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Jul 06 2013

Corporate Taxes 1/3 of Marginal Rate

One of the mantras we hear from the right often is that business taxes are too high in the United States and it chases corporations overseas. And now, a word from reality. A new GAO study finds that the average corporate tax rate is less than 13%, or about 1/3 of the marginal corporate tax rate.

The biggest, most profitable American companies paid only a fraction of the taxes they would owe under the official corporate rate, according to a study released on Monday by the Government Accountability Office.

Using allowed deductions and legal loopholes, large corporations enjoyed a 12.6 percent tax rate far below the 35 percent tax that is the statutory rate imposed by the federal government on corporate profits…

The report found that even when foreign, state, and local taxes were included, the tax rate of large companies rose only to 16.9 percent of total income, still well below the official 35 percent.

“Some U.S. multinational corporations like to complain about the U.S. 35 percent statutory tax rate, but what they don’t like to admit is that hardly any of them pay anything close to it,” Mr. Levin said in a statement. “The big gap between the U.S. statutory tax rate and what large, profitable U.S. corporations actually pay is due in large part to the unjustified loopholes and gimmicks that riddle our tax code.”

60 years ago, corporate taxes made up 32% of the federal budget; today it’s 9%, or less than 1/4 the amount of tax paid by individual taxpayers. That’s why we are 32nd out of 34 OECD countries in business taxes. And yet we spend more on defense than the other 33 nations combined. We want an empire but we don’t want to pay for it, which is the root of our fiscal problems. Thus, we start wars that cost trillions of dollars while simultaneously cutting taxes, in effect writing a huge IOU to ourselves that we have to pay back with interest.

31 comments

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  1. 1
    Chiroptera

    Ed Brayton: And yet we spend more on defense than the other 33 nations combined. We want an empire but we don’t want to pay for it, which is the root of our fiscal problems.

    And you know the punchline to the joke: the empire exists mainly to serve corporate interests!

  2. 2
    Johnny Vector

    The reasons to increase corporate taxes do not include needing to balance the budget. The corporate apologists are right that any additional corporate taxes will be passed on to the customers. Cause, where else is the money going to come from? There is a certain amount of productivity in the country, and a certain portion of that needs to go to things we all want but aren’t amenable to being done by markets. (And of course to “defense”, which is insanely overprovided for, but again that is orthogonal to corporate tax rates.) The government’s fiscal balance doesn’t depend on where the taxes come from.

    The reason to tax corporations more highly is not to reduce the federal deficit, but to reduce the corporations’ power (that is, the power of their leaders). It directly reduces it by simply giving them less money. But more specifically, if your corporate tax rate is higher, and labor is deductible (which, as the primary cost of doing business, it perfectly well should be), then it encourages hiring. If research is deductible (which it always has been) then higher tax rates encourage research. The higher the base rate, the higher the incentive to spend. And as we’ve seen recently, it is the accumulation of capital, without spending, that threatens the economy. When you can make more by investing your money in stocks than by hiring a worker to build more widgets, who is going to hire people?

    At the root, there are two questions. One is how much the government should spend, and the other is how that should be collected. These are almost always conflated, but they are separate decisions, with separate reasons for what to decide. The allocation of taxes changes not just the economy, but the state of the country. Reducing taxes on already too-powerful corporations gives them more power, and incentives to use it in ways that does not benefit the rest of the population.

  3. 3
    Modusoperandi

    Oh, please! Everybody knows that the USA has the highest corporate tax rate in the world! Yes, some don’t pay that, but you have to remember all the little Mom & Pop multinational corporate entities that are fighting so hard to have the punitive tax rate lowered. Pay no attention to the fact that the first group and the second group are the same group; all you have to remember is that they wouldn’t have to hide their money overseas if they could hide it here in America…as dividends, which, as everybody knows, would Trickle Down, buoying up the entire population of the 1%, giving them even more money to gamble on the Wall Street casino!
    So, what do you say, people? How can they protect us from the predations of government when we won’t protect them? When are we going to rise up and protect our corporate citizens? Now! U! S! A! U! S! A!
    And also Walmart cut your hours.

