In extensively reviewing websites of US Senate and US House Republican candidates running in the November 2010 election, I consistently see that a key issue of theirs is to reduce income taxes. And some of these websites specifically focus on the candidate’s position that the US Corporate Federal Income Tax Rate of 35% is way too high and needs to be substantially reduced.
Just to mention a few, US Republican Senate candidates Pat Toomey in Pennsylvania, Linda McMahon in Connecticut, and Dan Coats in Indiana all specifically and prominently mention in their websites that they would like to significantly reduce the US Corporate Federal Income Tax Rate of 35%.
So many Republican candidates assert that Big US Corps are being severely penalized because they are paying way too much US corporate federal income taxes presently, and thus they aren’t able to compete overseas. They further contend that by simply substantially reducing this 35% top US corporate federal income tax rate, somehow magically this will trickle down and create US jobs.
Given the tepid US jobless recovery, coupled with the huge US Government Debt, I think some research on just what these Big US Corps pay in US Corporate Federal Income Taxes is warranted.
Well, the conclusion is pretty clear…Big US Corps aren’t paying too much US Federal Income Tax. In fact, they are paying way too little tax. Let me explain in more detail, with this research coming from an exhaustive study of Big US Corp SEC filings.
I first studied the 30 Dow Industrial companies. From their annual report income tax footnotes, here’s the US Current Federal Corporate Income Tax Paid or Payable in the Current Year as compared with their Worldwide Pretax Income in total for each of the most recent five years for all 30 Dow companies, except for Pfizer in 2009, because it had a huge foreign earnings repatriation in connection with its acquisition of Wyeth in that year:
2005…..16.9%
2006…..15.6%
2007…..14.7%
2008…..10.5%
2009….. 7.8%
Yeah, these Big US Dow Industrial Corps are not paying anywhere near 35%. In fact, in the most recent year 2009, the US Federal Income Tax Rate they are paying is only 22% of the 35% statutory federal tax rate, or a paltry 7.8%. And look at the above incredible trend…in just the three most recent years, this effective tax rate has been cut precisely in half from 15.6% in 2006 to only 7.8% in 2009.
This downward effective tax rate trend looks to me like Arne Duncan’s Education Race to the Top in reverse….thus, I’ll call it the Big US Corp Race to the Bottom…..or who can pay the lowest effective tax rate to the US government.
Of the 30 Dow Industrial companies, 43% of them, or 13, paid a US federal income effective tax rate of less than 9% each for the most recent two years (2008 and 2009). Let me present the individual winning (?) companies in this Race to the Bottom:
…………………………..........2008-09.....2008-09…...2008-09
…………………………........US Current……………..…...US Current
……………………………........Federal……Worldwide……Federal
…………………………........Income Tax…Pretax………Effective
…………………………….......Expense……Income……...Tax Rate
……………………………......(Benefit)
…………………………….......(in millions of dollars)
#13…Procter & Gamble…..2,727………30,957………… 8.8%
#12…Coca Cola…………......1,199……….16,452………… 7.3%
#11…United Technologies….815……….12,696………… 6.4%
#10…Chevron……………....3,007……….61,585………… 4.9%
# 9…Caterpillar…………....... 230………...5,070………… 4.5%
# 8…Merck………………........ 999………..25,224………… 4.0%
# 7…IBM…………………......... 811………..34,853………… 2.3%
# 6…Hewlett Packard…….... 452……….19,888…………. 2.3%
#..5…Exxon Mobil………....2,167……..118,174…………. 1.8%
# 4…Dupont………………….......37………..4,575……………0.8%
# 3…Verizon……………….....(246)……..27,482…………..(0.9)%
# 2…Boeing……………….........(88)……….5,726…………..(1.5)%
# 1…GE…………………........(1,609)……..30,126………….(5.3)%
Total Above 13 Cos………10,501…….392,808……………2.7%
Yeah, that’s right, 13 of the 30 Dow Industrial companies had a total US Corporate effective federal tax rate in the most recent two years of an incredibly low 2.7%, which is 92% below the statutory US Federal Income Tax Rate of 35%.
