A new report by Citizens for Tax Justice and its sister organization, the Institute for Taxation and Economic Policy (h/t Dirt Diggers Digest), documents the extent to which the Fortune 500 is able to skate around the tax system and pay far less than its fair share. The study covers 280 firms in the F500 that had pre-tax profits in the U.S. every year from 2008 to 2010, excluding companies that reported "ridiculous" geographic allocations of their pre-tax profits
Between subsidies, stock options, indefinite deferral of taxes on income earned abroad, apparently abusive transfer pricing, skillful use of tax havens, and aggressive tax shelters (which can only be identified after the fact), these companies reduced the amount of their global income that was taxable in the United States, and slashed the amount paid on their U.S. taxable income by over $70 billion per year. That is, the difference between what these companies would have paid at the 35% corporate income tax on their $1.4 trillion in U.S. profits over those three years, and what they actually paid, came to $222.7 billion.
This only scratches the surface. Note that this is only the companies' U.S. income--which has already been reduced by transfer pricing, making profits show up in low-tax foreign jurisdictions. The report singles out Google and Microsoft because "almost all or even more than all of their pretax profits were reported as foreign, even though most of their revenues and assets were in the United States." In Microsoft's case, as I report in my latest book, one of its subsidiaries in Ireland had $16 billion in patent assets but almost no employees, draining royalties from the U.S. to Ireland for booking purposes. U.S. companies do not pay taxes on their foreign earnings until they are brought back to the United States. As the CTJ/ITEP report points out, if the U.S. stopped taxing foreign earnings, as for example, Herman Cain and Rick Perry advocate, this would create even bigger incentives to declare profits overseas rather than in this country.
Considering U.S. taxes only, the report shows that 30 companies paid negative tax rates on their 2008-10 domestic income, with General Electric having negative taxes in all three years, receiving $4.7 billion in tax refunds despite $10.5 billion in U.S. pre-tax income.
As I have emphasized repeatedly, what one group does not pay in taxes means higher taxes on others, greater deficits, or budget cuts. One way or the other, those of us who do pay our taxes are harmed by those who do not. This report does a great job spotlighting the worst offenders. In posts in the near future, I will discuss how transfer pricing works, and ways to tackle tax havens.