  4. 4
    tuibguy

    Anecdotal evidence that lowering tax burdens for corporations doesn’t trickle down is my employer. Every quarter they are announcing record profits, or exceeding projected profits and are proud to announce that they will respond by raising dividends on shares. The Board of Directors is largely paid in stocks and options, of course, so they are voting themselves big raises frequently. Like quarterly, and slapping each other on the back. In the meantime, the salary ranges are never shifted nor adjusted. In my position, the salary ranges have been the same for 8 years, partly because there is high turnover and they can always find people desperate to get out of their Wal-Mart jobs and into cubicles for twice the pay and full-time. The salary ranges include “Minimum,” “Midpoint” and “Maximum.” Despite objective reviews with high scoring, I have not been granted a raise for two years because I am at “Midpoint.” Half of the salary range is a lie. The only way to get paid in that range is transfer into this job class with a salary that was in that higher range.

    Anecdotal, but real-life.

    Oh, and I pay a higher tax rate than the members of the board do, because their income is “Capital Gains.”

  5. 5
    John Pieret

    A new GAO study finds that the average corporate tax rate is less than 13%, or about 1/3 of the marginal corporate tax rate.

    But … but … how can the poor average CEO get fabulosly wealthy, buy every politician in sight and support the poor by paying them minimum wage (… well, if they’re “legal”) to maintain my several estates if we have to pay 13% on our profits?

    Socialist!!!

  6. 6
    pocketnerd

    Thus, we start wars that cost trillions of dollars while simultaneously cutting taxes, in effect writing a huge IOU to ourselves that we have to pay back with interest.

    Correction: Should be “… in effect writing a huge IOU that our children have to pay back with interest.” Of course, I guess that’s only fair, since we also send those same children to go fight and die in those wars. The Global War On Terror should have been subtitled “Ha ha ha, screw you, under-40 set!”

  7. 7
    davem

    Meanwhile , the US corporations that go overseas pay hardly any tax. at all 13% would be 13% more than some of them pay here in the Uk. Starbucks, Amazon and Google, with sales of about 10 billiion dollars in the UK, claim they make no profit, or make it in other countries. See http://www.guardian.co.uk/business/2013/jun/23/starbucks-pays-corporation-tax

  8. 8
    doublereed

    The nominal rate is still much higher than other countries’, regardless of what the actual rates are. The mantra on the right is usually “close loopholes and lower rates.”

    It’s more of a question of whether you buy their bullshit, which few people do anyway. Most conservative people I’ve talked to know that’s a shell game either way.

  9. 9
    CaitieCat, getaway driver

    That’s a fish of an incarnadine type, doublereed; in the current and foreseeable US political climate, raising rates is next to impossible, while passing loopholes is how they reward their buddies/donors/owners. Reducing rates means reducing them more or less permanently. Closing loopholes will only be temporary, until they find or buy new ones.

  10. 10
    sigurd jorsalfar

    Why should corporations be taxed at all?

    1. The federal government does not tax in order to spend. It spends first, then taxes, and it MUST tax less than it spends. It must be this way otherwise no US dollars could exist in the first place. So the argument that the government needs the revenue from corporate taxes falls away.

    2. Taxes are just a cost of doing business to corporations, which is passed on to the consumer. So taxing corporations is essentially just a sales tax. If you think corporations should be taxed to teach them a lesson about greed, think again. Corporations are profit distributors. Therefore the taxes should be paid by the owners of the corporation when the profits are paid out to them, i.e. taxes on dividends. Dividends should be included in income with no special rules.

    3. I support eliminating special rates on capital gains. Capital gains should be included in income with no discount.

    4. Income tax rates are too high in the lower brackets, too low in the highest brackets. No one earning under $60k a year should be paying any federal income taxes, especially under the current economic conditions.

    5. The FICA deduction should be eliminated immediately and social security funded directly by the US Treasury just as it funds all of America’s wars. All talk that social security is going bankrupt is misguided or propaganda. Do the powers worry that there won’t be enough money in the future to fund America’s wars? Of course not, because federal taxes, including FICA, don’t actually ‘fund’ anything.

  11. 11
    doublereed

    1. The federal government does not tax in order to spend. It spends first, then taxes, and it MUST tax less than it spends. It must be this way otherwise no US dollars could exist in the first place. So the argument that the government needs the revenue from corporate taxes falls away.

    What? Does anybody else understand this guy? Budgets can have surpluses and deficits. It’s not like the government spends all the dollars in the US. That’s just kind of silly.

