“Tax Reform” and the myth of the corporate tax rate
Donald Trump, together with Senate Majority Leader Mitch McConnell, participated in a press conference in the Rose Garden on Monday – a Q and A preceded by one of Trump’s excessive, rambling, largely incomprehensible word salads. It was, as we have come to expect – riddled with false statements and devoid of factual data. The scope of the questions and answers was too broad to deal with in their entirety here, but one topic that came up fairly early in Trump’s comments cried out for a response. Taxes.
Trump had this to say regarding them and Congress’ process on the tax cut / tax reform question:
So we have been working together long and hard. We think we’re in good shape for the budget, we hope. And we hope to be in good shape with, again, the largest tax cuts ever passed in this country. It’s going to spur business. You look at other countries, what they’ve done — and we’re competing with other countries. When China is at 15 percent, when I hear that Ireland is going to be reducing their cooperate rates down to 8 percent from 12. But you have other countries also reducing. We can’t be at 35 percent and think we’re going to remain competitive in terms of companies and in terms of jobs. So we worked on that.
Trump is deceptive here when he refers to the corporate tax rate at 35 percent. This is true of all U.S. politicians for a century in America. Statistically, in a virtual sense, no corporation pays 35 percent of their income. To suggest that they do is an outright deception.
Corporations, hedge fund brokers, financial houses and other well connected members of the 1 percent class, have accountants that sit in the offices of Congressmen and Senators who are members of the House Ways and Means Committee and the Senate Finance Committee – and assist the wonks on the staff of these Senators and Congressmen in crafting carve outs and exemptions that reward the campaign contributors and lobbyists they represent.
Why is a proper and a reality based understanding of the state of existing affairs with regard to corporate taxes critical? Because “tax reform” is being packaged by Donald Trump and Mitch McConnell as a benefit not only to corporations and wealthy Americans, but to workers and the unemployed alike.
The pretext is that if corporations pay less taxes than they are currently paying, they will make greater investments in the economy and more people will be employed and wages will increase for the average worker. We’ll test that hypothesis in a moment.
Meanwhile, be aware of the crucial difference between the marginal or statutory rate as advertised and the “effective rate” – the rate corporations actually pay after all of the thousands of arcane and obscure deductions are subtracted by savvy corporate tax accountants.
The Institute on Taxation and Economic Policy (ITEP) has taken an in depth look at what corporations that actually owed taxes – (meaning that they reported profits), really paid. Their findings were based on reviewing the actual financial statements and reporting, which are public information obtained through the mandatory filings with the Securities and Exchange Commission (SEC) and include data on what corporations paid in taxes, if anything.
ITEP’s study closely examined 258 of America’s largest and most profitable corporations in the period between 2008 and 2015 . We’re talking about businesses that consistently rank among the Fortune 500. During that period of time, the 258 companies in ITEP’s survey reported total pretax U.S. profits of more than $3.8 Trillion.
Some Key Findings in the report (courtesy of ITEP):
- As a group, the 258 corporations paid an effective federal income tax rate of 21.2 percent over the eight-year period, slightly over half the statutory 35 percent tax rate.
- Eighteen of the corporations, including General Electric, International Paper, Priceline.com and PG&E, paid no federal income tax at all over the eight-year period. A fifth of the corporations (48) paid an effective tax rate of less than 10 percent over that period. Editor’s Note: PG&E, (Pacific Gas and Electric) by the way, is the public utility serving a vast segment of Central and Northern California, that has been named as a contributing factor in the magnitude of the suburban and wildlife fires impacting California currently, due to their failure to employ advanced technology in situating power lines and transformers.
- Of those corporations in our sample with significant offshore profits, more than half paid higher corporate tax rates to foreign governments where they operate than they paid in the United States on their U.S. profits.
- One hundred of the 258 companies (39 percent of them) paid zero or less in federal taxes in at least one year from 2008 to 2015.
- The sectors with the lowest effective corporate tax rates over the eight-year period were Utilities, Gas and Electric (3.1 percent), Industrial Machinery (11.4 percent), Telecommunications (11.5 percent), Oil, Gas, and Pipelines (11.6 percent), and Internet Services and Retailing (15.6 percent). Each of these industries paid, as a group, less than half the statutory 35 percent tax rate over this eight-year period.
- The tax breaks claimed by these companies are highly concentrated in the hands of a few very large corporations. Just 25 companies claimed $286 billion in tax breaks over the eight years between 2008 and 2015. That’s more than half the $527 billion in tax subsidies claimed by all of the 258 companies in our sample.
- Five companies — AT&T, Wells Fargo, J.P. Morgan Chase, Verizon, and IBM — enjoyed more than $130 billion in tax breaks during the eight-year period.
This recital of facts contradicts the claims among the political class that America’s corporate income tax is more burdensome than that of other countries and refutes the narrative that there exists an uncompetitive “tax gap” between us and our economic counterparts overseas.
So, with respect to the corporate tax component of the so-called “tax reform” package, what can we learn from this data in terms of the claims of Trump and McConnell?
If, as has been demonstrated here – almost half of the surveyed corporations paid nothing (or even less) in taxes at least one of the years of the survey, we can conclude that even when corporations pay nothing in taxes, it has little to no impact whatsoever on investment or hiring.
Remember that 2008 was ground zero for the national economic meltdown and that GDP has been running mostly under 1% for the entire period. Corporations did not take their untaxed profits and fold them back into the productive economy, but instead executed unprecedented stock buy backs, which incidentally explains the rise in the stock markets, not the election or presidency of Donald Trump.
If corporate tax rates are lowered to 15 percent, the benefit to anyone other than the executives and stockholders will be negligible. In this sense, past results are indicative of future performance. The claims of Trump and McConnell and Co., are fat, juicy nothingburgers.
And if the loopholes and carve outs are not reigned in from the tax “reform” Congress manufactures this time – like the nasty sausage they don’t want you to see being made, the income gap will increase even more than it has and the average American household will be tapped to bear even more of the economic burdens of debt and increased government spending.
Don’t be fooled by the rhetoric from Washington D.C. and the White House about ‘reform’ of any sort, much less tax reform. It is just another in a long string of con jobs.