And it’s not just the large Dow Industrial companies. From their annual report income tax footnotes, here’s the US Current Federal Corporate Income Tax Paid or Payable in the Current Year as compared with their Worldwide Pretax Income in total for the most recent three fiscal years for 141 large non-Dow companies, which each had Worldwide Pretax Income above $3 bil in total for the most recent three years, with also a couple more companies added, where I had a local interest:
FYE 2007-8…..20.3%
FYE 2008-9…..19.3%
FYE 2009-10…13.8%
Of these large 141 non-Dow Industrial companies, 43 of them, or 30.5%, paid an effective US federal income tax rate of less than 10% for the most recent two fiscal years (2008-9 and 2009-10). And as you can see from the below 43 companies, 12 of them were Big Oil companies. Let me present the individual winning (?) companies in this Race to the Bottom:
…………………………................Most Recent Two Fiscal Year Ends
……………………………...........US Current……………..…...US Current
………………………………..........Federal……Worldwide……Federal
……………………………...........Income Tax…..Pretax………Effective
………………………………..........Expense…….Income………Tax Rate
……………………………….........(Benefit)
……………………………….........(in millions of dollars)
#43…Occidental Petroleum…..1,574………16,040…………..9.8%
#42…Accenture………………........567………..5,786…………. 9.8%
#41…Praxair…………………….......305………...3,127…………..9.8%
#40…ConocoPhillips…………....3,820……..39,362***…..….9.7%
#39…Kimberly Clark………….......463………..4,865…………...9.5%
#38…Air Products&Chemicals....220………..2,316…………...9.5%
#37…Spectra Energy………….......275………..2,959…………...9.3%
#36…Qualcomm………………........524………..5,902…………...8.9%
#35…Loews…………………….........198………...2,317…………...8.5%
#34…PNC Financial……………......364………..4,319…………...8.4%
#33…XTO Energy…………….........473*………6,189…………...7.6%
#32…Ensco……………………..........178*………2,356…………...7.6%
#31…Honeywell……………….........466……….6,799……………6.9%
#30…Marathon………………….......697……...10,192……………6.8%
#29…Bristol Myers Squibb……....692*…....10,378……………6.7%
#28…Mosaic…………………….........261………..4,096……………6.4%
#27…Omnicom Group………….....160………..2,889……………5.5%
#26…Applied Materials…………......51………….923……………5.5%
#25…Yum Brands……………….......147……….2,687……………5.5%
#24…Western Digital…………….......94……….2,021……………4.7%
#23…Phillip Morris Intl…………....818………19,180……………4.3%
#22…AON………………………............76………..1,828……………4.2%
#21…Dow Chemical…………….........68………..1,746…………....3.9%
#20…Whirlpool…………………..........19…………..540……………3.5%
#19…EOG Resources………….........146………...4,619……………3.2%
#18…Schlumberger…………….......262……….10,786……………2.4%
#17…Heinz………………...................49………...2,610……………1.9%
#16…Weatherford………………........33*…….....1,989……………1.7%
#15…Baxter……………………….........67………...5,196…………….1.3%
#14…Cummins……………….............20*……….1,818……………..1.1%
#13…Hess………………………............49………...6,219……………..0.8%
#12…FedEx………………………............1………..2,571……………..0.0%
#11…Corning……………………...........(4)……….4,816…………….(0.1)%
#10…Apache……………………...........(2)……….1,258…………….(0.2)%
# 9…Newmont Mining…………......(67)…….....4,165…………….(1.6)%
# 8…Southern Copper………….......(65)*…......3,498……………(1.9)%
# 7…Avon Products…………….......(64)………..2,165……………(3.0)%
# 6…Eli Lilly…………………........... (162)……….4,050…………….(4.0)%
# 5…Paccar……………………..........(127)……….1,639…………….(7.7)%
# 4…Wells Fargo…………….......(1,909)**…..21,298……………(9.0)%
# 3…Halliburton………………........(531)……….5,531…………….(9.6)%
# 2…DirecTV…………………..........(851)……….4,305……………(19.8)%
# 1…Prudential Financial……......(329)…………430……………(75.3)%
Total Above 43 Cos…………….....9,031……247,780…….........3.6%
*also includes State Income Tax
**appears to also include tax benefits from IRS Audit Settlements
***excludes large asset impairments
So what’s with these extremely low effective US federal income tax rates? It’s mainly the shifting of income, along with the related US jobs offshored, to international tax havens. These Big US Multinational Corps set up in the many tax havens like China, Ireland, and Puerto Rico. They are clearly aware on the front end that to get their hands on the massive amount of low-taxed foreign earnings, hoarded in cash and investments in these tax havens, they will have to eventually pay federal income taxes in the US at 35%, like other US Corps.
And then these Big US Multinational Corps have their fingers crossed that sometime in the future, the US Congress will forgive 85% of this federal income tax owed upon their foreign earnings repatriation, as the US Congress amazingly did in 2004, when all US Congressional Republicans voted for it. Just think how crazy this is….. it’s like a US taxpayer having magically 85% of his federal income taxes paid for many years related to his W-2 earnings refunded to him, like he won a huge lottery….fat chance for that to happen…..there’s no equivalent lobbying group acting on his behalf.
And this lower effective US federal income tax rate is also due to the tons of Big Corp tax loopholes that bring the artificially high stated US corporate income tax rate of 35% down frequently to a single-digit effective tax rate actually paid, and sometimes even down to an effective tax rate below zero.
These extremely low effective tax rates are also due to the 50% bonus tax depreciation in the US in 2008 and 2009. And did the US get any job creation from this very lucrative 50% bonus tax depreciation granted to these Big US Corps? No way. If the US government permits 100% expensing of Plant and Equipment by these Big US Corps, the US job creation won’t trickle down. If you want to create US jobs, the US government should allow Big US Corps to get this effectively 100% bonus depreciation only if there are clear requirements to also sufficiently increase US full-time payroll counts by these Big US Corps on the front end, accompanied by subsequent retention requirements of these payroll count increases.
I really can’t understand how so many Big US Multinational Corps think that it is OK to pay such an incredibly low federal effective tax rate to the US Government. These companies, their Board of Directors, their executives, their non-executive employees, and their stockholders all get the massive benefits from all of these very costly services provided by the US Government, and they think it is perfectly acceptable to pay such meager amounts for these services, and in some cases, the US Government even pays these Big US Multinational Corps for providing them of all of these services, such as military protection, homeland security, and tons of others.
Given the incredibly low effective federal income tax rates paid by Big US Corps presently, I think it is really silly for any candidate to assert that he wants to reduce the Corporate US Federal Income Tax Rate. This candidate is either very financially naïve, or he is showing his clear allegiance to Big Multinational Corps over his allegiance to the country and to its many desperate US citizens. This just isn’t right and US citizens must wisely vote against these candidates.
