On paper, the United States has the highest corporate income tax, at 35%, amongst all of the OECD industrialized nations. President Donald Trump has promised to cut that rate to 15% even as he has boasted that his corporate empire has managed to pay little to no income tax in some years. Yet, he is not alone, as hardly any company pays the full 35%, as indicated in a recent New York Times article. Some companies have even managed to pay absolutely zero in income taxes, and no, it is not because they weren’t profitable. (For more, see: How Trump's Proposals Can Impact Your Taxes.)
The Real Tax Bill
The Institute on Taxation and Economic Policy (ITEP), in a recent study, found that over the eight-year period from 2008 to 2015, 258 profitable Fortune 500 companies paid an average effective federal income tax rate of 21.2%. Over that same period, exactly 18 companies, including General Electric, International Paper, Priceline.com and PG&E Corp., avoided paying a single penny of federal income tax.
The complete list of the 18 corporations is listed below in a graphic from ITEP’s report:
A total of 100 companies avoided paying income taxes in at least one year between 2008 and 2015, and their combined pretax income during that period totaled $336 billion. Yet, instead of paying $118 billion according to the 35% statutory income tax rate, the number of tax breaks applicable to these companies allowed them to earn a negative effective tax rate. That means they actually earned more in their after-tax income than in their pretax income, often due to tax rebates from the U.S. Treasury.
How to Avoid Taxes
There are several major ways that corporations avoid paying taxes, or manage to earn tax subsidies. One way is through finding ways to shift U.S. profits to foreign subsidiaries in countries with lower tax rates, a practice known as offshore tax sheltering.
Another way is through the use of accelerated depreciation. The relative degree of freedom in tax laws has allowed companies to expense the cost of their capital at a faster pace than it actually wears out. This allows a company to declare less income and thus defer paying taxes until later years, and as long as the company continues to invest, the deferral of taxes can continue for an indefinite amount of time.
The giving of stock options to employees, as a part of their compensation, is another avenue that has helped companies reduce their total tax bill. When the options are exercised, the difference between what employees pay for the stock and its market value can be claimed for a tax deduction.
Finally, some industries such as research, oil and gas drilling, ethanol production, alternative energy, video game and film production, are privileged by the federal tax code to receive certain tax breaks.
Over the eight years, more than half of the total tax subsidies, which totaled $286 billion, went to just 25 companies. AT&T raked in the largest amount with a total of $38 billion in subsidies over the period. Other major recipients included Wells Fargo at $31.4 billion, J.P. Morgan Chase at $22.2 billion, Verizon at $21.1 billion, IBM at $17.8 billion and Exxon Mobil at $12.9 billion.