Tax activist group Citizens for Tax Justice (CTJ) released a report indicating that America’s top corporations pay little or no federal taxes despite the 35 percent tax they are mandated to pay on their profits. Corporations use offshore tax havens, loopholes in tax law, corporate stock options, and outright non-payment of federal income taxes to avoid paying their fair share.
During a five-year study, the CTJ found that from 2008 to 2012, 26 of the 288 most-profitable Fortune 500 companies paid absolutely no federal income taxes. The accumulated pre-tax profits of these companies equaled $170 billion. Some of those companies are Boeing, General Electric, and Verizon. In the same period, 111 of the 288 companies didn’t pay federal income taxes for at least one year of the five years observed.
The U.S. tax code mandates the 35 percent rate and has often been criticized by lawmakers and the public for its complexity and loopholes. The current code, Tax Reform Act of 1986, was introduced 27 years ago, during the Reagan Administration, and lowered the corporate tax rate from 48 percent to its current rate. Despite not paying taxes outright, corporations still lobby for a lower rate, 25 percent.
According to the report, corporations in the 1990s started to find ways to circumvent the 1986 tax reforms by abetting tax law changes and applying tax-avoidance schemes “devised by major accounting firms.” The average effective corporate tax rate has steadily decreased ever since. By the late 1990s, the effective corporate tax rate was 21.7 percent and fell to 17.2 percent by 2002. The rate rose to about 19 percent by 2012 as a result of a slightly rising corporate tax share of the GDP.
Stock options also allow corporations and their executives to avoid paying corporate taxes. With stock options, companies enjoy tax deductions for the difference between what employees pay for the stocks and the stocks’ actual worth. Also, companies aren’t required to reduce the profits reported to shareholders “by the amount that they deducted on their tax returns as the ‘cost’ of the stock options.” Over the study’s five years, Goldman Sachs saved the most because of stock options at over $1.5 billion in taxes from stock options.
Corporations also use offshore tax havens, which are foreign bank accounts with lower tax rates than America, in order to avoid paying the American corporate tax rate. In 2012, 80 of America’s largest corporations hid over $160 billion in offshore bank accounts which increased the total amount to over $1.5 trillion hidden from the federal government.
Tax subsidies and loopholes enabled companies to avoid paying $364 billion in taxes, almost half of what would be owed under the 35 percent tax rate. Had the 288 companies in the study paid the full 35 percent corporate tax rate, companies would have paid $816 billion to the federal government.