    If anything it’s the opposite. The government controls corporations, therefore corporations need to pony up the dough for that service.

    As corporations aren’t people, we can be pretty much as ruthless as we damn well please in terms of taxing them. We should whatever is economically better, and that means taxing them. Especially right now, considering that corporate profits are sky-high and their investments are low. In other words, they have piles of cash sitting on the sidelines. Taxing them (and spending it on government or redistribution) would be economically better.

    2. Taxes are just a cost of doing business to corporations, which is passed on to the consumer. So taxing corporations is essentially just a sales tax. If you think corporations should be taxed to teach them a lesson about greed, think again. Corporations are profit distributors. Therefore the taxes should be paid by the owners of the corporation when the profits are paid out to them, i.e. taxes on dividends. Dividends should be included in income with no special rules.

    How is that like a sales tax? At all? There’s nothing about corporate tax that is like a sales tax. Random statement.

    Besides, corporate taxes can be progressive. It’s does not have to be a flat tax. The problem with sales tax is that it is regressive.

    Taxes are not used to “punish” people. They are used to earn revenue for the government, and correct externalities.

  12. 12
    iangould

    ” The corporate apologists are right that any additional corporate taxes will be passed on to the customers.”

    Right, because foreign competitors who don’t face a tax increase will also increase their prices.

    “Cause, where else is the money going to come from?”

    Profits and executive salaries.

  13. 13
    iangould

    The other point Americans should note is that while American high-income earners pay significantly less than their counterparts in most other OECD countries, people on average earnings in the US pay effective tax rates that aren’t much below the OECD average.

    http://www.oecd.org/tax/tax-policy/Table%20I.6_Mar_2013.xlsx

  14. 14
    Chiroptera

    iangould, #12: ” The corporate apologists are right that any additional corporate taxes will be passed on to the customers.”

    Right, because foreign competitors who don’t face a tax increase will also increase their prices.

    Another problem with that argument is Economics 101: prices are already set, in theory, to maximize the the revenue from the consumers. Higher prices means fewer customers which will result in lower income. In the short term, anyway, higher costs (as from taxes) have to be absorbed or ameliorated in other ways. There may be long term affects on the economy that will change the equilibrium point, and real economies can be pretty complicated to predict accurately, but the point remains that businesses can’t just set prices to whatever they want and have a limited ability to “pass on costs” to the consumers.

  15. 15
    pocketnerd

    @doublereed, #11: I suspect post #10′s author might be talking about post-Keynesian economic theory, which declares governments do not spend or tax, but rather “create” money by printing and spending it, and then destroy it after circulation by taxing it. Post-Keynesians generally support a laudable set of economic goals, such as low unemployment and heavy regulation of the financial sector. On the other hand, I think an economist is inviting stability problems by assuming one can print money first and then just tax the excess out of circulation. Basically, PKs really think the way gold bugs claim all fiat currency advocates think.

  16. 16
    unbound

    To those that think higher taxes means higher consumer prices, you really should do some research on “market pricing”. Costs have very little to do with the price you pay for most goods and services. Part of the reason that corporate America fights taxes so hard is because they know that they’ll have to pay the price of the taxes.

    Let’s look at the reverse from a long time ago (to distance ourselves from current policies). Nike in the 70s moved their shoe manufacturing to South Korea. The cost of making shoes (including the shipping costs back to the US) were cut down to about 1/3. Nike shoe prices went up more than 2 fold. Recent history is littered with such examples. Supply side economics has been debunked many times, but lives on thanx to the generous donation of the Koch brothers (via think tanks) to various universities (such as my own local George Mason University).

    Just as someone above pointed out that worker salaries have remained largely static for about a decade now despite the corporations doing just fine during that same time (most making solid profits quarter after quarter), so too are prices completely unrelated to corporate costs.

    Please stop buying the libertarian lies which have been largely brought to you by large corporate interests.

  17. 17
    doublereed

    @15pocketnerd

    Huh. I’ve never really heard of that. That sounds like magical fairytale libertarian talk, where “government” is a giant angry ogre of doom while corporations are sweet innocent baby ducklings that would never hurt a fly. Interesting. Maybe I’ll look more into that.

  18. 18
    pocketnerd

    @17doublereed:
    Post-Keynesians aren’t libertarians, and in fact hold some deeply non-libertarian ideas… but yeah, in some ways PK economics are a weird fusion of Keynesian “controlled capitalism” and libertarian-style monetarism.

