Once health care is tamed, President Donald Trump and Congress will turn to other bears, such as the byzantine U.S. tax code. Conveniently, a new report has come out on legal tax avoidance.
The report, from the Institute for Taxation and Economic Policy, says 18 of America’s biggest corporations paid zero federal income tax from 2008 to 2015.
Feel free at this point to bang your head on the tax forms strewn across your kitchen table. After that, consider these points:
1. General Electric Co., International Paper Co., Priceline Group, and Pacific Gas & Electric Co. were among the companies that the Institute for Taxation and Economic Policy says had no net tax liability at all over the period.
2. These are not simple calculations. They involve complicated assumptions and choices, such as what bits to put in the numerator (the tax) and what bits to put in the denominator (the profit). General Electric called the report “deeply flawed and misleading” and added: “Over the last decade, GE paid $32.9 billion in cash income taxes worldwide, including in the U.S.”
3. The Institute for Taxation and Economic Policy and its sister organization, Citizens for Tax Justice, lean left. Sample blog headline: “Bernie Sanders Is a Champion for Tax Fairness.” That said, CTJ's corporate-tax studies have been cited even by neutral experts.
4. Note the word “legal” in “legal tax avoidance.” These companies obeyed the law, as far as anyone knows. If you have a problem with their actions, blame Congress, not the companies and their highly skilled tax attorneys and accountants.
5. ITEP cites the 18 companies to reinforce its larger point: that corporate taxes are lower than they appear to be. One of President Trump's familiar talking points is that the U.S. has just about the world's highest corporate tax rate. The ITEP report is titled The 35 Percent Corporate Tax Myth. It says that of the 258 companies in its sample that had profits every year from 2008 to 2015, the average “effective” tax rate was 21.2 percent.
6. It's pretty well accepted by now that while the U.S. has one of the very highest top rates on corporate income, its average rate isn’t unusually high because there are lots of allowable deductions. So the new report, the latest in a series going back to the 1980s, isn’t breaking any conceptual ground.
7. Most of the 18 companies on the list are electric utilities. That’s no coincidence. During the financial crisis, Congress enacted a policy called “bonus depreciation” intended to stimulate economic growth. It allowed companies to write off new investments right away. Because they do a lot of investment, utilities enjoyed some of the biggest benefits. The downside? Because the investments are already fully written off, the companies won’t be able to get a tax benefit from depreciating them in future years, notes PG&E spokesman Brian Hertzog. International Paper also cited bonus depreciation, along with the impact of the recession and pension fund contributions. A spokeswoman for Priceline disputed the report, citing filings showing it did pay federal income taxes.
8. Just about everyone agrees that the U.S. corporate income tax system is a mess. That includes GE, which said in a statement, “The tax code is complex and outdated, which is exactly why tax reform must happen this year. GE has long been advocating to simplify and modernize the tax system—even if it means we pay more in taxes.”
9. Even if 35 percent isn’t what companies pay, the top rate does matter. As every student of intro econ learns, decisions are made at the margin, not on the average. If the government grabs 35 percent of the last dollar of income you earn, you'll be at least a bit discouraged from earning that last dollar. “There’s a good argument for coming up with some broader business tax with a lower rate that doesn’t allow so many deductions,” said Alan Cole, an economist at the Tax Foundation, which describes itself as nonpartisan and which Cole called more “market-leaning” than ITEP and Citizens for Tax Justice.
10. The report urges Congress to stop allowing U.S. companies to defer federal taxes on offshore profits. More than $1 trillion in cash has piled up abroad because companies don’t want to pay U.S. tax on it. That may be a good idea, but only if it’s coupled with a cut in the top rate. Otherwise U.S. companies would have an even stronger incentive to shift their headquarters overseas to escape U.S. taxation, Cole said.
Now go pay your taxes.
(Updates with comment from Priceline in the 10th paragraph.)