According to new analysis by USA Today, more than 10 percent of the corporations on the Standard & Poor’s 500 index – a stock market gauge of 500 of the largest publicly-traded U.S. corporations – did not pay any taxes last year. Using data from S&P Capital IQ, the report’s authors found that 57 of those 500 companies paid an effective tax rate of 0 percent or less, even if they turned a profit – and it’s all completely legal.
The report is a striking contrast to the oft-heard refrains of “overtaxation” by corporate executives. Well-known corporations like Verizon Wireless, NewsCorp and Met-Life were among those on USA Today’s zero-liability list, along with lesser-known IT and real estate companies like Agilent, Seagate and Kimco.
Some of the companies listed were not profitable, and therefore had no tax bill, but others did finish the year in the black. The statutory tax rate (i.e. the rate on the IRS books) for profitable corporations is 35 percent. But the effective tax rate, which is calculated by dividing the company’s overall tax expenses by its pre-tax earnings, is often significantly lower, thanks to regulatory loopholes and creative accounting measures. Another report, released in July by the Government Accountability Office (GAO), showed that profitable large companies (defined as having assets of $10M or more) were taxed an average of 12.6 percent. That is just below the median effective tax rate for middle-class Americans.
The companies mentioned in the USA Today report are behaving within the bounds of the law. But just weeks after the federal government was shut down due to what was, in part, a battle over the deficit, the report resurrects questions about just what “paying your fair share” means to politicians, lobbyists and corporate America.
Offshore havens and creative accounting
The most recent uproar over corporate tax evasion centered on Apple, Inc. this spring, with CEO Tim Cook forced to testify in front of the Senate Permanent Subcommittee on Investigations in May. The company, which paid $6 billion in U.S. taxes in 2012, was accused of sheltering billions in revenue using “highly questionable” offshore entities. According to the Senate subcommittee, the California-based tech behemoth, which reaps two-thirds of its revenue from outside of the U.S., funneled some of its vast profits through Irish subsidiaries. These subsidiaries, through various legal quirks, business designations and incentives, effectively had no tax jurisdiction anywhere. As noted in May by The Guardian, one Irish subsidiary brought in $22 billion of pre-tax earnings in 2011, but was taxed at a rate of just 0.05 percent – far below the statutory corporate rate of 12.5 percent on the Emerald Isle. Apple received some bad press as a result of the hearings, but looks to have escaped any real fallout. Its tax strategy was cleared by the Securities and Exchange Commission in early October.
Complicated international transactions are just one of the “questionable” – but entirely legal – tactics used by large companies to reduce their effective tax rate. As last week’s USA Today report points out, companies that face a loss do not have to pay taxes. But depending on how certain calculations are done, companies can also push their effective rate below zero and accrue tax credits that can be applied to future profitable years. Indeed, the government’s Byzantine tax code is another contributing factor to effective tax rates that are far below statutory ones. With a little creativity, accounting departments can use the myriad of loopholes and hidden credits to their company’s advantage while remaining well within the bounds of the law. In fact, it is a fairly common occurrence for corporate America to dodge the taxman altogether. According to a 2008 GAO report, 55 percent of all large U.S. corporations had no tax liability in at least one year between 1998 and 2005. The Department of Treasury estimates that special exemptions and credits used by corporations cost the government $181 billion in lost tax revenue in 2011. The same measures are also available to some individuals (including non-incorporated businesses) and lowered the tax haul by a further $125 billion in the same year.
Need for debate, reform
It should be noted that TriplePundit is not arguing for or against specific tax measures or reforms. There are certainly benefits to tax credits and other exceptions when they are used to effectively shield fledgling industries and help small businesses grow. The debate over tax reform is as vociferous as it is complicated and dynamic, and there are no guaranteed outcomes from any proposed reform. But, if we engage in a debate without transparent facts – or by looking at only what is “on the books” instead of what happens in reality – we are guaranteed to fail.
It is unfortunate that at just the time that this transparent debate is needed most, it is also seemingly impossible. With another budget showdown set for January and the elusive “Grand Bargain” all but dead, any major changes look to be off the table for the foreseeable future. Perhaps more than ever, it is worth asking: exactly how much longer can we really afford to abide by “business-as-usual”?