Why taxing corporate America is so hard to do

The tax burden on US corporations has fallen since the last major tax overhaul in 1986. Simply, it's a deal too good to give up.

By MSN Money Partner Apr 11, 2014 5:28PM
Credit: © Garrian Manning/Getty Images

Caption: Uncle Sam shaking man to get tax moneyBy Edward Alden and Rebecca Strauss, Fortune

The U.S. system for taxing corporate profits is outdated, ineffective at raising revenue, and creates perverse incentives for companies to shelter profits overseas.


It is also, for most U.S. companies most of the time, a pretty good deal, which is one of the big reasons why any serious overhaul will be so difficult to achieve.


The quick opposition that greeted the ambitious reform plan released a month ago by Republican Ways & Means Committee chairman Dave Camp, who last week announced he would retire from Congress, was chalked up to the usual array of special interests. But the broader problem is that U.S. companies, particularly those that compete in international markets, have adapted remarkably well to the current tax system.


Indeed, the tax burden on U.S. corporations has fallen over the three decades since the last major tax overhaul, in 1986, even as corporate profits have been rising to record levels.


This is contrary to most of what we hear in the tax debate. Much of the attention is on the U.S. statutory tax rate, which at 39 percent combined federal and state average, is now the highest in the advanced industrial world. Most other countries have been aggressively lowering their statutory rates in an effort to attract investments.


But 39 percent is a highly misleading number. The average U.S. corporation actually pays roughly 27 percent, on par with what other corporations pay in similarly sized advanced economies, and this effective rate has been steadily declining since the 1980s. Part of the reason is that Congress has sweetened corporate tax breaks for specific industries, including deductions or credits for domestic production, capital investments, and research and development.


The biggest reason most U.S. companies are not disadvantaged is the way in which the U.S. taxes -- or mostly does not tax -- the overseas earnings of its corporations. Foreign profits now account for more than 20 percent of total U.S. corporate profits -- double the figure of two decades ago, and that percentage is much higher for big multinationals that drive the debate over corporate tax.


In practice, U.S. corporations rarely pay much in U.S. taxes on foreign profits because they receive credit for taxes paid to foreign governments, and are allowed to avoid any U.S. tax payments as long as those profits are retained abroad. Companies are also increasingly adept at sheltering profits in tax havens that collect little or no tax on corporate profits.


The best available estimate suggests U.S. corporations face an effective tax rate (including all foreign and U.S. taxes) of just 15.7 percent on foreign profits. Of that, the U.S. Treasury actually collects only 3.3 percent, since most profits are never repatriated. U.S. companies are currently holding about $2 trillion offshore, in large part to avoid tax liabilities.


U.S.-based companies often complain that the U.S. system, which in theory requires companies to pay taxes on their profits "worldwide," is a big competitive disadvantage. Most European countries have a "territorial" tax system, which taxes only domestically earned profits. But according to one study that calculated the global tax burden of the largest 200 European- and U.S.-based multinational corporations, U.S. corporations on average faced similar or lower effective tax rates than their European counterparts, though it varied by industry sector .


There are big problems in the corporate tax system, to be sure. Companies pay highly uneven effective tax rates depending on whether they qualify for tax breaks; research-intensive multinational companies like General Electric (GE), for example, usually face tax rates in the single digits, while retailers like Target (TGT) that depend on domestic sales pay close to the statutory rate.


Companies with intangible assets like patents and trademarks, such as Apple (AAPL) or Pfizer (PFE), are more easily able to book profits in tax haven countries like Bermuda or Ireland. The largest tax havens account for 24 percent of reported foreign profits by U.S. multinationals, even though they represent just 1 percent of the global economy.


Deferral on foreign profits also creates incentives for companies to keep those profits offshore rather than re-invest them in the U.S., which is generating pressure in Congress for another "tax holiday" to encourage repatriation. Research suggests that deferral encourages corporations to invest more abroad than they otherwise would, though the effect is small. Other factors like lower wages, proximity to fast-growing markets, and government investment incentives matter much more for corporate investment decisions. Still, no country wants a tax system that in any way encourages foreign over domestic investments.


The prospects for a corporate tax reform that lowers the statutory rate and addresses some of these problems would seem brighter than they have in years. Both Republicans and Democrats have now developed comprehensive proposals that lay out the arithmetic for adopting different trade-off options in any agreement. But unfortunately the arithmetic may show that, for all their complaints, most U.S. companies -- and particularly those competing in foreign markets -- are doing pretty well under the current system. That is probably not a recipe for change.


Edward Alden is a senior fellow specializing in U.S. economic competitiveness at the Council on Foreign Relations. Rebecca Strauss is associate director of CFR's Renewing America publications series. This article draws on research for the CFR report "Standard Deductions: U.S. Corporate Tax Policy."


