Two-Thirds of Corporations Pay No Taxes, But McCain Still Wants To Lower the Corporate Tax Rate
Two-Thirds of Corporations Pay No Taxes, But McCain Still Wants To Lower the Corporate Tax Rate
A cornerstone of Sen. John McCain’s (R-AZ) economic plan — Jobs for America — is cutting the corporate tax rate from 35 percent to 25 percent, which McCain claims will turn America into a “low-tax business environment.” But as it turns out, even with the rate at 35 percent, most corporations are not paying taxes.
Today, the Government Accountability Office (GAO) released a report showing that between 1998 and 2005 “about two-thirds of corporations operating in the United States did not pay taxes.” Corporations have a “variety of reasons” for not paying, including “the cost of producing their goods, salary expenses and interest payments on their debt.”
McCain, meanwhile, has derided the U.S. corporate tax rate as the “second highest in the world.” While his statement is technically accurate for the purely nominal rate, U.S. tax revenue as a share of the economy is significantly lower (See graph below), and is below the Organization for Economic Cooperation and Development (OECD) average. The U.S. raises less revenue from corporations than Japan, the United Kingdom, and even Ireland, which the McCain campaign cites as a country with a competitive corporate rate.
Source: OECD
The reasons for low U.S. revenue are the tax loopholes, shelters, and giveaways that minimize, or completely eliminate corporate taxes, and which McCain has not proposed fixing. A loophole allowing corporations to keep profits offshore aided Hewlett-Packard, whose CEO at the time was McCain economic adviser Carly Fiorina, in defering taxation on $14.4 billion. This lowered Hewlett-Packard’s effective tax rate from 35 percent to 12 percent.
As ABC’s George Stephanopolous pointed out during an interview with Fiorina, McCain’s proposed cut in corporate taxes won’t entice any corporations to bring money back to the U.S. “if they can pay no taxes” by taking advantage of offshore loopholes.
UPDATE: During an interview on CNBC today, Center for Economic & Policy Research co-director Dean Baker explained that it “doesn’t make any sense” to say that the corporate tax rate is “smothering the economy.” (4:20 into the video)
Baker: We used to have a 50 percent tax rate in the 50’s and 60’s when the economy had its most prosperous period, so I think you’re pretty hard-pressed to make the case that taxes are smothering the economy […] [T]he idea that somehow the tax rate, which is lower now than its been in years past, is strangling corporations, it doesn’t make any sense.
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3 Responses to “Two-Thirds of Corporations Pay No Taxes, But McCain Still Wants To Lower the Corporate Tax Rate”
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While the practice of shifting tax obligations through such techniques as moving operations offshore, and maximizing the many benefits which accrue to corporations is shameful, it’s important to understand that not all corporations are equal with regards to tax obligations. While C-corporations are taxed at corporate rates, it is the participants of S-corporations who are taxed at their marginal rates—rather than the corporation—and therefore, the simplistic label corporation in such dicussions is meaningless.
The tendency to lump all corporations together creates the clearly mistaken impression that many or most corporations are actively working to avoid paying taxes which they are obligated to pay when, in many cases, there is no corporate tax obligation whatsoever.
There is widespread abuse of corporate taxation in all forms, including among S-corporations, limited liability and professional corporations. But, it is not helpful to the discussion to create the overarching impression that all corporations are engaged in tax avoidance when, in fact, this is not the case. All corporations, it turns out, are not created equal with regard to taxation.
August 12th, 2008 at 2:57 pmI find one detail from this report very misleading. It talks about S-Corporations as an example of corporations that don’t pay taxes. However, these corporations pass through their profits to the individual shareholders of the corporation. Corporate profits are taxed as part of the individual tax returns.
Here’s an example of how this works. Say your corporation pays four shareholders $50,000 a year salary (and may pay other non shareholders as well). If the corporation has $200,000 in the bank account at the end of the year then $50,000 of that “profit” is added to each shareholder’s individual return. Their income is reported at $100,000 for the year. This occurs even if the “profit” is not distributed to the shareholders. The tax is paid even if that money stays in the bank to cover the next year’s expenses or to help the corporation get past an economic downturn.
That money raises each of the shareholders from the 25% to the 28% tax rate so the corporate profits are effectively taxed at 28%. This is less than the 39% tax rate which a normal corporation would pay on that money. But, it still is most definitely not a case of the corporation dodging taxes.
August 13th, 2008 at 12:38 pmI’d like to see a more detailed analysis of these companies. Such as C-corp vs. S-Corp. vs. LLC etc. What are the percentages based on ranges of profit and total sales ($$$).
My reason is the tag line “Two thirds of companies pay no taxes…” is what most people focus on yet, not knowing that (like what fletc3her mentioned above) S-Corp status pass the losses to the shareholder’s personal tax returns. It my personal belief that the GOP don’t truly support the small business owner. They don’t what us lowly engineers to be anything other than subservient button pushers. Otherwise, it would be MUCH easier to start a business and keep it going.
August 15th, 2008 at 10:29 am