How Big Corporations Stiff the Tax Man and Worsen the Deficit

Last Updated Jun 3, 2011 8:12 AM EDT

Over the last three years, Boeing (BA) paid an effective federal income tax rate of negative 1.8 percent on profits of $9.7 billion. Now here's what an executive at the aviation giant told House lawmakers today in a hearing on corporate tax reform:
It is our view that significantly reducing the corporate tax rate will improve U.S. competitiveness.... We believe a substantially lower rate and a less complex system would make U.S. companies like Boeing more competitive with the rest of the world.
Bizarro world, presumably. According to Citizens for Tax Justice, a Washington advocacy group that was instrumental in spurring President Reagan to crack down on corporate tax loopholes in 1986, from 2008 to 2010 Boeing and 11 other major U.S. corporations paid an average of negative 1.5 percent in federal income taxes on total pre-tax earnings of $171 billion (see chart at bottom).

As a group, in other words, they collected tax benefits of $2.5 billion. Over that three-year period, 10 of those companies -- which range across industry and include such players as Dupont (DD), Exxon Mobil (XOM), FedEx, GE, IBM, Verizon (VZ) and Wells Fargo (WFC) -- had at least one year when they paid no tax despite reporting a profit.

GE, which the NYT recently exposed as the country's savviest corporate tax-dodger, reaped a tax benefit of $4.7 billion between 2008-10 on total pre-tax profits of $7.7 billion. Over the last two years, meanwhile, Exxon paid a grand total of $39 million in net taxes on total earnings of $9.9 billion. For those of you keeping score at home, that's an effective tax rate of 0.4 percent.

Said CTJ director Bob McIntyre in a statement:

These 12 companies are just the tip of an iceberg of widespread corporate tax avoidance. Our elected officials have a duty to the American public to make reducing or eliminating the vast array of corporate tax subsidies the centerpiece of any deficit-reduction strategy.

How corporate tax subsidies affect the federal deficit
Indeed, if our dirty dozen had paid taxes at the statutory corporate rate of 35 percent, the U.S. government would've been nearly $60 billion richer. That would've boosted federal revenue from corporate taxes by a full 12 percent.

There are only three problems with rewarding profitable corporate giants with huge tax subsidies -- such benefits are enormously expensive, often economically harmful and unfair. According to the Treasury Department, subsidies for corporations, business owners and business investors cost this country at least $365 billion per year, hardly chump change relative to the total U.S. federal debt of $14.3 trillion.

Such tax breaks are also frequently unnecessary, as McIntyre noted in recent congressional testimony. For instance, Boeing scored big earlier this year when the Pentagon awarded it with a $35 billion contract to build airborne tankers for the U.S. Air Force. And nothing wrong with that. But Boeing, which over the past three years has made a pre-tax profit of nearly $10 billion, got something else -- the privilege of paying not a cent in federal income taxes during that time. Does Boeing need that subsidy as an incentive to build planes? No. This is what defense companies do. All it needs is a willing customer, like the Defense Department.

Playing favorites
One point that tends to get lost in the debate over corporate taxes is how the current system unfairly penalizes some companies while benefiting others. As the above table indicates, effective tax rates vary widely by industry (click to expand). It also varies by company. A company like drugstore chain CVS Caremark (CVS) pays an effective rate of nearly 39 percent, for example, while drugmaker Merck's (MRK) rate is only 12.5 percent.

Such disparities owe largely to the distribution of tax subsidies. Other contributing factors include a company's ability to shift earnings to foreign tax havens, differences in state and local taxes, and, as GE shows, the expertise of your tax lawyers.

The bigger point is this -- big corporate tax benefits often amount to money down the drain. They distort competition. They're a poor way of creating jobs and boosting business investment. And they deprive the government of critically needed revenue, undermining efforts to reduce the federal debt.


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    Alain Sherter covers business and economic affairs for