No wonder President Obama loves to bash Big Oil. Thanks to high crude prices, America's big three oil companies are raking in the profits. Last year ExxonMobil churned out net income of $41 billion, while Chevron netted $27 billion and ConocoPhillips $12.4 billion. With profits like that, these guys couldn't possibly be paying enough taxes, right? So says the president, who in late March urged Congress to take away their tax breaks, insisting that doing so could bring in $25 billion in additional tax revenue over 10 years. "They can stand with big oil companies, or they can stand with the American people," the president said.
The Senate, in late March, voted down the president's proposal 51-47 on a bill that needed 60 votes to survive. It's unlikely that the senators spent much time poring over financial statements and annual reports. But if they had it might have given them a reason to vote against the president's wishes. In 2011 these three oil giants each paid more in income taxes than any other corporation in America.
ExxonMobil in 2011 made $27.3 billion in cash payments for income taxes. Chevron paid $17 billion and ConocoPhillips $10.6 billion. And not only were these the highest amounts in absolute terms, when compared with the rest of the 25 most profitable U.S. companies (see our slideshow for the full rundown of who paid what), the trio also had the highest effective tax rates. Exxon's tax rate was 42.9%, Chevron's was 48.3% and Conoco's was 41.5%. That's even higher than the 35% U.S. federal statutory rate, which is already the highest tax rate among developed nations.
(The lowest taxpayers among the most profitable companies? Automakers Ford and GM, despite $20 billion and $9 billion in net income, respectively, paid a scant $270 million and $570 million in taxes -- simply because they have billions in previous-year losses to balance against recent profits.)
So is it time to sympathize with the oil companies? Hardly. Joel Slemrod, chair of the economics department at the University of Michigan points to a recent survey finding that only 9% of respondents thought corporations paid too much in taxes, while 67% thought they paid too little.
"This is related to the presumption that the burden of corporate taxation is borne by fat cats. But that's not necessarily true," says Slemrod. Business owners take some of the hit, but "in the longer term the burden gets shifted in the form of lower wages or higher prices." Such as higher prices at the gas pump.
Full List: The 25 U.S. Companies That Pay The Most In Taxes
Just what are those tax breaks the president wants to take away from Big Oil? Here's the three biggest ones. First off, the president doesn't think that oil companies should be able to get credit on their U.S. income tax bills for all the billions in income taxes they pay to oil-rich regimes around the world. Second, the president doesn't think Big Oil should be allowed to deduct from taxable income some of those costs incurred in exploring for oil and drilling wells. Third, the president wants to cancel oil companies' domestic manufacturing tax deduction of 6% of the value of oil and gas they produce in the United States.
Those don't sound like egregious handouts, but, said the president, "It's not like these are companies that can't stand on their own." Sure they can stand on their own, but that's not the point. Do we really want a corporate tax policy that has one set of rules for oil companies and another set for everybody else?
Yet the campaign against Big Oil tax breaks won't end there. We'll hear again and again between now and Election Day that oil companies aren't paying their share. Left-leaning tax groups like the Citizens for Tax Justice try to make the case that ExxonMobil pays tax of just 13% or so on its U.S. profits. But if Exxon pays a smaller portion of its taxes in the U.S. it's because it faces huge tax bills overseas in countries like Angola where the petroleum income tax is as high as 70%. Like every U.S. multinational, Exxon gets tax credits that offset their U.S. tax liability by the amount of tax paid to other countries.
How bad are those oil "tax breaks," really? The deduction for oil drilling costs isn't much different from the deductions that pharmaceutical companies are allowed to take for research and development costs (no one has proposed taking those away). And as for the domestic manufacturing deduction, every other company that manufactures anything in the U.S. can deduct up to 9% of the income they generate on those goods. Right now, oil companies only get a 6% deduction on the oil and gas they produce. Why single them out?
As Joseph Henchman of the Tax Foundation explains, "All this goes to show that what's really behind this idea is the desire to extract revenue from a captive company ('What are they going to do, move the oil field?') in the belief that higher taxes won't affect their behavior."
And income taxes isn't even the half of it--literally. Exxon also recorded more than $70 billion last year in sales taxes ($33.5 billion) and other taxes and duties ($43.5 billion). But none of that will matter to the president if gasoline prices keep climbing. Having been blocked on his Big Oil tax hike, don't be surprised if in the heat of the summer driving season he calls for a windfall profits tax on oil companies. The very concept implies that the companies are earning an unfairly high return. Sure Exxon's and Chevron's net incomes are high. But so are their revenues! Exxon's revenues were $486 billion and Chevron's were $254 billion. That implies an average net margin of just 10%.