  19. 19
    Johnny Vector

    Another problem with that argument is Economics 101: prices are already set, in theory, to maximize the the revenue from the consumers.

    What kind of Econ 101 is that? How is the cost of doing business not relevant to the equilibrium price? What curve do you think the demand curve intersects to determine the price? If those airline tickets three years ago were set to maximize revenue, why are they twice as expensive now?

    Unless you mean that they will attempt to adjust other costs within the business to allow them to set a price that maximizes profit. Which was, y’know, kinda exactly my point.

  20. 20
    unbound

    @19 – The price of the airline ticket is only loosely related to cost. Econ 101 was a basic set of rules that worked in a very simplistic (i.e. non-existent) world where there was always unlimited providers and unlimited consumers. Once you recognize that the vast majority of markets are oligopolies, you have to shift your understanding of the markets appropriately.

    Let’s make it more simple. I can buy a can of soda/pop for about $0.45 at a local club store. Depending on which event I go to, I can pay anywhere from $1.00 to $2.00 (with a single exception of $2.50 once) in this area. The transportation and cooling costs are the same for any of these events, as are the original cost of the can of soda. The price I end up paying is related to competition (or lack thereof). The $1.00 cans tend to where there is at least one other food vendor (oligopoly). The $2.00 cans are always where there is no other food vendors (monopoly). Think about the prices you pay for soda/pop in the movie theater…not even remotely related to costs of the product and, in reality, not even remotely related to the costs of operating the theater.

    Airline ticket prices are very similar as well, but much more complex. The price of your airline ticket will vary wildly depending on the time of day, number of other airlines offering the same service (i.e. usually same number of stops to / from your destination), and how far out you buy the ticket (sweet spot is about 6 weeks from departure date…beyond 8 weeks and within 4 weeks, you will pay elevated prices for several reasons). none of that has anything to do with cost and everything to do with decreasing levels of competition (e.g. American has gobbled up Continental and US Airways).

  21. 21
    Johnny Vector

    @20: All of which is exactly Econ 101 (assuming your school, like mine, put microeconomics as 101). The price is an equilibrium between demand and supply. (And the answer to the question which should have been obviously rhetorical is: fuel costs more now than it did then.)

    To get back to the original point, “we should tax corporations more” isn’t a solution to the problem of too much deficit spending (understanding that how much is too much is a whole nother question). Or rather, the moral outrage of “Hey, how come corporations pay so little tax, why aren’t they paying their share?” isn’t a sensible reason to increase corporate taxes.

    The reason to increase corporate taxes is because specific taxes distort the market in specific ways. Higher corporate taxes distort the market in ways that are beneficial to the general public, which is my original point. It will increase the cost of goods, but so what? You shift the supply curve a little, and the demand curve stays where it is. A new equilibrium is found, and in the process you increase the incentive to do all sorts of good things, such as hiring more workers, investing more in R&D, and hoarding less cash. Same thing with raising the minimum wage. It will (minimally) drive up the costs of (some) goods and services, but if so it’s only because they were underpriced to start with. If a person can’t live on the wages they earn from making hypergonic prodsponders, then prodsponders are being sold too cheap. And if increasing a company’s tax rate will push them to hire more people to build prodsponders, that is a valid reason to do so.

  22. 22
    atheist

    @Johnny Vector – July 6, 2013 at 9:32 am (UTC -4)

    The corporate apologists are right that any additional corporate taxes will be passed on to the customers. Cause, where else is the money going to come from?

    It would be taken out of their ridiculously high profit margins, you silly person. They could certainly do their best to pass this on to the consumer, but this is their greed, not an economic law.

  23. 23
    doublereed

    The reason to increase corporate taxes is because specific taxes distort the market in specific ways. Higher corporate taxes distort the market in ways that are beneficial to the general public, which is my original point. It will increase the cost of goods, but so what? You shift the supply curve a little, and the demand curve stays where it is. A new equilibrium is found, and in the process you increase the incentive to do all sorts of good things, such as hiring more workers, investing more in R&D, and hoarding less cash. Same thing with raising the minimum wage. It will (minimally) drive up the costs of (some) goods and services, but if so it’s only because they were underpriced to start with. If a person can’t live on the wages they earn from making hypergonic prodsponders, then prodsponders are being sold too cheap. And if increasing a company’s tax rate will push them to hire more people to build prodsponders, that is a valid reason to do so.

