Less than zero
In December 2017, every Republican in Congress voted for tax legislation that drastically reduced the corporate tax rate (from 35% to 21%), while preserving loopholes that allow corporations to avoid paying taxes. As a result, many highly profitable corporations are paying no federal income taxes at all.
A new study by the Institute on Taxation and Economic Policy (ITEP) found that 91 corporations in the Fortune 500 paid no federal income tax in 2018. Collectively these companies raked in over $100 billion in profits. The effective tax rate for these corporations is negative 5.9%. That means, at the end of the year, the government is sending them a check.
Some of the largest and most profitable corporations in America are now paying less than nothing in taxes, including Amazon, Chevron, Netflix, and Starbucks.
Overall, the 379 corporations in the Fortune 500 that turned a profit "paid an effective federal income tax rate of 11.3 percent on their 2018 income" — little more than half of the statutory rate. That is "the lowest average effective rate identified by ITEP since it began publishing these studies in 1984."
The difference between the statutory rate (21%) and what each company actually pays is effectively a tax subsidy. Massive corporations like Bank of America, J.P. Morgan Chase, Wells Fargo, Amazon, and Verizon received billions in tax subsidies in 2018.
Overall, corporations in three sectors — financial, utilities, and oil and gas — accounted for 50% of the total subsidies. Utilities paid a -0.5% tax rate, the oil and gas industry paid a 3.6% tax rate, and the financial industry paid a 10.2% rate.
What would Ronald Reagan do?
The 11.3 percent effective tax rate paid by the 379 profitable Fortune 500 corporations is shockingly low. From 2008 to 2015, the average rate was 21.2%. In 1984, ITEP found that corporations were paying just a 14.1% rate. That rate was seen as so egregiously low that by 1986 "President Ronald Reagan fully repudiated his earlier policy of showering tax breaks on corporations." That year, Reagan signed the Tax Reform Act of 1986, which "closed corporate loopholes that had provided tens of billions of dollars in tax breaks." By 1988, the effective corporate tax rate had increased to 26.5%.
This historical context illustrates that tax avoidance is not inevitable; it is a policy choice. The current Republican president and his allies in Congress have decided that massive corporations with billions in yearly profits should pay little to nothing in taxes.
The 2017 tax law is working as it was intended
The extraordinary low tax rates — in many cases less than zero — is not an unexpected consequence of the 2017 tax law. It was the point.
The 2017 bill made it easier for corporations to lower their tax bills through accounting tricks. For example, when a corporation makes a capital investment, the value of those assets depreciates over time, creating a "loss." These losses can be used to reduce taxable profits. But the 2017 bill allowed "companies to immediately write off the entire costs of most capital spending." So the companies now realize losses on capital assets that have not depreciated at all.
At the same time, the 2017 tax bill repealed the corporate Alternative Minimum Tax (AMT), which was designed to ensure that corporations pay some tax on their profits. While the corporate AMT was dramatically weakened, it still provided some assurance that profitable companies paid taxes. Now it's gone.
What Americans want
The 2017 tax bill could become a major liability for Republicans. Americans overwhelmingly believe corporations should pay more taxes. The most recent Gallup poll, conducted in April 2019, found that 69% of people believe corporations are paying too little in taxes. Only 6% of Americans believe that corporations are paying too much.
The numbers were similar in 2017, prior to the passage of the Trump tax cuts. That's why it was not sold as a corporate tax cut. Instead, Americans were told that the bill closed corporate loopholes that allowed corporations to avoid taxes and, in return, lowered the overall rate.
That did not happen. The rate was lowered, and the loopholes were retained and enhanced. The result was a massive corporate tax cut that the American public does not support.
Meanwhile, Congress continues to pile on more corporate tax breaks to benefit specific industries. A spending bill that passed the House on Tuesday included corporate tax breaks for "[b]rewers, distillers, and racehorse owners," among others. A tax on health insurers was also repealed.
The scramble for special interest corporate tax breaks illustrates "the inability of Mr. Trump’s tax cuts to reduce businesses reliance on targeted tax credits and other breaks." The new and extended tax cuts will "add more than $427 billion to the federal debt over the next decade," according to an analysis by the Joint Committee on Taxation.
One provision that didn't survive, however, was a substantial increase in tax credits for low-income families.
Trump wants another corporate tax rate cut
Last week, White House Chief of Staff Mick Mulvaney told a group of CEOs that Trump will push to lower the corporate rate again if he's reelected. Mulvaney said Trump was “disappointed” that the corporate tax cut was not larger.
Mulvaney said this second push for tax cuts will be easier “now that we’ve proven they can work.” But the corporate tax cuts have not worked. The stated purpose of the tax cuts was to spur business investment. But since the tax cuts, private sector investments have dropped.
The lost revenue from Trump's corporate tax cuts has real consequences. If the 379 profitable corporations in the Fortune 500 paid the 21% statutory rate in the actual bill, instead of an 11.3% effective rate, it would raise about $74 billion. If the same companies paid a 25% rate, which was standard just a few years ago, it would raise over $100 billion.
That is real money. Many people have derided plans from Democratic presidential candidates to provide free public college to all Americans as "unrealistic." How much would it cost on an annual basis? $79 billion.
As a result of the 2017 tax cuts, "tax revenue as a proportion of GDP" dropped more in the United States last year than any other country in the Organisation for Economic Cooperation and Development, a group of 36 developed countries.
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