Putting Corporate Tax “Loopholes” In Perspective
Special Report No. 184
There is a popular misperception that U.S. corporations pay less taxes than they should because of a plethora of “tax loopholes” in the tax code that allow them to minimize their tax burden. President Obama, for example, has been critical of certain tax breaks that, he maintains, allow companies to avoid U.S. tax and encourages them to “ship jobs overseas.” Another campaign was launched recently by special interest groups claiming that the tax code gives billions in special, unjustifiable tax subsidies to the major oil companies each year.
Putting aside the rhetoric, it is legitimate to ask:
• What are the different types of corporate tax preferences – known as “tax expenditures” in Washington budgetary jargon—and how much do they “cost” the U.S. Treasury?
• How do corporate tax expenditures compare to the tax breaks available for individuals?
• How much do tax expenditures actually reduce the amount of taxes corporations pay?
As is often the case in Washington, reality does not measure up to political rhetoric. According to estimates produced by the President’s own Treasury staff, the special tax provisions benefiting corporations will cost the Treasury about $102 billion in 2011. While seemingly a lot of money, the value of the tax expenditures benefiting corporations is actually less than the budgetary cost of popular tax provisions benefiting individuals, such as the mortgage interest deduction, the exclusion for employer-provided health benefits, and the exclusions for pension and 401k contributions. Indeed, even the value of tax breaks benefitin state and local governments is almost as much as those benefiting corporations.
Moreover, a close inspection of the universe of corporate tax provisions reveals that only about 20 percent of the tax benefits are targeted to specific industries or sectors while roughly half of them are, generally speaking, available to all companies. The oil and gas industry, currently in the political cross-hairs, receives just $2.8 billion in targeted tax incentives, less than 3 percent of all incentives, and far less than its smaller rivals in energy production, the renewable energy sector which receives $11.3 billion.
Surprisingly, 22 percent of the tax benefits are targeted to aiding state and local governments or advancing charitable and social objectives, which means there are more so-called corporate tax loopholes benefiting local governments or social causes than targeted private industries.
While tax preferences are certainly important to many corporations and industries, they don’t appear to dramatically reduce the overall amount of taxes corporations pay. Indeed, while the top statutory corporate rate stands at 35 percent, IRS corporate tax return data show that, on average, U.S. companies pay an effective tax rate of roughly 27 percent, while many industries pay an effective rate above 30 percent—not much below the statutory rate.
The bottom line is that the rhetoric surrounding corporate tax expenditures far exceeds reality. However, if Washington is going to debate the future of corporate tax expenditures it should do so within the broader context of reforming the entire corporate tax code rather than attacking certain provisions in a politically charged and piecemeal process. The U.S. has one of the highest overall corporate tax rates in the industrialized world and that rate—not tax breaks—is threatening American competitiveness, wages and jobs. Lowering the corporate rate should be a top priority for lawmakers and broadening the base by closing some tax expenditures should be part of that discussion.