    It does not necessarily shift the supply curve at all. It could just be taken out of their massive profit margins and corporate hoarding of money. They just have lower profits, but the actual supply/demand part remains exactly the same.

  24. 24
    francesc

    @2
    “The corporate apologists are right that any additional corporate taxes will be passed on to the customers.”
    Ok, unbound (@16) was faster than me. No, they aren’t. Prices are far more dependent on how much is the customer willing (and able) to pay than on real production costs. Or in other words: every company tries to sell his products gaining the maximum margin and having the most benefits. I.e: if corporations could pass the cost on the customers increasing the price of their products, they would have already increased the prices.

    The only argument to support that an increase on taxes would rise prices is because of comptetition: in an scenario where everybody has higher production costs everybody could -theoretically- rise their prices at the same time, being still equally competitive and avoiding customer losses. That’s pretty difficult when US companies have external competitors.

  25. 25
    francesc

    “What curve do you think the demand curve intersects to determine the price?”
    That was before the invention of marketing. Companies don’t try to sell a product anymore, they sell a service, a brand and life-values. All that investement to avoid other companies to step-in with lower prices and take some share from them.

  26. 26
    matty1

    It does not necessarily shift the supply curve at all. It could just be taken out of their massive profit margins and corporate hoarding of money.

    It could easily but why would they? Think like an oligarch for a minute – you need to find one million dollars, you can do this from your own funds (cut profits) or someone else’s (raise prices). Your aim in business is to maximise profits so why are you going to reduce them if another option is possible? The issue is not should those bumper profits be taxed it’s how can the money actually be got out of those hoards and a simple increase in the tax on declared profits may not do it.

  27. 27
    matty1

    For the record I don’t understand the arguments against taxing all income to individuals on the same basis regardless of source.

    Wages, commission, carried interest, capital gains, dividends, profit from a food stall etc it’s all money in?

  28. 28
    sunsangnim

    If we just cut their rate down to -13%, then they’ll start creating all the really good jobs!

    So the largest companies only pay 16.9%, including federal, state, and other taxes. Meanwhile, according to the CBPP, households in the bottom quintile pay about 16 percent of their income in taxes. The next fifth pay about 21% of their income in taxes. So if you make $30,000 a year, you probably have a higher effective tax rate than the largest companies. Awesome.
    http://www.cbpp.org/cms/?fa=view&id=3505#_ftnref7

  29. 29
    kermit.

    Assuming the corporations will “simply pass on” the increased cost assumes that consumers will buy the same things in the same amounts if the costs are increased. I am not an economist, but:
    1. The consumers will not necessarily have a proportionate increase in income.
    2. If loopholes are closed, some products will become increase cost more than others.
    3. Price isn’t determined by how cheaply a widget can be produced, but rather by how much the company thinks they can sell widgets for.
    3. Some widgets don’t compete with other widgets so much as completely different sorts of products. For example, if gasoline costs more at the pump (rather than being subsidized through tax breaks etc.) then solar and wind sources and electric vehicles become much more competitive. Also think of the recent switch from compact disks to file downloads.

  30. 30
    kermit.

    sigurd, I disagree with point 2. I largely agree with points 3 & 4. I have no idea what 1 and 5 mean.

  31. 31
    doublereed

    It could easily but why would they? Think like an oligarch for a minute – you need to find one million dollars, you can do this from your own funds (cut profits) or someone else’s (raise prices). Your aim in business is to maximise profits so why are you going to reduce them if another option is possible? The issue is not should those bumper profits be taxed it’s how can the money actually be got out of those hoards and a simple increase in the tax on declared profits may not do it.

    Please think about this for a second. Companies don’t just charge whatever they want for something. Why wouldn’t the price already be set at the higher profit-earning price? They already are charging higher prices, regardless of tax or no tax.

    There’s no difference in this regard. Hence why taxes would not affect the supply/demand curve. Companies already are at the price that generates the most profit.

    For the record I don’t understand the arguments against taxing all income to individuals on the same basis regardless of source.

    Wages, commission, carried interest, capital gains, dividends, profit from a food stall etc it’s all money in?

    I believe most of the arguments have to do with “incentives” but I don’t think they actually make sense.

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