For a PDF of the full study, click here. A summary of the report and the key findings are below.
View a slide presentation from a Capitol Hill briefing on this paper.
Tax Foundation Special Report No. 194
· While the corporate tax code—like the individual tax code—is complicated by too many credits and deductions that benefit a narrow set of taxpayers at the expense of the many, recent reports of large corporations avoiding their “fair share” of taxes are misleading.
· IRS data on millions of actual corporate tax returns shows that the effective U.S. federal corporate tax rate has averaged 26 percent between 1994 and 2008.
• The effective U.S. federal corporate tax rate differs considerably across sectors, but much of this variance is explained by the mixture of U.S. and foreign income, foreign taxes paid, and foreign tax credits claimed, which merely prevents double taxation of foreign profits.
• Foreign taxes explain most of the difference between U.S. statutory and effective rates. The overall effective corporate income tax rate on the worldwide income of U.S. corporations, inclusive of foreign taxes paid on foreign income, is between 32.1 and 33 percent, which is close to the statutory rate of 35 percent.
• The largest corporations pay the lion’s share of taxes. In 2008, the 1,937 largest companies were responsible for 68 percent of corporate tax revenue.
A number of recent news stories and think tank reports have drawn attention to the amount of income taxes paid by large corporations. For example, a recent report by Citizens for Tax Justice claimed that the financial statements of 12 large companies showed that eight paid no federal corporate income taxes between 2008 and 2010, and as a group, their effective federal corporate rate was -1.5 percent. Similar news stories by the New York Times have focused on the ability of a few large companies, particularly General Electric, to take advantage of various credits and deductions in the corporate tax code.
To many Americans, such reports are an indication that the tax code is riddled with preferences that allow large corporations to avoid “paying their fair share” of taxes. To be sure, the corporate tax code—like the individual tax code—is complicated by too many credits and deductions that benefit a narrow set of taxpayers at the expense of the many. But as if often the case in tax discussions, anecdotes do not tell the whole story.
A review of actual IRS corporate tax return data shows that while the largest corporations
in America (those with assets larger than $2.5 billion) represent a tiny fraction of all corporations, they pay an overwhelming share of all federal corporate income taxes. And while the more sensational reports focus on the low effective tax rates paid by a few companies—at least according to their financial statements—the IRS data shows that the effective U.S. tax rate for all corporations averaged 26 percent between 1994 and 2008.
The effective U.S. tax rate varies across years, ranging from 27.5 percent in 1999 to 22.8 percent in 2008. It also depends on industry and company size, with small, domestically based corporations paying close to the statutory rate of 35 percent and large, multinational corporations (MNCs) paying a lower effective U.S. rate. However, when foreign taxes are included, the overall tax rate on large MNCs is also close to the U.S. statutory rate of 35 percent. Averaged for all corporations in 2007, the overall effective corporate tax rate was between 32.1 and 33 percent.