Declining Corporate Tax Payments
In the Bush Years
by Robert Mcintyre and T.D. Coo
Multinational Monitor, November
Ostensibly, the U.S. federal tax code
requires corporations to pay 35 percent of their profits in income
But of the 275 Fortune 500 companies that
made a profit each year from 2001 to 2003 and for which adequate
information to draw conclusions is publicly available, only a
small proportion paid federal income taxes anywhere near that
statutory 35 percent tax rate. The vast majority paid considerably
In fact, in 2002 and 2003, the average
effective tax rate for all of these 275 companies was less than
half the statutory 35 percent rate. Over the 2001-2003 period,
effective tax rates ranged from a low of-59.6 percent for Pepco
Holdings to a high of 34.5 percent for CVS.
Over the three-year period, the average
effective rate for all 275 companies dropped by a fifth, from
21.4 percent in 2001 to 17.2 percent in 2002-2003.
The statistics are startling:
* Eighty-two of the 275 companies, almost
a third of the total, paid zero or less in federal income taxes
in at least one year from 2001 to 2003. In the years they paid
no income tax, these companies earned $102 billion in pretax U.S.
profits. But instead of paying $35.6 billion in income taxes as
the statutory 35 percent corporate tax rate seems to require,
these companies generated so many excess tax breaks that they
received outright tax rebate checks from the U.S. Treasury, totaling
$12.6 billion. These companies' "negative tax rates"
meant that they made more after taxes than before taxes in those
* Twenty-eight corporations enjoyed negative
federal income tax rates over the entire 2001-2003 period. These
companies, whose pretax U.S. profits totaled $44.9 billion over
the three years, included, among others: Pepco Holdings (-59.6
percent tax rate), Prudential Financial (-46.2 percent), ITT Industries
(-22.3 percent), Boeing (-18.8 percent), Unisys (-16.0 percent),
Fluor (-9.2 percent) and CSX (-7.5 percent), the company previously
headed by current Secretary of the Treasury John Snow.
* In 2003 alone, 46 companies paid zero
or less in federal income taxes. These 46 companies told their
shareholders they earned U.S. pretax profits in 2003 of $42.6
billion, yet they received tax rebates totaling $5.4 billion.
Almost as many companies, 42, paid no tax in 2002, reporting $43.5
billion in pretax profits, yet receiving $4.9 billion in tax rebates.
From 2001 to 2003, the number of no-tax companies jumped from
33 to 46, an increase of 40 percent.
* In 2001, the Treasury paid corporations
$40 billion in tax refunds, a third more than the 1998-2000 average.
* Then in 2002 and 2003, after the law
was changed to expand tax subsidies and make it easier for corporations
to carry back excess tax breaks to earlier years, corporate tax
refunds skyrocketed to an average of $63 billion a year - more
than double the 19982000 average.
Corporations are now paying the lowest
levels of taxes in the post-World War 11 era. In fiscal 2002 and
2003, federal corporate incomes taxes dropped to their lowest
sustained level as a share of the economy since World War II.
Only a single year during the early Reagan administration was
In 1986, President Ronald Reagan fully
abandoned his earlier policy of showering tax breaks on corporations.
The Tax Reform Act of 1986 closed tens of billions of dollars
in corporate loopholes, so that by 1988, the overall effective
corporate tax rate for large corporations was up to 26.5 percent.
That improvement occurred even though the statutory corporate
tax rate was cut from 46 percent to 34 percent as part of the
In the 1990s, however, many corporations
began to find ways around the 1986 reforms, abetted by tax-shelter
schemes devised by major accounting firms.
Effective corporate tax rates then plummeted,
thanks to Bush administration-backed tax breaks passed in 2002
and 2003, continued corporate offshore tax-sheltering, and the
refusal of the Congress and White House to crack down on even
the most abusive inherited corporate tax-sheltering activities.
Corporate taxes paid for more than a quarter
of federal outlays in the 1950s and a fifth in the 1960s. They
began to decline during the Nixon administration, yet even by
the second half of the 1990s, corporate taxes still covered 11
percent of the cost of federal programs. But in fiscal years 2002
and 2003, corporate taxes paid for a mere 6 percent of federal
BILLIONS AND BILLIONS
Over the 2001-2003 period, the 275 Fortune
500 companies that were profitable each year and for which adequate
information is publicly available earned almost $1.1 trillion
in pretax profits in the United States. Had all of those profits
been reported to the Internal Revenue Service (IRS) and taxed
at the statutory 35 percent corporate tax rate, then the 275 companies
would have paid $370 billion in income taxes over the three years.
