Merry Christmas and congratulations to you, if you’re a U.S. corporation. On Wednesday, your congressional friends gave you the greatest one-time tax cut in U.S. history. The Tax Cuts and Jobs Act slashes the corporate rate from 35 percent to 21 percent. Of course, this reduction in the tax rate is really theoretical because many huge corporations pay substantially less than that. Besides, the “new” rate is what 258 huge corporations have paid, on average, in the past. Between 2008 and 2015, these companies paid an effective federal income tax rate of 21.5 percent. Eighteen of them paid no tax at all, and 48 others paid less than 10 percent.
Let’s look at AT&T. Between 2008 and 2012, Congress gave the corporation $19.2 billion in tax subsidies, according to the Washington Post. By adding this generous gift to various tax breaks and loopholes, AT&T paid an effective tax rate of 8 percent. One of the rationales for favoring low taxes for huge corporations is that the savings will filter down to current employees and will also create jobs. But, between 2008 and 2015, AT&T reduced its total workforce by nearly 80,000 jobs while spending more than $34 billion on stock repurchases and executive bonuses.
A study of the 258 corporations, published by the Institute on Taxation and Economic Policy (ITEP), showed that — during the years between 2008 and 2015 — collectively they earned more than $3.8 trillion in pretax profit. Profit, of course, is the money that is left over after the organizations have paid rents, salaries, bonuses, benefits, dividends, and other business expenses. If they had paid the statutory 35 percent corporate tax rate, that would have come to $1.3 trillion over the seven-year period. But, in fact, they paid just 60 percent of that amount.
The difference in what they were supposed to pay and what they actually paid was largely due to tax subsidies, a staggering $527 billion. More than half of that, $286 billion, went to just 25 companies. AT&T was at the top the list. It received more than $38 billion in tax subsidies over the eight years. The other winners in the Subsidy Bowl were Wells Fargo, $31.4 billion; J. P. Morgan Chase, $22.2 billion; IBM, $17.8 billion; and Exxon Mobil, $12.97 billion.
Now, take a look at your PG&E bills. If you keep annual records, you’ll see how the amount that you pay has steadily increased. But, the ITEP study shows that gas and electric utility companies had the lowest effective federal tax rate, a mere 3.1 percent average over the eight years of the investigation. While your bill went up annually, the corporations’ tax rate declined from 12.8 percent in 2008 to 1.8 percent in 2015. The report states: “These results were largely driven by the ability of these companies to claim accelerated depreciation tax breaks on their capital investments. None of the 25 utilities in our sample paid more than half of the 35 percent statutory tax rate during the 2008 to 2015 period.”
Lobbyists for our giant corporations claim that their clients need even more tax breaks in order to be competitive with foreign firms. The ITEP study concludes, “But the figures that most of these corporations report to their shareholders indicate the exact opposite, that they pay higher corporate income taxes in other countries where they do business than they pay here in the U.S.”
The authors of the study compared what 107 companies that had significant pretax foreign profits paid in foreign effective tax rates with what they paid here. They found that about 60 percent of these corporations paid higher foreign tax rates on foreign profits than they paid in U.S. rates on their U.S. profits. Yet, the effective foreign tax rate on the 107 companies was roughly equivalent to the U.S. effective tax rate. Any difference is due to distortions that their accountants create. ITEP states that “many of these corporations are likely to report something very different to the IRS by using various legal but arcane accounting maneuvers.”
And how does this profit-shifting arise? “Some of the profits correctly reported to shareholders as U.S. profits are likely to be reported to the IRS as profits earned in tax-haven countries like Bermuda or the Cayman Islands, where they are not taxed at all.” The study clearly states: “This ‘profit-shifting’ problem will exist so long as our tax laws allow corporations to ‘defer’ paying U.S. taxes on their ‘offshore’ profits, providing an incentive to make U.S. profits appear to be earned in offshore tax havens.”
Decades ago, the IRS allowed “accelerated depreciation” on equipment and certain other tangible investments made by U.S. corporations. In 2008, while the economy was in the early stages of the Great Recession, Congress expanded these depreciation tax breaks by interjecting a “temporary 50 percent bonus depreciation.” This provision allowed companies to write off as much as 75 percent of the cost of investments in new equipment immediately. This “temporary” adjustment in the tax law has been allowed year after year and is currently scheduled to expire at the end of 2019.
ITEP reports, “These changes to the depreciation rules, on top of the already far-too-generous depreciation deductions allowed under pre-existing law, certainly did reduce taxes for many of the companies … by tens of billions of dollars.” Moreover, a recent Congressional Research Service report indicates that “accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”
As ITEP shows, “A corporation can borrow money to purchase equipment or a building, deduct the interest expenses on the debt and quickly deduct the cost of the equipment or building thanks to accelerated depreciation.” Unbelievably, all of this financial maneuvering can make an investment more profitable after-tax than before-tax.
Taxing seems to be a zero-sum game. In other words, somebody’s gain is another person’s loss. So, who’s the loser? The answer is the general public, you and me. To make up for corporate gains, we have to pay more for — and/or get less in — public services. The only alternative is to increase annual deficit spending, which adds to the national debt through borrowing. According to the U.S. Debt Clock, the total debt is now more than $20.6 trillion. The U.S. population is about 326.5 million. So each man, woman, and child owes about $63,000, and each family of four owes a about a quarter of a million dollars.
Happy New Year!
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Jim Glynn may be contacted email@example.com.