33 percent over the five year period.  As an aside, it's interesting to note that Pepco is a substantial lobbyist as shown on this chart:

Apparently, spending millions on lobbying does pay off!

Here is a complete listing of the 111 companies that had a negative tax rate in at least one year of the five:

One thing that stood out for me was the large number of energy and health care companies represented in the "zero corporate tax list", two of the most consistently profitable sectors in the economy.  These 111 companies made a total profit of $226.782 billion in the year that they had a negative tax rate, averaging negative 12.4 percent, and received $28.096 billion in tax refunds.

Over the period between 2008 to 2012, the 288 companies in the study earned more than $2.3 trillion in pre-tax profits in the United States.  If these companies had paid taxes at the standard 35 percent rate that they continuously gripe about, they would have paid $816 billion in total corporate taxes.  Instead, they paid only $452 billion because they received $364 billion in tax subsidies.  

Over the five year period, the biggest tax subsidies were received by:

Wells Fargo - $21.574 billion

AT&T - $19.2 billion

IBM - $13.223 billion

General Electric - $12.685 billion

Verizon Communications - $11.106 billion

ExxonMobil - $8.673 billion

Boeing - $7.368 billion

J.P. Morgan Chase - $5.886 billion

PNC Financial Services - $5.343 billion

Wal-Mart Stores - $5.139 billion

Note that oil companies including Occidental Petroleum, ConocoPhillips, Chevron, Devon Energy and Chesapeake Energy were all in the top 20 recipients of corporate tax subsidies.

Over the five year period, the following ten industries had the lowest overall effective corporate tax rates:

Utilities, Gas and Electric - 2.9 percent

Industrial Machinery - 4.3 percent

Telecommunications - 9.8 percent

Oil, Gas and Pipelines - 14.4 percent

Transportation - 16.4 percent

Aerospace and Defense - 16.7 percent

Financial - 18.8 percent

Chemicals - 19.6 percent

Computers, Software, Office Equipment and Data - 19.8 percent

Pharmaceuticals and Medical Products - 21.1 percent

There are several key means that companies have at their disposal to reduce their overall tax bills:

1.) Offshore tax sheltering.

2.) Accelerated depreciation that allows companies to write-off capital investments at a faster rate than the assets wear out.

3.) Stock options that allow companies to take a tax deduction for the differences between what employees (mainly executives) pay for the stock and what it is worth.  Over the five year period, the use of executive stock options allowed companies to reduce their overall taxes by $27.1 billion including $1.6 billion for Goldman Sachs, the number one user of this tax break.

4.) Industry-specific tax breaks.

The next time that you hear Washington, particularly the Republicans, say that America can't afford something (i.e. $21 billion in benefits for veterans over the next ten years as shown here), remember this posting.  I would also suggest that you keep this in mind the next time that you hear a corporate leader complain about America's non-competitive corporate tax regime.