General Electric Co. made headlines in the spring of 2011 when reports surfaced that the company paid no corporate income taxes the previous year while claiming a net tax benefit of more than $3 billion.
While Fairfield-based GE has disputed the notion it pays no income taxes, numerous studies and reports have pointed to dozens, if not hundreds, of large corporations that pay little to no income taxes just as others are weighed down by the high corporate tax rate.
In response to some of those discrepancies in the tax code, a group of renowned economists and academics recently sent a letter to congressional leaders calling for a budget-neutral package of corporate tax reforms that would involve lowering the current tax rate and closing loopholes.
The group included academics from Columbia University, George Mason University and Georgetown University, as well as economists from the Brookings Institution, Precision Economics, American Enterprise Institute and the American Consumer Institute, among others.
“A high corporate tax rate impairs our ability to attract domestic and foreign investment, undermines job creation and reduces wages, and distorts financial and economic decision making by U.S. firms,” the letter said. “Reducing the corporate tax rate would improve the allocation of resources throughout the economy and would increase productivity and living standards.”
The U.S. corporate tax rate is the highest in the world at 35 percent, which is 10 percentage points above the global average, according to the group.
Because of the high rate, companies are more likely to locate abroad, the group wrote, noting that from 2000 to 2011, the number of Fortune 500 companies headquartered in the U.S. decreased by 26 percent. Meanwhile China, Korea and Switzerland, all of which have corporate tax rates at or below 25 percent, have seen “sizable” increases.
During his State of the Union address, President Barack Obama renewed his call for corporate tax reforms that would eliminate loopholes and deductions for the “well-off and well-connected.”
U.S. Rep. Jim Himes, a Greenwich Democrat, said he believes there”™s interest on both sides of the aisle to reform corporate taxes but that it will be a difficult task to achieve. More than a year ago, Obama unveiled a plan to lower the corporate tax rate to 28 percent while closing loopholes elsewhere, but little progress has been made toward a bipartisan solution.
“I”™m all in favor of eliminating as many loopholes as possible, but it”™s hard to do that,” Himes said, noting that anyone or any company that benefits from those loopholes would likely fight against their elimination.
Companies with significant accounting resources have seemingly benefitted from the abundance of loopholes and deductions.
In 2012, the U.S. Treasury lost roughly $150 billion in revenue through corporate tax breaks and loopholes, according to an analysis of federal budget data by the Brookings Institution.
Because of these reductions, the effective tax rate is closer to 18.5 percent on average, according to Washington, D.C. think tank Citizens for Tax Justice (CTJ), making the rate one of lowest of any developed country.
“Some of these companies are paying absolutely nothing in taxes,” said CTJ Director Robert S. McIntyre.
A 2011 report on 280 corporations conducted by CTJ found that nearly a third paid no federal income tax in at least one of the three previous years, while 30 of those surveyed recouped more federal dollars than they paid in taxes in one of the previous three years.
Among the companies examined were GE, which averaged a net gain from 2008 to 2010, General Dynamics, which averaged a 27 percent effective rate, United Technologies, which averaged a 10 percent effective rate, and Pitney Bowes, which averaged a 30.4 percent rate.
“(Congress) should fix the system that they”™ve allowed to become such a colossal mess,” McIntyre said. “If you crack down on corporate tax abuse, then you won”™t have to cut programs that benefit ordinary people.”
