Global Corporate Tax Rates
Obama & Romney want to Lower Corporate Tax Rates
What do companies really pay?
The United States corporate tax rate is 35% for large, highly profitable corporations, a rate both presidential candidates pledge to lower. Mitt Romney would lower the corporate tax rate to 25%, while President Barack Obama favors 28%. Both candidates also feel the corporate tax code is too complicated and would take steps to simplify the system.
The Argument For Lower Corporate Tax Rates
Proponents of lowering the corporate tax rate believe that the current rate of 35%, the highest in the world, is driving American businesses to shift their operations to foreign countries to minimize taxes. By reducing the tax rate, more American corporate income would stay in the country, increasing tax revenues despite the lower rate and keeping American jobs from moving overseas. Further, lower tax rates would increase after-tax earnings, giving companies additional income to reinvest for growth, boosting the American economy.
Do the facts support these arguments?
For the candidates’ proposals to be effective, there must be American tax dollars currently going overseas or otherwise not being collected that could be captured with a revised tax code. To answer this question, NerdWallet studied the tax rates paid by 500 of the largest American companies in the most recent fiscal year and found that over half of companies (51%) reported a total tax expense of less than 30% with the average reported tax rate being 27%. Further, only 8% of companies with positive earnings actually paid at least 30% of their pre-tax earnings to the U.S. federal government in the current year with the average actual tax rate being 13%. These results strongly suggest that the current statutory rate of 35% is largely ineffective.
Taxes Reported vs. Taxes Paid
How can companies pay only 13% when the official tax rate is 35%? The U.S. tax code is complex and there are many legitimate reason a company can both report and pay taxes that are lower than the official rate. The statutory rate differs from the reported rate because there are many accounting deductions and credits that a company can legally claim that reduce their liability. Some of these, like domestic manufacturing deductions and research and development credits, were intentionally put in place by the government with the intention of foregoing tax revenue to boost long-term innovation and growth of the American economy.
Tax rate reported can also differ from tax rate paid to the U.S. since the tax rate reported on a company’s financial statements is not directly due to the U.S. government. The reported rate includes all taxes, including any portion due to foreign taxing entities. It also includes both taxes due immediately and tax payments that can be legally deferred. The accounting code, used for financial reporting, is meant to provide a picture of the true economic state of a company’s business operations, while the tax code is meant to collect a portion of earnings for government purposes. As a result, these two codes have many differences, including differences in when revenue is recognized and how long-lived assets are depreciated. These timing differences often allow companies to defer paying a portion of their reported tax expense until a later date, if at all.
Global Corporate Tax Rates
Statutory vs Reported
- R&D credits
- Foreign earnings taxed at lower rates
- Tax Exempt Interest
- Special deductions to spur domestic manufacturing
- IRS settlements
- Basis differences on asset sales
- Changes in valuation allowance
- Life insurance tax differences
- Goodwill impairment
Reported vs Paid to US
- Current vs Deferred:
Timing differences between the accounting and tax code allow payment of some reported taxes to be deferred - Domestic vs Foreign:
“Reported” includes foreign taxes; “Paid to US” does not
What the presidential candidates are proposing is to lower the statutory tax rate so that companies are less inclined to shift their operations to foreign countries with lower tax rates. If successful, the statutory rate would be lower, but the reported rate would stay near current levels and the paid rate would increase due to foreign governments claiming a lower share of American corporate taxes dollars.
Adding confusion to the debate: Exxon’s false tax claims
As we have already seen, figuring out exactly what a company pays in “taxes” can be extremely confusing, making the efforts to reform corporate taxes more difficult. Some companies that pay very low taxes add fuel to the fire by putting out press releases designed to mislead the public.
On July 26, 2012 ExxonMobil released a statement claiming that “Over the past five years, ExxonMobil’s total U.S. tax expense was $57 billion.” Was this their official accounting expense for taxes? No. Was this their actual tax rate paid? No again. So where did they get this number? They counted operating expenses as taxes.
In most industries a company has to purchase materials in order to make a product that it then sells to earn a profit. Companies are required to report this expense as a “Cost of Goods Sold” under operating expenses. The oil industry is no exception. The royalties and other payments to access oil-rich land are operating expenses. These payments are sometimes labeled by collecting parties as “taxes,” even though they are not taxes in a business or accounting sense. Despite this, Exxon has decided to add these operating payments to its “tax expense” in its press release, although not in its financial statements since that would be illegal.
To get a sense of how misleading this is, consider how this would look if another company did the same thing. Chipotle is a company that already pays significant U.S. taxes. Suppose that Chipotle’s chicken suppliers told the company that they would charge a “tax” for chicken rather than a “price.” Now suppose that Chipotle responded by issuing a press release announcing they were now paying much higher “taxes” because of the additional chicken tax. Laughable, right? But unfortunately that is exactly what Exxon has done by claiming a “tax expense” of $57 billion.
Below are ExxonMobil’s real numbers, directly from their official financial statements:
| ExxonMobil Tax Expense, Past 5 Years | ||||||
| $ Billion | Total | 2011 | 2010 | 2009 | 2008 | 2007 |
| "Tax Expense" including Operating Costs as "Taxes" | 57.5 | 12.3 | 9.8 | 7.7 | 13.3 | 14.3 |
| U.S. Federal Tax Expense (Official Accounting) | 12.2 | 3.1 | 1.3 | -0.2 | 3.4 | 4.5 |
| U.S. Taxes Paid | 9.6 | 1.5 | 1.2 | -0.8 | 3.0 | 4.7 |
A tool to provide transparency
Unfortunately, Exxon is not alone in trying to portray their tax situation in a misleading manner. In response, NerdWallet has created a Tax Rate Transparency Tool to make corporate tax information transparent and easily accessible. Regardless of whether or not the presidential election leads to corporate tax rate reform, this tool will serve as an accessible resource for unbiased corporate tax information.
