Corporate Tax Avoidance in the First Year of the Trump Tax Law
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Table of Contents: Executive Summary | Introduction | Who’s Paying Corporate Taxes—and Who’s Not | The Size of the Corporate Tax Subsidies | Tax Rates (and Subsidies) by Industry | Historical Comparisons of Tax Rates and Tax Subsidies | How Companies Lower Their Tax Bills | Tax Reform Options | A Plea for Better Disclosure | Appendices
This study provides a comprehensive overview of profitable corporations’ effective tax rates in 2018, the first year that companies were subject to the Tax Cuts and Jobs Act (TCJA), the tax law signed by President Donald Trump at the end of 2017. The law lowered the statutory federal corporate income tax rate to 21 percent (a 40 percent decrease from the previous 35 percent rate) and made other changes affecting what companies pay.
ITEP’s examination of Fortune 500 companies’ financial filings identifies 379 companies that were profitable in 2018 and that provided enough information to calculate effective federal income tax rates, which is the share of 2018 pretax profits they paid in federal income taxes in that year. This report only includes companies that were profitable in 2018 and would thus be expected to owe income tax for that year. (The corporate income tax is a tax on profits.)
For most of these companies, their effective federal income tax rate was much lower than the statutory corporate tax rate of 21 percent. This is by design.
When drafting the tax law, lawmakers could have eliminated special breaks and loopholes in the corporate tax to offset the cost of reducing the statutory rate. Instead, the new law introduced many new breaks and loopholes, though it eliminated some old ones. The unsurprising result: Profitable American corporations in 2018 collectively paid an average effective federal income tax rate of 11.3 percent on their 2018 income, barely more than half the 21 percent statutory tax rate.
• The 379 profitable corporations identified in this study paid an effective federal income tax rate of 11.3 percent on their 2018 income, slightly more than half the statutory 21 percent tax rate.
• 91 corporations did not pay federal income taxes on their 2018 U.S. income. These corporations include Amazon, Chevron, Halliburton and IBM. An ITEP study released in April 2019 examined 2018 Fortune 500 filings released to date and found 60 companies paid zero in federal income taxes. Now, all companies have released their 2018 financial filings, and this report reflects that.
• Another 56 companies paid effective tax rates between 0 percent and 5 percent on their 2018 income. Their average effective tax rate was 2.2 percent.
• Fully half of the companies in our sample (195 out of 379) paid effective tax rates that were less than half the new statutory rate.
• The sectors with the lowest effective corporate tax rates in 2018 were industrial machinery (-0.6%), utilities, gas and electric (-0.5 percent), motor vehicles & parts (1.5%), oil, gas & pipelines (3.6%), chemicals (4.4%), transportation (8.0%), engineering and construction (8.0%), miscellaneous services (8.3%), publishing and printing (9.8%), and financial (10.2%). Each of these industries paid, as a group, less than half the statutory 21 percent tax rate on their 2018 U.S. income.
• The tax breaks identified in this report are highly concentrated among a few very large corporations. Just 25 companies claimed .1 billion in tax breaks in 2018. That’s almost exactly half the .9 billion in tax subsidies claimed by all 379 companies in our study.
• Just five companies—Bank of America, J.P. Morgan Chase, Wells Fargo effective rate identified by ITEP since it began publishing these studies in 1984., Amazon, and Verizon—collectively enjoyed more than billion in tax breaks in 2018.
• The 11.3 percent average effective tax rate paid by profitable corporations is the lowest average.
Recommendations for Reform:
• Repeal the full expensing of capital investments that was enacted as part of the Tax Cuts and Jobs Act and pare back permanent provisions that allow accelerated depreciation.
• Limit the ability of tech and other companies to use executive stock options to reduce their taxes by generating “costs” that far exceed what companies actually incur.
• Repeal the new “territorial” tax system and instead move toward a worldwide tax regime that would remove the tax incentive to shift profits and jobs overseas.
• Reinstate a strong corporate Alternative Minimum Tax to act as a backstop to ensure all profitable corporations pay a meaningful corporate income tax bill each year.
• Increase transparency by requiring country-by-country public disclosure of company financial information, including corporate income and tax payments, through filings to the Securities and Exchange Commission.
In 2017 Republican leaders in Congress and President Donald Trump pushed through the unpopular “Tax Cuts and Jobs Act,” which sharply reduced the federal corporate income tax rate and created a huge new break for capital investments while making a token effort to broaden the corporate tax base by eliminating some existing loopholes. Hastily cobbled together in less than seven weeks, the law is the result of a long-term aggressive push by corporate lobbyists to reduce the federal corporate income taxes their companies pay, based on the claim that tax cuts will spur capital investment, economic development and job growth.
This study examines federal income taxes paid or not paid by some of America’s largest and most profitable corporations on their U.S. income in 2018, the first year that TCJA was in effect. The companies in our report are all from Fortune’s annual list of America’s 500 largest corporations and were profitable in the United States in 2018. The 379 companies in this study reported total pretax U.S. profits of 5 billion.
While the statutory federal tax rate is 21 percent, the 379 corporations in this study on average paid slightly more than half that rate, 11.3 percent, on their U.S. income in 2018. Many companies paid far less, including 91 that paid nothing last year.
It does not have to be this way. Corporate tax dodging is not inevitable but rather is the result of choices made by lawmakers. They can instead choose to shore up the corporate tax system with the types of reforms described in this report.
TCJA includes provisions that dramatically cut taxes and provisions that offset a fraction of the revenue loss by eliminating or limiting certain tax breaks. Many of TCJA’s changes, including those benefiting ordinary families, expire at the end of 2025, whereas most of TCJA’s corporate tax changes are permanent.
See Figure 1, below, for changes that affect corporate tax revenue.
Jump to: Executive Summary | Introduction | Who’s Paying Corporate Taxes—and Who’s Not | The Size of the Corporate Tax Subsidies | Tax Rates (and Subsidies) by Industry | Historical Comparisons of Tax Rates and Tax Subsidies | How Companies Lower Their Tax Bills | Tax Reform Options | A Plea for Better Disclosure | Appendices
Who’s Paying Corporate Taxes—And Who’s Not
The Tax Cuts and Jobs Act (TCJA) established a 21 percent statutory corporate income tax rate. That means corporations must pay 21 percent of their taxable income in federal taxes, but that is not the end of the story. Several breaks and loopholes allow companies to report taxable income that is much smaller than their actual income. Other special breaks allow companies to reduce their tax liability after they apply the rate to their taxable income. The result is that most corporations pay an effective rate that is much lower than the statutory rate of 21 percent.
The table on this page summarizes what the 379 companies paid (or didn’t pay) in effective U.S. income tax rates on their pretax U.S. profits.
• 91 companies paid effective tax rates of zero or less on their 2018 U.S. income. Their average effective tax rate was negative 5.9 percent. A negative tax rate means a corporation receives a refund from the IRS.
• 56 companies paid effective tax rates between zero and 5 percent in 2018. Their average effective tax rate was 2.2 percent.
• Fully half of the companies in our sample, 195 out of 379, paid effective tax rates that were less than half the new statutory rate.
• At the other end of the spectrum, 57 companies (roughly one-sixth of the companies in this report), paid effective tax rates of more than 21 percent in 2018, often because they repaid taxes that were deferred from prior years. Their average effective tax rate was 26.9 percent…