- 379 large, profitable U.S. companies in 2018 paid an effective tax rate of 11.3%, the first year the Tax Cuts and Jobs Act was in force, a new study finds.
- That's slightly more than half of the nominal corporate tax rate of 21%, which itself was reduced by the TCJA from a previous rate of 35%.
- Last year's corporate tax cuts have boosted stock buybacks but has done little to raise wages for workers, another study finds.
Hundreds of large, profitable U.S. corporations are paying a tax rate that most Americans can only dream of: 11.3%. That's according to a new analysis of the impact of the Tax Cuts & Jobs Act, which President Donald Trump signed into law two years ago.
The study, from the progressive Institute on Taxation and Economic Policy, reviewed financial filings for Fortune 500 companies, finding 379 corporations that reported profits in 2018 and that also provided enough data to calculate their "effective" tax rates, meaning after deductions are factored in. Last year was the first full year that the new tax law went into effect. The 11.3% effective rate is the lowest the ITEP says it has measured since 1984, when it began studying the issue.
The findings also show that the effective tax rate for the large businesses cited by ITEP is considerably lower than the 21% nominal corporate rate instituted by the TCJA, which had cut the corporate tax rate from 35%.
At the time of the TCJA's passage, the White House vowed that slashing corporate taxes would unleash economic growth and provide higher wages for workers. But there's little evidence that has occurred, according to a separate analysis from the liberal-leaning Economic Policy Institute.
"What the plan has done is dramatically increase stock buybacks and exacerbate decades of rising income inequality," said EPI director of research Josh Bivens in a statement.
Among the Fortune 500 businesses, 91 corporations didn't pay federal income taxes on their 2018 income, according to ITEP. Among those cited is retail giant Amazon, which declined to comment specifically on the report. However, a spokesperson said in an emailed statement that the company "pays all the taxes we are required to pay in the U.S. and every other country where we operate."
The company added, "Over the last three years, we paid $2.6 billion in corporate taxes. We also collect and remit sales tax and pay state income taxes. Congress designed our tax laws to encourage companies to reinvest in the American economy – we have. We've invested more than $270 billion in the U.S. since 2011 and created 300,000 U.S. jobs."
To be sure, the analysis is based on public filings, rather than corporations' actual tax filings to the IRS, which are private. That means the actual federal tax payments may differ from the estimates. And state and local taxes paid by companies are not included in the ITEP study.
$500 billion on stock buybacks
Many big corporations are using part of their tax windfall to purchase their own stock, a financial strategy that helps boost their share price and can benefit investors. In 2018, companies spent $580 billion to buy back their own shares, a jump of 50% from a year earlier, EPI said. It's likely stock buybacks will again reach at least $500 billion this year, it added.
Stock buybacks have become a talking point in the presidential campaign, with Democratic candidate Bernie Sanders of Vermont proposing to ban the strategy. Prior to 1982, stock buybacks were difficult for companies to pursue without fear of being charged with stock manipulation, although that changed when the U.S. Securities and Exchange Commission loosened its regulations that year.
How are tax rates so low?
Even though the statutory tax rate for corporations is 21%, corporations are lowering their effective rate below that thanks to legal loopholes and tax breaks, the ITEP study found. Those methods include "accelerated depreciation," which allows companies to write down the cost of capital investments faster than they actually wear out, and industry-specific tax breaks, such as writeoffs for maintaining railroad tracks
Effective tax rates vary hugely between industries, partly due to those tax breaks. About half of total tax subsidies went to three industries: financial services, utilities, and oil, gas and pipelines, ITEP said.
But the lowest effective federal tax rate last year went to industrial machinery companies, which paid a rate of -0.6%, the study found. That was largely due to the rule about accelerated depreciation, which allowed them to claim large tax breaks on their capital investments.
The impact of the corporate tax cut was to enrich wealthy shareholders while diverting revenue away from the U.S. government and workers, ITEP and EPI argue. (Both groups favor a hike in corporate taxes.) For instance, if the 379 businesses identified in the ITEP study had instead paid the 21% tax rate, the U.S. would have generated an additional $74 billion in tax revenue, the analysis estimates.
"Corporations' claims that the TCJA spurred worker bonuses and wage increases were baseless PR and are not supported by serious analysis," the EPI study noted. "While wage growth accelerated only slightly in the two years before the TCJA, this growth has outright decelerated in the first ten months of 2019."