Earlier this year, the Government Accountability Office (GAO) grabbed headlines by claiming that U.S. corporations pay an effective 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. rate of 12.6 percent. This made headlines precisely because it is less than half the rate found by most studies. We pointed out the many flaws with GAO’s analysis, including the failure to properly account for foreign taxes on foreign income and losses carried forward and back following the financial crisis. Now, Andrew Lyon of PWC (in an article for Tax Analysts) has done the calculations correctly using the same data that GAO used, and he finds the U.S. corporate effective tax rate on worldwide income is above 35 percent:
Effective tax rates calculated from Schedule M-3 data offer a unique ability to relate federal income tax payments to the book incomeBook income is the amount of income corporations publicly report on their financial statements to shareholders. This measure is useful for assessing the financial health of a business but often does not reflect economic reality and can result in a firm appearing profitable while paying little or no income tax. of the same entities. However, timing differences between book income and taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. can make a single year’s analysis unrepresentative of the actual long-term effective tax rates of corporations. Further, the asymmetric treatment of companies with financial statement losses — omitting them in years in which they experience financial statement losses but including them in a year in which the related tax benefit from the loss is received — also can result in unrepresentative calculations of the average effective tax rate faced by U.S. corporations over the period.
The extension of the GAO analysis provided in this article shows that these distorting effects were significant in the years during and following the 2007-2009 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. . These results show that the 2010 effective tax rates presented in the GAO report are not representative of the long-term effective tax rates faced by corporations. Further, the analysis indicates that inclusion of other foreign taxes that were omitted from the GAO analysis results in higher corporate effective tax rates than reported by the GAO. Finally, much of the media coverage of the GAO report focused on the 2010 effective tax rate based only on federal taxes. In addition to being limited to a single year, this measure of the effective tax rate reflected only a partial picture of the taxes paid or incurred by U.S. companies because it omitted state and local taxes and foreign taxes. As shown in this analysis, the effective tax rate based on worldwide current tax payments for all U.S. corporations exceeded 35 percent for the 2004-2010 period.
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