March 31, 2023

Today’s Economist: Bruce Bartlett: Some Big Corporations Don’t Pay Taxes, Either


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

On Sept. 13, Harold Hamm, chairman and chief executive of Continental Resources, testified before the House Committee on Energy and Commerce about achieving energy independence. He said his company, an oil producer, could produce much more if federal policies didn’t hold it back. Among them is the tax system. Mr. Hamm said his company paid an effective tax rate of 38 percent.

Today’s Economist

Perspectives from expert contributors.

One often hears corporate executives make such assertions. Republicans always accept them at face value, because to them there is no public policy problem that isn’t caused by high taxes. Tax cuts are their solution to just about every problem. Cutting the corporate tax rate is among the key measures that all Republicans favor to stimulate growth.

One problem with the Republican theory is that many big corporations actually pay little, if any, federal income tax. For example, The New York Times has reported that General Electric, the sixth-largest corporation in the United States, earned $14.2 billion in 2010, but disclosed in federal filings that it had no federal tax liability.

This disparity between the high taxes that many people say they believe American corporations pay and the low rate they actually pay applies to Mr. Hamm’s business as well. Citizens for Tax Justice, a labor-backed group, looked at Continental Resources’ financial reports, where it must disclose tax payments, and found that in 2011 it paid a federal tax rate of 1.9 percent on profits of close to $700 million. Its average federal tax rate over the last five years was 2.2 percent.

According to Citizens for Tax Justice, G.E. paid a federal tax rate about the same as Continental Resources’ over the last 10 years – an average of 2.3 percent, including four years in which it received a net tax refund.

When poor people pay no federal income taxes and get a government refund because of such programs as the earned-income tax credit, Republicans are incensed, implying that if only the poor paid their fair share that the deficit would disappear. They never suggest that corporations like G.E. pay their fair share, even though the G.E. example is far from unique, according to Citizens for Tax Justice.

The complexity of the corporate income tax makes it easy to evade and avoid American taxes. Edward D. Kleinbard, a professor of tax law at the University of Southern California, points to the easy availability of tax havens, where corporations artificially book their profits and avoid taxation on them.

I had a personal experience with such tax havens recently. I needed a copy of Microsoft Word for a new computer and went to to buy and download it. But my credit card company refused the charge. When I checked to see what the problem was, I was told that the credit card company was suspicious because the charge went to a company based in Luxembourg.

Luxembourg is, of course, a notorious tax haven. Arranging to realize its profits in such places has long been a tax-avoidance policy practiced by Microsoft and other big corporations. According to a July 22 report by the London-based Tax Justice Network, as much as $32 trillion of global financial wealth may be parked in the world’s tax havens.

Even without taking account of offshore tax havens and other aggressive tax avoidance activities, corporate taxes are grossly overrated as a cost of doing business in the United States. According to the Office of Management and Budget, the corporate income tax raised just 1.2 percent of the gross domestic product last year. Even in 2007, before the economic crisis, it raised only 2.7 percent of G.D.P. This is well down from the 1950s, when the corporate tax raised twice as much revenue as a share of G.D.P.

Republicans often point to the statutory corporate tax rate in the United States as evidence that American companies are overtaxed. Indeed, it is true that the United States has the highest statutory central government tax rate among members of the Organization for Economic Cooperation and Development. The combined statutory rate in the United States is 39.2 percent, including state taxes, compared with an average of 29.6 percent in the O.E.C.D.

However, as a Sept. 13 report from the Congressional Research Service explains, looking only at the statutory rate is highly misleading as an indication of the burden of the corporate tax. That is because it does not take account of the many tax expenditures that reduce the effective tax rate paid by American corporations. In 2011, they reduced corporate tax revenues by $159 billion.

As a consequence, the weighted effective tax rate – taxes as a share of profits – is 27.1 percent in the United States, which is below the 27.7 percent average rate of O.E.C.D. nations. The weighted average marginal tax rate on corporations – the tax on each additional dollar earned – is 20.2 percent in the United States, compared with 18.3 percent in the O.E.C.D.

For these reasons, the investor Warren Buffett says it’s “a myth that American corporations are paying 35 percent or anything like it.”

The Congressional Research Service report also notes that in the United States corporate taxes as a share of G.D.P. were the third lowest among all O.E.C.D. countries in 2009 – 1.7 percent of G.D.P. (including state taxes), compared with an O.E.C.D. average of 2.8 percent of G.D.P. Even Ireland, which conservatives often point to has having an exemplary corporate tax system, raised corporate taxes equal to 2.4 percent of G.D.P.

One continuing confusion in the corporate tax debate is who, exactly, pays it. Corporations, after all, are not entities separate from their owners (shareholders), employees and customers. They are the ones who pay the tax, but economists have been debating about who and to what degree for a century.

A Treasury Department report in May concluded that 82 percent of the corporate tax is borne by capital, with 18 percent borne by labor. Contrary to popular belief, none of the tax is shifted to consumers, which stands to reason because prices are set by producers that pay different tax rates or may even be tax-exempt.

