Firms Often Avoided Taxes
More than half of U.S. corporations paid no federal income taxes during the boom years of the late 1990s, and those that did were able to shelter much of their income, according to congressional accountants.
The report by the General Accounting Office raises questions about whether the corporate income tax burden is too light and distributed unequally. It could undermine arguments that U.S. companies are overtaxed and provide ammunition to politicians and activists who claim companies are using loopholes to avoid paying their fair share.
“This describes a problem in the corporate tax system in which a good many of these companies are avoiding any tax obligation at all,” said Sen. Byron L. Dorgan (D-N.D.), a former state tax commissioner who requested the GAO study. “We’ve got a bad tax law that tells ordinary folks, ‘You pay up,’ and allows some of the largest enterprises to avoid paying.”
The share of tax receipts paid by corporations has been declining for decades, U.S. government figures show. But it has been falling at an even faster rate in many other countries, said Gary Hufbauer, senior fellow at the Institute for International Economics, and any attempt to raise corporate taxes or close loopholes in this country runs the risk of making U.S. companies less competitive in world markets.
“When you get a report like this people think, gee, they’re getting away with murder,” he said. “But most of the murder they’re getting away with was deliberately designed by legislatures in response to competitive concerns. This is the result.”
The GAO report showed that 61% of U.S. corporations paid no federal income taxes from 1996 through 2000, a period of rapid economic growth and rising corporate profits. The study was based on an Internal Revenue Service sampling of more than 2 million tax returns, most of them from smaller companies.
An estimated 94% of U.S. corporations reported tax liabilities amounting to less than 5% of their total income in 2000. The corporate income tax rate is ostensibly 35%, but companies are able to reduce their effective burden by claiming various deductions and credits, in some cases for losses incurred in other years.
U.S. companies paid an average of $11.88 in corporate taxes for every $1,000 in gross receipts, the study said.
Small corporations were more likely to avoid taxation than large ones, it showed. About 38% of big companies (those with more than $250 million in assets or $50 million in revenue) paid no taxes during the five-year period.
Foreign-owned firms fared better in some respects than their U.S.-based competitors. The report found that 71% of foreign-controlled corporations paid no taxes on their U.S. income, while 89% had liabilities of less than 5% of their income.
The GAO didn’t attempt to determine why so many firms were able to avoid paying taxes. It said possible explanations included legitimate deductions for current-year operating losses, losses carried forward from previous years and sufficient credits to offset any tax liabilities. In addition, it said improper pricing of transactions between U.S. and foreign operations could contribute to tax avoidance.
The findings feed into a broader political debate over taxes. President Bush and many Republicans have been working to reduce corporate taxes, contending that tax cuts would make U.S. companies more competitive globally and better able to create jobs at home.
Democratic challenger Sen. John F. Kerry cited the GAO findings Tuesday during a rally on the banks of the Ohio River in Cincinnati, expressing outrage that many companies were paying no taxes despite productivity-driven profit gains.
“The burden of the tax share is being shifted to the average worker in this country,” Kerry said, eliciting a chorus of boos from his audience. “It’s being shifted to the worker at the expense of fairness in America.”
Yet even Kerry has advocated an across-the-board reduction in corporate taxes, although he has called for closing loopholes that may encourage U.S. companies to move jobs overseas.
The percentage of federal tax collections paid by corporations has tumbled from a high of 39.8% in 1943 to a low of 7.4% last year. It ranged from 10% to 11% in 1996 to 2000, the period studied by the GAO. But since World War II, the share paid by individual income tax filers has remained relatively stable, bouncing between 40% and 50%. Most of the difference is explained by higher payroll taxes for Social Security and Medicare.
“The accounting firms have been very aggressive at marketing shelters to the companies,” said Robert McIntyre, director of Citizens for Tax Justice, a Washington advocacy group. “I am very hopeful it will be a big issue in the presidential campaign.”
Eugene Steuerle, a former Reagan administration tax official, said the declining share of corporate taxes reflected the increasing sophistication of companies and of the lawyers and accountants who advise them.
“It’s called arbitraging the tax system,” said Steuerle, now a senior fellow at the Urban Institute. “You move income from a high-tax-rate country to a low-tax-rate country. You move deductions to where they get the biggest tax advantage ... and so on and so forth.”
Said lawmaker Dorgan, “The IRS has to begin enforcing the tax laws in an acceptable way. Part of this is a problem with the tax law. Another part of it is massive tax avoidance, and perhaps in many cases tax evasion.”
Times staff writer Maria L. La Ganga in Cincinnati contributed to this report.
