Most Corporations Don’t Pay Income Taxes

By Richard Rubin | Most corporations, including the vast majority of foreign companies doing business in the United States, pay no income taxes, according to a Government Accountability Office report released Tuesday.

During the eight-year period covered by the report, 72 percent of foreign-owned corporations went at least one year without owing taxes, and the same was true for 55 percent of domestic corporations.

Small companies were much more likely to pay no taxes than larger companies. Still, more than 3,500 large domestic corporations - with more than $250 million in assets or $50 million in gross receipts - did not pay taxes in 2005.

The report said about 80 percent of the companies studied paid no taxes because they didn’t generate any profit after expenses. Money-losing companies can legitimately owe no tax, and others can use provisions of the tax code to lower or eliminate their liability.

But the lawmakers who sought the data seized on the report as proof of corporate gamesmanship.

“It’s shameful that so many corporations make big profits and pay nothing to support our country,” said Byron L. Dorgan , D-N.D., who requested the report along with Carl Levin , D-Mich. “The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes. We need to plug these tax loopholes and put these corporations back on the tax rolls.”

The report covered the period from 1998 through 2005. During that time, corporate income taxes as a share of gross domestic product dipped, from 2.2 percent in 1998 to 1.2 percent in 2003, the lowest share since 1983. But receipts jumped after that, hitting 2.7 percent in 2006 and 2007, according to the Office of Management and Budget. That was the highest share since the late 1970s.

The GAO report also found that foreign-owned corporations were somewhat more likely to report no income than domestic corporations. There are several possible reasons for that. Foreign corporations may be younger, and startups are more likely to have no net income after expenses. They may also be in industries with lower profit margins.

Another possibility could be the use of transfer pricing, which companies use to account for transactions between subsidiaries in different countries. Creative, rule-stretching use of transfer pricing can allow companies to push their profits into lower-taxed jurisdictions. The report does not attempt to examine whether illegal transfer-pricing caused the difference between foreign and domestic companies.

But companies looking for lower-taxed jurisdictions often take profits out of the United States. The country’s 35 percent top rate on corporate income is among the highest in the industrialized world.

Many tax experts and lawmakers from both parties, including Ways and Means Chairman Charles B. Rangel , D-N.Y., and presidential candidate Sen. John McCain , R-Ariz., have called for lowering the corporate tax rate. Lawmakers are likely to differ on what revenue-raising measures, if any, should be paired with a corporate rate cut.

In addition, Levin, Finance Chairman Max Baucus , D-Mont., and other senators have been trying to close the “tax gap,” the difference between taxes owed and taxes collected.

In a statement, Baucus said, “I’m committed to finding ways to improve compliance and reduce taxpayer burden so that we begin to bridge the tax gap, which accounts for $345 billion in legally owed but uncollected federal revenues each year.”

He said the GAO report “shows yet again the need for full-fledged [tax] reform next year….”

“We are constantly reviewing the tax code to find ways to crack down on those who are trying to avoid paying their fair share, without placing undue compliance or reporting burdens on honest taxpayers. As part of this on-going effort, we are reviewing the GAO report to see what it might suggest about where to target tax gap efforts,” Baucus said.

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