What Do Corporations Pay in Income Tax?

September 16, 2011

A number of recent news stories and think tank reports have drawn attention to the amount of income taxes paid by large corpora­tions, says William McBride, an economist with the Tax Foundation.

Stories such as these mislead the public.  The largest corporations pay the lion's share of taxes.  Data collected from Internal Revenue Service (IRS) corporate tax returns shows some of the following finds:

  • The effective U.S. federal corporate tax rate (taxes paid after deductions and credits) has averaged 26 percent between 1994 and 2008.
  • In 2008, the largest corporations (with assets greater than $2.5 billion) paid an effective corporate tax rate of just 21.2 percent.
  • In that same year, midsize and large corporations (those whose assets are within the ranges of $5 million to $100 million and $100 million to $500 million, respectively) paid effective tax rates of 32.5 percent and 31.7 percent, respectively.

While the differential between the rates paid by midsize and the largest corporations has given rise to the belief that the largest companies exploit substantial tax loopholes, the fact that large corporations conduct more business in foreign nations creates this divide -- not tax code abuse.  Because income received by American companies from foreign operations is taxed by that foreign government, it cannot be double-taxed by the IRS.  Therefore, these corporations appear to pay a lower effective tax rate while still shouldering a comparable package of domestic and foreign taxes:

  • Taking into account taxes paid on foreign income, American corporations pay an effective tax rate between 32.1 percent and 33 percent, which is close to the statutory rate of 35 percent.
  • Some corporations actually pay an effective rate greater than 35 percent, if their foreign operations are located in a country with a higher corporate tax rate.
  • Even ignoring taxes to foreign governments, the 1,937 largest U.S. companies were responsible for 68 percent of corporate tax revenue in 2008.

This explanation answers squarely the accusation put forth in numerous headlines that the largest corporations dodge their share of the corporate tax burden.  As is often the case in tax discussions, anecdotes do not tell the whole story.

Source: William McBride, "Beyond the Headlines: What Do Corporations Pay in Income Tax," Tax Foundation, September 2011.

 

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