But instead, the companies reported only about half of their profits
- $557 billion - to the IRS. Instead of a 35 percent tax rate,
the companies as a group paid a three-year effective tax rate
of only 18.4 percent.
In 2002 and 2003, the 275 companies sheltered
more than half of their profits from tax. They told their shareholders
they earned $739 billion in those two years, but they paid taxes
on less than half of that, only $363 billion.
Loopholes and other tax subsidies cut
taxes for the 275 companies by $43.4 billion in 2001,$60.8 billion
in 2002 and $71.0 billion in 2003, for a total of $175.2 billion
in tax breaks over the three years.
Half of the total tax-break dollars over
the three years - $87.1 billion went to just 25 companies, each
with more than a billion-and-a-half dollars in tax breaks.
General Electric topped the list of corporate
tax break recipients, with $9.5 billion in tax breaks over the
Effective tax rates varied widely by industry.
Over the 2001-2003 period, industry effective tax rates for the
275 corporations ranged from a low of 1.6 percent to a high of
In 2003, the range of industry tax rates
was even greater, ranging from a low of -30.0 percent (a negative
rate) up to a high of 27.9 percent.
* Aerospace and defense companies enjoyed
the lowest effective tax rate over the three years, paying only
1.6 percent of their profits in federal income taxes. This industry's
taxes declined sharply over the three years, falling to -30.0
percent of profits in 2003.
* Other very low-tax industries, paying
less than half the statutory 35 percent tax rate over the entire
2001-2003 period, included: transportation (4.3 percent), industrial
and farm equipment (6.2 percent), telecommunications (7.5 percent),
electronics and electrical equipment (10.8 percent), petroleum
and pipelines (13.3 percent), miscellaneous services (14.4 percent),
gas and electric utilities (14.4 percent), computers, office equipment,
software and data (16.0 percent), and metals & metal products
* Not a single industry paid an effective
tax rate of more than 29 percent, either for the entire three-year
period or in any given year.
Within industries, effective tax rates
also varied widely. For example, over the three-year period, average
tax rates on oil companies ranged from 3.0 percent for Devon Energy
up to 31.4 percent on Marathon Oil. Among aerospace and defense
companies, three-year effective tax rates ranged from a low of
-18.8 percent for Boeing up to a high of 25.0 percent for General
HOW THEY DO IT
There are myriad reasons why particular
corporations paid low taxes. The key major tax-lowering items
revealed in the companies' annual reports - plus some that are
not disclosed include:
The tax laws generally allow companies w write off their capital
investments considerably faster than the assets actually wear
out. This "accelerated depreciation" is technically
a tax deferral, but so long as a company continues to invest,
the tax deferral tends to be indefinite. In 2002 and again in
2003, Congress passed and President Bush signed new business tax
breaks totaling $175 billion over the 2002-2004 period. These
new tax subsidies centered on a huge expansion in accelerated
depreciation, coupled with rules making it easier for companies
with an excess of tax breaks to get tax rebate checks from the
Treasury by applying their excess tax deductions to earlier years
and still other new tax subsidies.
Atop the list of accelerated depreciation
beneficiaries are SBC Communications, with $5.8 billion in accelerated
depreciation tax savings, Verizon (with $4.5 billion), Devon Energy
($4.4 billion), ExxonMobil ($2.9 billion) and Wachovia ($2.8 billion).
Most big corporations give their executives and other employees
options to buy the company's stock at a favorable price in the
future. When those options are exercised, corporations can take
a tax deduction for the difference between what the employees
pay for the stock and what it is worth. But in reporting profits
to shareholders, companies do not treat the effects of stock-option
transactions as business expenses - based on the arguable theory
that issuing stock at a discount doesn't really reduce profits
because the market value of a company's stock often has only a
very attenuated relation to earnings.
The corporate tax benefits from stock
option write-offs are quite large. Of the 275 corporations, 269
tax benefits over the 2001-2003 period,
which lowered their taxes by a total of $32 billion over three
years. The benefits ranged from as high as $5 billion for Microsoft
over the three years to tiny amounts for a few companies.