Compare that with the $33 billion that Apple made in 2011 on $128 billion in revenues and Microsoft's $23 billion income on $72 billion in sales. Those margins are 26% and 32%. And yet Apple enjoyed a low effective tax rate of 25% and paid a relatively meager $4 billion in income taxes, putting it in ninth place on our list of the biggest U.S. corporate taxpayers, while Microsoft had an effective rate of just 16% and paid $5.3 billion, placing it sixth. So why doesn't President Obama propose a windfall tax on Apple and go after its $100 billion cash hoard?
Full List: The 25 U.S. Companies That Pay The Most In Taxes
What's sad is that, in a sense, he has. (And we're not just talking about the federal antitrust lawsuit against Apple for collusion on e-book pricing.) In February the president released his a business tax reform plan that calls for reducing the statutory corporate rate to 28% but getting rid of a bunch of loopholes and breaks that according to analysts would effectively raise the rate back up to 33%.
And far from making the tax code fairer, the president's plan calls for the creation of even lower rates for manufacturers and lower still for companies engaged in "advanced manufacturing." It would cut those "loopholes and subsidies" on Big Oil while retaining subsidies for greener energy developers.
Prof. Slemrod says tax policy works better when it doesn't play favorites. He suggests cutting the domestic manufacturing tax credit entirely (and not just for oil companies, like the president proposes). Though some manufacturers would complain, cutting the credit would simplify tax reporting and generate roughly $20 billion more in tax revenue. Martin Sullivan, chief economist at Tax Analysts, suggests that the U.S. ought to create a new value-added-tax on consumption, which he insists is not as regressive against low-income families as commonly thought.
What to think about the hallmark of the president's plan: a proposed "corporate minimum tax" on global profits? This is a tax that would chase U.S. multinationals all around the world, and if the local authorities aren't charging a high enough tax rate (like in Ireland, where the rate is just 12.5%), the president would tack on extra tax to bring the company's tax burden up to the U.S. level.
This could trigger a huge shift in business strategy. Pharmaceutical and software giants are renowned for setting up subsidiaries in low-tax countries like Ireland then transferring ownership of patents and other intellectual property to those subs. That way, when they get paid fees and royalties on licenses, the high-margin profits are recognized and taxed in Ireland instead of the U.S. Only if they bring the profits back to the U.S. do they face U.S. taxes, so they don't. Avoiding the 35% U.S. tax rate automatically saves the companies 22.5 cents on every dollar of pre-tax income. A new global tax would seek to end that offshoring practice. But would it?
Not for long. Think about it for a second: corporations would only be subject to Obama's global tax as long as their corporation remained registered in the United States. Why would investors subject themselves to double taxation of overseas profits just so they can say their company is U.S. based? They wouldn't. Instead they'll sell the whole thing to a Chinese or Japanese or German company -- over which the U.S. has no tax jurisdiction. "The net effect is to put a 'For Sale' sign on every profitable U.S. multinational company," writes J.D. Foster, a tax expert with the Heritage Foundation. "The buyers, however, won't be U.S. companies. The buyers will all be foreign companies."
The onerous tax code is why when Mercedes-Benz bought Chrysler in 1998, the resulting company was based in Germany, not the U.S. Same thing when Belgium's InBev bought Anheuser-Busch in 2008. Sure InBev has to pay U.S. taxes on income generated by sales of Budweiser in the U.S., but it won't face any U.S. taxes spreading Bud around the rest of the world.
The economist Martin Sullivan isn't as worried that an add-on global tax would chase away U.S. multinationals. In a study of the issue, Sullivan found that although Ireland and other low-tax countries do generate a disproportionate share of U.S. multinationals' pretax income (30%), they are home to just 14.7% of employees and only 12.8% of property, plant and equipment. If low-taxes were such a siren song we'd already see companies building more factories overseas.
While there's still room for debate on the merits of a global minimum tax, there's something else that nearly all leading tax experts agree on: the need to lower the statutory rate. "The corporate tax is our worst tax," writes Sullivan. "The more we smash it down, the more opportunity there is for expanding the economy."
As for the optimal corporate rate, Michelle Hanlon, a professor of accounting and taxation at MIT, says "a good start would be if the U.S. taxed worldwide earnings at 15%."
Slemrod says the corporate tax rate needs to be lower, but not too low. "If it were 12.5% then I'd think about incorporating myself," as a way of ducking taxes, he says. That’s not a good thing to encourage. "We do have to raise revenues after all."
Do we ever. The last four years of quantitative easing and stimulus spending has boosted the national debt by $6 trillion to $15 trillion. It will take a lot more than higher taxes on Big Oil to pay that off.
Full List: The 25 U.S. Companies That Pay The Most In Taxes
Note: Corporate financial data was sourced from Thomson Reuters Fundamentals via FactSet Research Systems.