More from Fortune


106Comments
Apr 11, 2014 7:08PM
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Politicians don't want to give up their money, so they're not about to tax their benefactors. THAT's what it boils down to...
Apr 11, 2014 9:06PM
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We are at a crossroads in this wonderful country that we inhabit, we have always served as a beacon to the dignity and right of individuals regardless of wealth, status or religion or creed, to be fair that statement has never been the literal truth but it remains our promise to the rest of the world and it remains our legacy, our promise, our contribution to the advancement of civilization as a whole and we have usurpered this obligation primarily through innattention, we have allowed carreer politicians, lobbyists and special interests to describe us. If we don't correct this we will fall by the wayside.
Apr 11, 2014 6:29PM
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This has been a bad joke on working Americans, for way too long..
Apr 11, 2014 9:35PM
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Any tax that a corporation "pays" gets passed on to customers, employees and shareholders. Corporations don't pay taxes. People do.
Apr 12, 2014 1:07AM
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You have so many people making money off this broken tax system, its not going to change, just get more complitcated. When you have individuals that can't even figure out their own taxes, the system is broke and sick.
Apr 11, 2014 7:09PM
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You can jack up corporate taxes all your want ---- just remember, it is ALWAYS  the individual citizens who will pay; either in higher prices or unemployment.  Therefore, those taxes will always be REGRESSIVE since those with lower incomes will pay a larger percentage of their earnings in high prices.
Apr 11, 2014 7:19PM
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The facts are that corporations now pay $300.0 billion less in taxes then they did six years ago.  A 33% decrease.  The individual taxpayer has seen no decrease and still pays his $2.1 trillion share.  Seems that paying to put congressmen in office does have it's economic advantages.
Apr 11, 2014 6:14PM
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This is an excellent article which explains how international companies on wall street can book substantial profits (until this 1st quarter, at least ), while main street businesses struggle.  Since small businesses are the nations largest employer, until they receive more equal retained earnings opportunities to counteract the risk of investment, middle class wages will remain stagnant and the disposable income needed to sustain economic growth will not materialize. 
Apr 11, 2014 8:19PM
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It's not so hard to do it's just that most of the people in congress are bought and paid for and they know where the next bribe is coming from.
Apr 12, 2014 2:11AM
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The tax system in this country has evolved into special interest groups that the politicians will not ignore. Just another nail in the coffin of this country.
Apr 12, 2014 1:25PM
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OK, one more time on Econ 101:

Corporations don't pay taxes! To a business, taxes are just another cost of operation that has to be passed on in the prices of their products. So consumers pay those taxes.

 

What's worse, if you tax your in-country businesses enough, foreign companies will be able to sell at lower prices and undercut domestic companies and jobs. You'd be better off replacing corporate taxes with a sales tax that hits all products evenly, but people and their politicians are too stupid for this.

Apr 11, 2014 7:25PM
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How can the United States ever raise enough revenue in order to balance budgets and pay down accumulated debt when trillions of dollars in profits are left un-taxed? Something has to give. 
Apr 12, 2014 6:43AM
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A Flat Tax on Gross Revenues from all sources. Eliminate the US Tax Code (thicker than the Bible) and replace it with template bookkeeping that cannot be manipulated by smoke and mirrors. 
If THAT is impossible... cap the number of people in any "group" at 3. Require any entity to hire all those who make it operate on 1-year contracts that must publicize expiration and open renewal up to competition for it.
In less than two years- big, bogus, false, overpaid (any- including unions, firms and cliques) would be right-waged. Set a fixed tax to that income. 
Our problem is-- we were engineered to be a Free Country but the same slime that ruined all those we immigrated from-- came here to ruin ours. If you want dynasties, legacies and any other type of inequality-- GET THE HELL OUT OF AMERICA. 
Apr 13, 2014 2:42PM
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Idiots, corporations don't pay any taxes, their customers do, most of the time that is you and I!

Apr 12, 2014 9:00PM
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You can't stop a person or a company from starting a business in another country and you can't tell that other country to pay the US for work done by people in another country.  The US doesn't pay other country's for work done here in the US. 

We are a one world economy, like it or not, it's here to stay.  We better figure out a way to compete in niche markets we can control and win.  The biggest issue of offshore services is not price as much as quality of service.  In certain markets, people in other countries often work harder and with more passion, higher quality and more productivity. 

More regulations on businesses here in the states - the new ACA taxes hitting businesses in 2015 and other issues will continue to destroy US labor markets and their ability to compete with other countries.

Apr 12, 2014 7:29PM
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Wouldn't have anything to do with corporate America owning the government, would it?
Apr 12, 2014 11:45AM
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.


  GE paid how much tax this year?  Was it more than zero this time?

Apr 12, 2014 10:19AM
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Look at policies of Obamanomics...   It goes after a few trespassing Nevada Cows with helicopters, 200+ heavily armed government thugs, all the while ignoring thousands of illegals crossing the border.   I have to wonder if the cows voted democrat if they would even bother? 


How about we redeploy these BLM thugs to the border and give them 'shoot to kill' orders and $500 bounty on every dead one illegal if the border problem would continue.


I guess when the government can create deem certain areas as "1st Amendment Zones", implying that in the rest of the country the "1st Amendment" is null and void, we are through.


Under democrats, it's clear that Cows have more rights than people...

Apr 12, 2014 9:11AM
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The money the corporations make as profit either goes back into the company to grow or modernize or goes out to the shareholders as dividends. The only issue here is how much should the government get to waste.
Apr 12, 2014 8:34PM
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I say US citizens should be able to tax the US government at 39%.  Make the US government actually do something to earn money and be taxed for it.  Make the politicians show that they can pay for themselves or get laid off.  Make the government workers deal with competition like everyone in the private sector.  Those divisions of the government would have to generate income and balance budgets or get terminated.  Sorry no more $100,000 government pensions - you won't be able to compete.
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