Today’s report from Citizens for TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Justice (CTJ) on 30 corporations that paid no federal income taxes for the years 2008-2010 rightly notes that these companies are taking advantage of various legal tax breaks and not some nefarious strategy for evading the law. Further, many of these tax breaks, aka loopholes, aka tax expenditures, are bad tax policy because they unnecessarily complicate the tax code and benefit a select few at the expense of the many. However, CTJ gives us a lot of reasons to doubt the veracity of their claims.
First, why did they choose just 3 years (2008-2010)? And why the 3 years which happen to be the worst recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. since the Great Depression? The last study they did like this also covered a recessionary period (2001-2003). It would be more believable if they averaged over a longer period of at least 5 years, mainly to include both the boom and bust portions of the business cycle. Also, certain tax provisions such as net operating losses can be carried forward or back more than 3 years, and take longer to resolve if disputed in court. For example, a company may have a huge loss in 2007 (out of sample) which is carried forward into 2008 through 2010 (in sample), grossly distorting their long run average profits and taxes paid on those profits.
Second, why just 280 companies? CTJ started with the 500 biggest corporations and only chose those that were profitable in each of the three years they look at. The question for CTJ is what sort of bias does this introduce, especially given the short and peculiar time frame? Their implication is that big corporations pay a lower rate than small corporations, but when we look at IRS data on all corporate tax returns (about 1 million) we find no evidence for that after foreign taxes are taken into account. Further, unlike CTJ, we find no evidence that the effective tax rate differs significantly across industries, again once taxes on foreign income are taken into account.
Third, there are many other legitimate studies, none of which come to CTJ’s conclusion that U.S. corporations generally have a low effective income tax rate. We recently surveyed all recent legitimate studies and find that regardless of the methodology the U.S. has a high effective tax rate (ETR) relative to other countries, and is in fact always among the top five OECD countries. For instance, this NBER study also uses financial statements to estimate corporate effective tax rates, and yet comes to a very different conclusion:
To our knowledge, this paper provides the most comprehensive analysis of firm-level corporate income taxes to date. We use publicly available financial statement information for 11,602 public corporations from 82 countries from 1988 to 2009 to estimate country-level effective tax rates (ETRs). We find that the location of a multinational and its subsidiaries substantially affects its worldwide ETR. Japanese firms always faced the highest ETRs. U.S. multinationals are among the highest taxed. Multinationals based in tax havens face the lowest taxes. We find that ETRs have been falling over the last two decades; however, the ordinal rank from high-tax countries to low-tax countries has changed little. We also find little difference between the ETRs of multinationals and domestic-only firms. Besides enhancing our knowledge about international taxes, these findings should provide some empirical underpinning for ongoing policy debates about the taxation of multinationals.
Lastly, obsessing about federal corporate income taxes ignores the fact that corporations pay a tremendous amount of other taxes as well, including state and local income taxes, sales, property, and payroll and social security taxes. Total taxes paid typically exceeds after-tax profits, meaning shareholders are left with less than government.
The authors of this CTJ report have started with a kernel of truth, which is that the corporate code is polluted with too many loopholes, and from there try to make the case that the overall tax burden on corporations is too low. Perversely, it is the fact that the U.S. has such a high statutory rate – second highest in the OECD – that creates the incentive to lobby for special tax breaks and politicize the entire process. The solution is to lower the rate and, yes, close some loopholes as well.
Follow William McBride on Twitter @EconoWill
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