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GAO reports large corporations’ average effective tax rate was well below statutory rate

Corporate Income Tax: Most Large Profitable U.S. Corporations Paid Tax but Effective Tax Rates Differed Significantly from the Statutory Rate (GAO-16-363, March, 2016).

In a report to the Ranking Member of the U.S. Senate’s Committee on the Budget, the Government Accounting Office (GAO) has concluded that, as in its previous 2013 report, the average effective tax rates, whether for all large corporate filers or only profitable ones, were significantly below the 35% maximum statutory rate.

Background. Under Code Sec. 11(b)(1), the income tax rate on an ordinary corporation is:

…15% on the first $50,000 of its taxable income;
…25% on any amount in excess of $50,000 and up to $75,000;
…34% on any amount in excess of $75,000 and up to $10,000,000; and
…35% on any amount in excess of $10,000,000.

How GAO calculates average effective tax rates. The average effective tax rates in GAO’s report are computed as a fraction, the numerator of which is taxes paid or tax liabilities accrued in a given year, and the denominator of which is net income the corporation earned that year (or loss).

GAO’s findings. The GAO found that for tax years 2008 to 2012, profitable large U.S. corporations (i.e., generally those with at least $10 million in assets) paid, on average, U.S. federal income taxes amounting to about 14% of the pretax net income that they reported in their financial statements. In addition, in each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability.

The GAO concluded that when foreign and state and local income taxes were included, the average effective tax rate for tax years 2008 through 2012 increases to just over 22%.

GAO also computed effective tax rates that combine large profitable corporations and those large corporations with current year losses, which pay little if any actual tax. Over tax years 2008 to 2012, all large corporations—profitable and those that reported current year losses—paid 25.9% of their pretax net income in U.S. federal income taxes, and 40.1% when foreign and state and local taxes are included. GAO noted that including corporations with losses results in a more comprehensive estimate, but makes the results difficult to interpret because effective tax rate is not meaningful for a corporation in a year in which it has a net loss. The increase in the effective tax rate that occurs when firms with losses are included is due to the way that the effective tax rate is calculated—these firms pay little tax, and thus have little effect on the numerator, but their losses significantly reduce the denominator.

Looking just at 2012, GAO found that among large corporations, 42.3% paid no federal income tax; and 19.5% of those large corporations whose financial statements reported a profit paid no federal income tax that year. Corporations that did have a federal corporate income tax liability for tax year 2012 owed $267.5 billion.

The GAO noted that there were a number of reasons why even profitable corporations may have paid no federal tax in a given year: the use of tax deductions for losses carried forward from prior years and tax incentives (such as depreciation allowances that are more generous in the Code than allowed for financial accounting purposes). These reasons also explain why corporate effective tax rates can differ substantially from statutory tax rates.

In general, effective tax rates 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 built into the law.

References: For the corporate income tax rate, see FTC 2d/FIN ¶  D-1003; United States Tax Reporter ¶  114.01; TaxDesk ¶  600,503; TG ¶  650.

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