If you're the CEO of drugstore company CVS Caremark (CVS), for instance, you might gnash your teeth at paying an effective tax rate of 38.8 percent, which exceeds the top statutory corporate rate of 35 percent. But if you're the boss of GE, you'd probably have no complaints at all, since over the last three years your conglomerate has paid an average effective rate of 3.6 percent.
As shown by the chart at bottom, prepared by Tax Analysts contributing editor Martin Sullivan, there are enormous disparities in how much companies pay in taxes. Here's why: Some corporations generate much of their profits in countries with low taxes.
How corporate tax dodges hurt the economy
As Sullivan, a former Treasury Department economist, recently told House lawmakers meeting to discuss tax reform, that's bad for several reasons. First, it favors some industries over others, particularly big multinationals in sectors where manufacturing and technology can easily be shifted overseas. That distorts competition and hurts smaller companies whose businesses are concentrated in the U.S.
Second, allowing large companies like GE, Google (GOOG) and Microsoft (MSFT) to shelter profits in foreign tax havens costs the federal government hundreds of billions of dollars in foregone revenue. The Obama administration estimates that sealing off overseas tax loopholes could raise $190 billion over the next decade.
Indeed, the amount of corporate taxes collected in the U.S. has been falling since the mid-1960s, even as it has risen in other developed economies. Most advanced countries have a lower nominal tax rate than the U.S., but also allow fewer loopholes.
As a result, despite having among the highest statutory tax rates in the industrialized world, the U.S. collects far less in corporate taxes as a percentage of GDP than other comparable states (click on adjoining chart to expand) -- a shortfall that other taxpayers have to make up. As NYT economics writer David Leonhardt recently said, it's the worst of all worlds.
Third, rewarding big companies that move their operations overseas with big tax breaks discourages them from creating jobs in the U.S. The counterargument is that profits generated abroad also benefit the home front (and there's some evidence that is true). But not when it comes to jobs.
Citing data from the U.S. Commerce Department, Sullivan notes that since 1999 U.S. multinationals have slashed domestic employment by 1.9 million, while increasing overseas employment by 2.4 million. Part of that is obviously because of the lower labor costs in Asia and other places. But it's also because of tax benefits, given that effective rates in the U.S. have consistently fallen in recent years. Said Sullivan in his testimony:
Whatever the positive effects of foreign operations may be on domestic employment, they have not offset the job losses. U.S. multinational corporations are not net domestic job creators.This isn't to bash big U.S. companies. As Sullivan noted, they conduct most of the private-sector research and development in this country. They also account for a disproportionately large share of exports.
But it is to recognize that companies focused on doing business here at home are equally important. It also calls into question why leading business groups claiming to represent enterprises large and small are lobbying to preserve overseas tax breaks for huge multinationals.
When it comes to taxes, the playing field in American business is terribly uneven. Time to level it.
Thumbnail from Flickr user Minimalist Photography