Opinion Editorial | |
| Wednesday, April 28, 1999 | |
Foreign Corporations Aren't Freeloaders |
The U.S. General Accounting Office (GAO) recently released a study of taxes paid by foreign-controlled corporations (FCCs). The study showed that many large FCCs are paying little, if any, federal taxes. Commenting on the GAO report, Senator Byron Dorgan, Democrat of North Dakota, said it is "more shameful evidence that the way the federal income tax law is being enforced, some of the biggest corporations doing over a trillion dollars in business in our country pay no U.S. income taxes."
With release of the study timed for maximum impact on April 14, the day before the federal income tax filing deadline, the GAO study made nationwide headlines. Missing from the press reports, however, was any indication that the reporters had actually read the GAO report, relying instead on Senator Dorgan's one-sided press release for a summary. A careful reading of the GAO report and other recent research on the taxation of FCCs gives one a much different perspective on the issue.
First, it is important to note that while a majority of FCCs did indeed pay no federal income taxes in 1995, the last year for which there is data, neither did a majority of U.S.-controlled corporations (USCCs). Among large corporations, the percentage of FCCs paying no federal taxes was actually less than those of USCCs, 29.4 percent of the former and 31.5 percent of the latter. Among financial services companies the gap was even larger, with 53.4 percent of USCCs paying no federal taxes compared with just 34.3 percent of FCCs.
Second, taxes paid by FCCs have been rising sharply in recent years. In 1995, they paid $13.2 billion in federal income taxes, more than twice the $6.1 billion paid in 1991. Taxes paid to state and local governments are also large and growing. In 1995, FCCs paid $22 billion in such taxes, up from $16.9 billion in 1990. Had the GAO taken account of these taxes as well, rather than looking only at federal taxes, the percentage of corporations paying no taxes, both FCCs and USCCs, would probably have fallen to zero.
Third, to the extent that FCCs pay lower taxes than USCCs, there are many reasons unrelated to tax avoidance why this would be the case. In recent years, FCCs have tended to be newer than USCCs and newer companies in general tend to pay less taxes than older companies because their profitability is lower. Also, FCCs have tended to be concentrated in less profitable industries and generally have higher operating costs than USCCs. The cost of goods sold for large FCCs, for example, was 65.4 percent in 1995 versus 52.8 percent for USCCs.
Fourth, the nature of FCCs almost inevitably reduces their tax liability. According to a 1997 U.S. Treasury Department study, between 50 percent and 75 percent of the difference in profitability, and therefore tax liability, between FCCs and USCCs is explained by systemic differences between the two. In particular, FCCs tend to have higher interest and depreciation expenses than USCCs.
The fact that FCCs have higher depreciation expenses is significant, because it means that they are investing heavily in tangible capital -- plant and equipment -- that creates jobs and income for Americans. According to the Organization for International Investment, FCCs invested $73 billion in the U.S. in 1995, accounting for 10 percent of all domestic investment. They employed 4.9 million Americans at wages averaging 26 percent more than those for all private sector workers. FCCs also aided the trade balance by exporting $137 billion in merchandise in 1995, 23 percent of all U.S. exports.
Bashing foreigners may be great sport for xenophobic senators, but the reality is that FCCs contribute a great deal to the U.S., including taxes at all levels of government.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 28, 1999.
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