At least on paper, the United States has one of the highest corporate tax rates in the world, discouraging international businesses from locating here. Whether the U.S. Treasury actually collects those taxes is another story. Often, it doesn't, thanks to teams of business lobbyists who write loopholes into the tax code, and company accountants and lawyers who dig for every tax credit, deduction and exemption. President Barack Obama said in his State of the Union address that basic fairness demands that these loopholes be closed and that the overall corporate tax rate come down. But in Washington what should happen often takes a back seat to what politics allow.
In the United States, the top tax rate for large corporations is 35 percent. But that's not even close to the effective rate paid by companies as diverse as General Electric and Google. In fact, according to a recent analysis commissioned by the New York Times, 115 of the 500 big companies in the Standard & Poor's stock index paid an effective corporate tax rate of less than 20 percent over the last five years. A tax rate of less than 10 percent was paid by 39 of those companies.
Tax loopholes vary. Some have good intentions, such as tax breaks that encourage domestic manufacturing or investments in low-income housing. Others are truly outrageous, such as the absurd tax treatment given to the cruise ship industry.
As New York Times Columnist David Leonhardt points out, the Carnival Corp. takes advantage of an array of government services from the Coast Guard protecting the seas, to states and localities building roads and bridges to the ports where its ships dock. But over the last five years the company has paid a tax rate of only about 1.1 percent on its $11.3 billion in profits. And that includes federal, state, local and foreign corporate taxes combined.
That's because a tax provision allows some shipping companies incorporated overseas to avoid most taxes. Carnival is incorporated in Panama, where it pays little in taxes, while its executives work from the United States and the company does much of its business here. Other specialized tax breaks help NASCAR racetrack owners and movie production companies.
Companies will spend inordinate resources trying to exploit loopholes. General Electric's tax department is renowned for its mastery in finding ways to reduce the company's tax liability, which was 14.3 percent over the last five years. Google, which paid corporate taxes of 22 percent in 2009, avoids some of its tax bill by routing a chunk of its income through Ireland, a popular way for U.S. companies to cut down their taxes.
As Obama said in the State of the Union address, it is possible to bring down the corporate tax rate while maintaining government revenue if Democrats and Republicans would work together to "get rid of the loopholes. Level the playing field."
Everyone knows this would be a shot in the arm for U.S. competitiveness, but every tax exemption or credit is one industry's sacred cow, and no one is volunteering to give theirs up. Moving toward a simpler and fairer corporate tax code will take the close cooperation of congressional Democrats and Republicans, and the united fortitude to say "no" to business lobbyists. Little evidence suggests that this day is coming soon.