Overall, tax benefits from stock options
cut the average effective corporate tax rate for the 275 companies
by 3 percentage points over the 2001-2003 period.
The benefits declined after 2001, however,
falling from $13 billion in 2001 to about $9.5 billion a year
in 2002 and 2003. The tax-rate effects of stock options are likely
to continue to decline as accounting standards are changed to
reduce the disparity between the book and tax treatment of options.
Tax credits. The federal tax code also
provides tax credits for companies that engage in certain activities
- for example, research (on top of allowing immediate expensing
of research investments), certain kinds of oil drilling, exporting,
hiring low-wage workers, affordable housing and supposedly enhanced
coal (alternative fuel). As credits, these directly reduce a company's
Some credits have unexpected beneficiaries.
For instance, Bank of America cut its taxes by $580 million over
the 20012003 period by purchasing affordable-housing tax credits.
Clorox saved $36 million, Kimberly-Clark, $115 million, and Illinois
Tool Works, an unspecified amount, from those same credits. Bank
of New York obtained $100 million in alternative fuel credits
over that period. Marriot International operates four coal-based
synthetic fuel facilities solely for the tax benefits, which cut
Marriot's taxes by $233 million in 2003 and $159 million in 2002.
Offshore tax sheltering. Over the past
decade, corporations and their accounting firms have become increasingly
aggressive in seeking ways to shift their profits, on paper, into
offshore tax havens, in order to avoid their tax obligations.
Some companies have gone so far as to renounce their U.S. "citizenship"
and reincorporate in Bermuda or other tax-haven countries to facilitate
tax sheltering activity.
Not surprisingly, corporations do not
explicitly disclose their abusive tax sheltering in their annual
reports. For example, Wachovia's extensive schemes to shelter
its U.S. profits from tax are cryptically described in the notes
to its annual reports merely as "leasing." It took extensive
digging by PBS's Frontline researchers to discover that Wachovia's
tax shelter involved pretending to own and lease back municipal
assets in Germany, such as sewers and rail tracks, a practice
heavily promoted by some accounting firms. Other tax shelter devices,
such as abuses of "transfer pricing," also go unspecified
in corporate annual reports. Nevertheless, corporate offshore
tax sheltering is estimated to cost the U.S. Treasury anywhere
from $30 billion to $70 billion a year, and presumably the effects
of these shelters are reflected in the bottom-line results of
what companies pay in tax.
TAX REFORM (& DEFORM) OPTIONS
Almost two decades after the major corporate
tax reforms under Ronald Reagan in 1986, many of the problems
that those reforms were designed to address have reemerged, along
with an array of new corporate tax-avoidance techniques.
If policymakers wanted to reform the corporate
income tax to curb tax subsidies and make the taxation of different
industries and companies more equal, they certainly could do so.
They could focus on the long list of corporate tax breaks, or
as they are officially called, "corporate tax expenditures"
produced each year by the joint Committee on Taxation and the
U.S. Treasury. They could reinstate a stronger corporate Alternative
Minimum Tax that really does the job it was originally designed
to do. They could rethink the way the corporate income tax currently
treats stock options. They could adopt restrictions on abusive
corporate tax sheltering, as the Clinton Treasury Department proposed.
They could reform the way multinational corporations allocate
their profits between the United States and foreign countries,
so that U.S. taxable profits are not artificially shifted offshore.
But all signs point to movement in the
opposite direction. In October, Congress adopted legislation to
comply with a World Trade Organization (WTO) ruling that an export
tax subsidy violates certain WTO obligations. The legislation
closed some heavily criticized corporate loopholes that almost
everyone agrees are unwarranted. But at the same time, the bill
expanded existing and created new tax breaks - to the tune of
$210 billion, mostly for corporations. They even include measures
that would make it easier (and more lucrative) for companies to
shift taxable profits, and potentially jobs, overseas.
The tax bill will further reduce corporate
taxes substantially over time. In fact, one of the biggest winners
under the bill will be General Electric, the company that already
enjoys more tax subsidies under existing law than any among the
275 Fortune 500 firms making a consistent profit from 2001 to
Robert McIntyre is director of Citizens
for Tax Justice. TD. Coo Nguyen works with the Institute on Taxation
and Economic Policy. This article is based on the two organizations'
report, "Corporate Income Taxes in the Bush Years,"
published in September 2004.