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The 35 percent corporate tax rate canard

Burger King deal to buy Tim Hortons donuts is amping the public debate over corporate inversions.
Burger King deal to buy Tim Hortons donuts is amping the public debate over corporate inversions.
Jack Ohman, Sacramento Bee

Washington Post columnist and Fox News contributor Charles Krauthammer is no friend of the Obama administration and regularly uses his pedestal to critique the president. But in his latest column he makes an argument repeatedly parroted by conservative pundits that has no basis in reality.

The subject at hand is tax inversions, whereby an American corporation acquires a foreign one and moves its headquarters overseas to avoid paying U.S. corporate taxes.

The practice has infuriated liberals and Democrats, to the point where they’ve taken credit for pressuring Walgreens from backing down from such a move. Burger King, however, is now flirting with the idea, having recently purchased Tim Hortons, the popular Canadian donut chain, keeping the issue in media foreground.

“Everyone knows why inversions are happening,” writes Krauthammer. “America’s 35 percent corporate tax rate is absurdly uncompetitive. Companies are doing what they always do: try to legally lower their tax liabilities.”

Conservatives never tire of stating that 35 percent tax rate, but those who do are either lying by omission or carelessly peddling incomplete information. Thirty-five percent is the statutory rate, not the effective rate corporations pay. Burger King's effective tax rate in 2013 was 27.5 percent. Canada’s corporate tax rate: 26.5 percent.

As Goldman Sachs told its clients last year, "The current S&P 500 median effective tax rate of 30 percent is almost 10 percentage points below the statutory rate. Over the last 10 years, fewer than 10percent of S&P 500 firms have paid the statutory rate or higher. This is not a new trend. For the last 45 years, the median S&P 500 firm has paid an average effective rate more than 5 pp below the statutory rate."

Indeed, the effective rate, the rate corporations actually pay, is lower now than at any time in recorded U.S. economic history.

Meanwhile, the Wall Street Journal, which surely Mr. Krauthammer reads, reported in 2012:

Total corporate federal taxes paid fell to 12.1 percent of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30, according to the Congressional Budget Office. That’s the lowest level since at least 1972. And well below the 25.6 percent companies paid on average from 1987 to 2008.

A 2010 investigation by the Government Accountability Office found that “profitable corporations based in the United States had an effective federal tax rate of 13 percent on their worldwide income, 17 percent including state and local taxes.” Thirteen, not 35 percent.

Additionally, according to a study by Citizens for Tax Justice, an advocacy group, between 2008 and 2012:

  • 288 corporations examined paid an effective federal income tax rate of just 19.4 percent over the five-year period – far less than the statutory 35 percent tax rate.
  • Twenty-six of the corporations, including Boeing, General Electric, Priceline.com and Verizon, paid no federal income tax at all over the five year period. A third of the corporations (93) paid an effective tax rate of less than ten percent over that period.
  • Of those 288 corporations with significant offshore profits, two thirds paid higher corporate tax rates to foreign governments where they operate than they paid in the U.S. on their U.S. profits.

And before anyone clamors about foreign taxes and double taxation, note that American companies get a 100 percent credit for all foreign taxes paid against their tax liability in the U.S.

The question then becomes: What are corporations whining about, and how fair is it that corporations can displace themselves to dodge tax obligations while the average citizen can do no such thing?

Krauthammer chides the president for calling these corporations “unpatriotic.” It’s not a question of patriotism; it’s a question of equity, and as the rules are rigged today, the playing field is clearly not level.

There are this who argue that the more companies have to pay in taxes the fewer jobs they can create. That argument falls flat when you consider that corporate taxes accounted for 33 percent of all tax revenue in 1952 but just 10 percent in 2013, so clearly, corporations are paying less in taxes, not more, as are the very wealthy, who were paying 92 percent on all income over $400,000, the highest percentage in our modern history. Today, those people are paying on 35 percent over that same income level.

And as it turns out, corporations did create jobs, but not here. According to the U.S. Bureau of Economic Analysis, between 1999-2009, U.S. multinational corporations added 2.9 million jobs overseas while cutting 865,000 jobs at home.

Krauthammer closes by writing, “A real political leader would abandon this sideshow and actually address corporate tax reform with a serious revenue-neutral proposal to Congress.” Would a good starting point for such a discussion be to insure we have our facts straight?