Profitable U.S. corporations paid only about 13 to 17 percent of their pretax worldwide income in U.S. federal income taxes, according to a new report from the Government Accountability Office based on data from the actual tax returns filed by the corporations.
For tax year 2010 (the most recent year for which information was available), profitable U.S. corporations that filed a Schedule M-3 paid U.S. federal income taxes amounting to about 13 percent of the pretax worldwide income that they reported in their financial statements (for those entities included in their tax returns), the GAO report found. When foreign and state and local income taxes are included, the effective tax rate for profitable filers increases to around 17 percent.
The inclusion of unprofitable firms, which pay little if any tax, also raises the ETRs because the losses of unprofitable corporations greatly reduce the denominator of the measures. “Even with the inclusion of unprofitable filers, which increased the average worldwide ETR to 22.7 percent, all of the ETRs were well below the top statutory tax rate of 35 percent,” said the GAO.
Proponents of lowering the U.S. corporate income tax rate commonly point to evidence that the U.S. statutory corporate tax rate of 35 percent, as well as its average effective tax rate, which equals the amount of income tax corporations pay divided by their pretax income, are high relative to other countries. However, the GAO's 2008 report on corporate tax liabilities found that nearly 55 percent of all large U.S.-controlled corporations reported no federal tax liability in at least one year between 1998 and 2005.
The GAO acknowledged that it could only estimate average ETRs with the data available and could not determine the variation in rates across corporations. The limited available data from Schedules M-3, along with prior GAO work relating to corporate taxpayers, suggest that ETRs are likely to vary considerably across corporations, the GAO cautioned.
The GAO report noted that effective tax rates differ from statutory tax rates in that they attempt to measure taxes paid as a proportion of economic income, while statutory rates indicate the amount of tax liability (before any credits) relative to taxable income, which is defined by tax law and reflects tax benefits and subsidies built into the law. Lacking access to detailed data from tax returns, most researchers have estimated ETRs based on data from financial statements.
A common measure of tax liability used in past estimates has been the current tax expense—either federal only or worldwide (which comprises federal, foreign, and U.S. state and local income taxes). The most common measure of income for these estimates has been some variant of pretax net book income. The GAO was able to compare book tax expenses to tax liabilities actually reported on corporate income tax returns.
Given the difficult budget choices the Congress faces and its need to know corporations’ share of the overall tax burden, the GAO was asked to assess the extent to which corporations are paying U.S. corporate income tax. To carry out its research, the GAO reviewed economic and accounting literature, analyzed income and expense data that large corporations report on the Schedules M-3 that they file with Internal Revenue Service, and interviewed IRS officials. While other studies have also pointed out the relatively low effective tax rates paid by corporations, few had access to the actual tax returns filed by corporations, as the GAO did.
The GAO did not make any recommendations in the report. The GAO provided a draft of the report to the IRS for review and comment, and the IRS provided technical comments which were incorporated as appropriate.
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