GAO: Big Companies Paid A 12.6% Effective Federal Income Tax Rate

Despite all their griping about the U.S.’s highest-in-the-developed-world 35% federal corporate income tax rate, big profitable U.S. companies paid just 12.6% of their reported worldwide profits in federal income taxes in 2010, a study released today by Congress’ Government Accountability Office shows.  That low-sounding number is likely to fuel the debate over whether U.S. companies, after using all the tax breaks and ploys at their disposable, are really overtaxed. One point of comparison: last fall, Mitt Romney's campaign produced a notarized letter from accounting firm PricewaterhouseCoopers stating that over the last two decades the Republican Presidential candidate  had never paid personal income tax at below a 13.66% effective individual rate.

What makes the GAO's report particularly interesting is that its analysts had access to aggregate data drawn from public companies’ Schedule M-3s—a not-public, but detailed form they must file with the Internal Revenue Service reconciling the differences between the income and expenses they report  to shareholders  using generally accepted accounting principles (GAAP) and those they report for tax purposes to the IRS.  This allowed the GAO to calculate what companies actually paid in a given year. (The federal income tax expenses corporations report in the financial statements include estimated future tax liabilities attributable to temporary differences between GAAP and taxable income. )

The GAO report was requested by Sen. Carl Levin (D-Mich.) and Sen. Tom Coburn, (R-Okla.) last year, while they were chairman and ranking Republican on the Senate’s Permanent Subcommittee On Investigations. The subcommittee, which Levin still heads, has  held hearings  this year on tax reduction ploys used  by Microsoft , Hewlett-Packard , and Apple Inc.

The GAO didn’t have access to individual companies’ confidential M-3s—just aggregate data drawn from them. So it couldn't, for example, pick on the low rate paid by the tech industry, as other studies and the subcommittee itself have. But that aggregate data did allow the GAO to separate out profitable and unprofitable companies.  While unprofitable companies generally pay no tax, their losses drive down aggregate corporate profits, making it look like the money-makers are paying a higher rate.

In 2010, for example, Schedule M-3 filers reported $1.1 trillion in net book income and $300 billion in losses.  When money losers were lumped in with profitable companies, the effective U.S. tax rate for 2010 rose from 12.6% to 16.6%, the GAO calculated.  The profitable companies paid 16.9% of their reported worldwide income when federal, state, and foreign income taxes are tallied up.  They paid 21% of their taxable income---the number  they got after claiming all the exclusions and deductions allowed by the U.S.  tax law. But that’s still a far cry from 35%.

In a joint press release, Levin said GAO’s findings “provide more stark evidence, if any is needed, that profitable U.S. corporations as a whole are not paying their fair share in taxes,'' while Coburn said the report “underscores the need for comprehensive tax reform.” Added Coburn: “We would be better off with a code that eliminated these loopholes so we can lower rates for both corporations and individuals.”

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