The corporate tax dance

The official corporate tax rate is 35%, but savvy companies know how to exploit loopholes to reduce that.

By Kim Peterson Feb 2, 2011 4:20PM
Image: Taxes (© Thinkstock/SuperStock)The corporate tax rate in the United States is a ridiculously high 35% -- so high, in fact, that companies spend a lot of money and time figuring out loopholes to avoid it.

And some of them are very good at it. Cruise-ship line Carnival (CCL) pays only 1.1% in taxes of its $11 billion in profits -- and that includes federal, state, local and foreign taxes, The New York Times reports.

About 39 companies in the S&P 500 index have been able to bring their rates down to under 10%. All the loopholes being exploited mean that the government gets less money from taxes than it once did, David Leonhardt reports. "Arguably, the United States now has a corporate tax code that’s the worst of all worlds," he writes.

Boeing (BA) pays just 4.5% in taxes, the Times reports. Southwest Airlines (LUV) pays 6.3%, Yahoo (YHOO) pays 7% and General Electric (GE) pays 14.3%.

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The corporate tax code is completely inefficient, and that at least seems to be recognized by Democrats and Republicans. The obvious solution here is to reduce the tax rate and at the same time close up those inefficient loopholes. But this is one of those things that everyone says they want to fix, but few lawmakers have the stomach to actually take action on.

Companies will no doubt fight any restriction on loopholes. A corporate lobbying group called the Business Roundtable, for example, says it's all for reducing the tax rate. But it says nothing about loopholes, Leonhardt writes.

What are some of the loopholes? Many of them make sense, and so any discussion of cutting loopholes will immediately run into protests. Companies that lose a lot of money, for example, can avoid most taxes until they start making profits, Leonhardt writes.

Companies with high capital costs -- think Southwest and its aircraft purchases -- can also lower their tax rate through deductions, and sometimes that leads them to buy more than they normally would. And GE is incredibly savvy at coming at taxes from a global stance, Leonhardt writes:
G.E. is so good at avoiding taxes that some people consider its tax department to be the best in the world, even better than any law firm’s. One common strategy is maximizing the amount of profit that is officially earned in countries with low tax rates.

But not everyone can be a GE. In the S&P 500 index, the average tax rate comes to 32.8%. Wal-Mart (WMT), Disney (DIS) and Exxon Mobil (XOM) pay more than that.

The system is unfair and inefficient -- but it doesn't sound like much will change soon.

1Comment
Feb 2, 2011 7:10PM
avatar

A lot of the problem is that loopholes usually have a good reason behind them, but people try to use the wording to work around the intent.  Income being taxed where it's earned, or tax rates based on where you are incorporated where to entice people to do business in America without being penalized on world income, not so every business can incorporate in Bermeuda for the low tax rate.  Forget the idea of corporations trying to have their cake and eat it too, but repeal a loophole and you penalize any number of businesses using it as intended.

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