The private Tax Policy Center published a study on Sept. 13 with similar conclusions. It estimates that 20 percent of the corporate tax is paid by labor, 20 percent is borne by the “normal” return to capital – roughly, the risk-free interest rate – and 60 percent by the “supernormal” return to capital. The latter is the extent to which the return to corporate stock has historically exceeded the risk-free interest rate.

One driving force for tax reform is a widespread belief, on both sides of the aisle, that the statutory corporate tax rate should be reduced. That is fine as long as the tax base is broadened by eliminating loopholes. But the idea that cutting the tax rate is a magic bullet to jump-start growth is nonsense, because corporate taxes are, in fact, quite low.

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Economix Blog: More on Mitt Romney’s Tax Rate

There are any number ways to calculate a household’s tax rate. You can look at just the federal income tax and conclude that almost half of Americans don’t pay taxes, or look at all taxes and conclude that a vast majority of Americans do pay taxes.



Thoughts on the economic scene.

To my news analysis explaining that most households actually pay a lower federal tax rate than 15 percent — the rate Mitt Romney, the Republican presidential candidate, says that he pays — there are two postscripts worth adding:

First, I focused on direct taxes. If you also include indirect taxes — mainly corporate taxes, effectively paid by stockholders — Mr. Romney’s rate rises higher. On average, the top 1 percent of earners pay about 10 percent of their income in corporate taxes, according to the Congressional Budget Office.

Companies officially pay these taxes. But by reducing the after-tax earnings of the company, the taxes ultimately come out of the pockets of the company’s owners. Economists, with good reason, like to apportion all taxes to people, rather than to an entity like a corporation.

Second, most of the article focused on federal taxes, not state or local taxes (for which the data is thinner). Because Mr. Romney’s income is so high, he pays relatively little of it in state and local taxes. A middle-class or poor family would pay a greater proportion.

These two factors obviously point in different directions. So if you widened the lens beyond direct federal taxes — to all taxes, including indirect, state and local taxes — the conclusion would likely be similar. Mr. Romney does not pay a lower tax rate than most Americans. He also doesn’t pay a much higher tax rate, despite being much more affluent.

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Economix Blog: Americans Used to Be Much More Anti-Tax



Dollars to doughnuts.

In addition to his Economix post, Bruce Bartlett also has a Tax Notes column today looking at public support for raising taxes (instead of or in addition to cutting spending)  to narrow federal deficits. He found dozens of surveys conducted over the last year showing that most Americans believe that taxes should be part of any deficit reduction package.

Incidentally, for an article (and related blog post) I wrote a while back on the evolution of deficit deals, I asked The Times’s polling department to see how American attitudes toward debt consolidation packages had changed in the last three decades. They pulled up the polls below.

As you’ll see, Congressional Republicans may have become more anti-tax in the last 30 years, but the American public has made the opposite transition: in March 1982, three-quarters of Americans said spending cuts alone should be used to reduce deficits; today, about the same share say tax increases should be included in any debt-reduction package. Remember, of course, that tax rates were much higher 30 years ago than they are today.


NBC News/Associated Press Poll, March 1982
In order to help reduce the federal budget deficit, which of the following would you prefer — federal income tax increases or federal spending cuts?

13% Tax increases
77% Spending cuts
4% Both (volunteered)
6 % Don’t know

Time/Yankelovich, Skelly White Poll, November 1985
What do you think should be done to reduce the federal deficit? Do you think we should: cut government spending, raise taxes, or both cut our spending and raise taxes?

54% Cut government spending
4% Raise taxes
36% Both cut our spending and raise taxes
6% Not sure (volunteered)


Gallup, May 1988
There are a number of ways to reduce the federal budget deficit, if the government decides to. Some people say we can reduce the deficit simply by cutting spending. Others say a combination of spending cuts and tax increases is required. Which of these views comes closer to your own?

47% Cutting spending
39% Combination of spending cuts and tax increases
2% Do neither (volunteered)
12% Don’t know/Undecided


Quinnipiac University Poll, March 2010
To reduce the federal budget deficit do you think there should be a combination of tax increases and spending cuts, or that only taxes should be raised, or only that spending should be cut?

42% Combination
4% Only tax increases
49% Only spending cuts
5% Don’t know/No answer


New York Times/CBS News, September 2011
Do you think any plan to reduce the federal budget deficit should include only tax increases, or only spending cuts, or a combination of both tax increases and spending cuts?

3% Only tax increases
21% Only spending cuts
71% Both
5% Don’t know/No answer


Time/Abt SRBI Poll, October 2011
Over all, what do you think is the best way to reduce the federal budget deficit — by cutting federal spending, by raising taxes, or by a combination of both?

29% Cutting federal spending
4% Increasing taxes
65% Combination
3% No answer/Don’t know

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Wealth Matters: Tax Burdens Tilt Coastal, and System’s Fairness Is Debated

But is that really the marker of wealth? After all, earning $250,000 a year in New York does not buy as much as it does in, say, Iowa or Alabama.

Or put another way: Why doesn’t the tax code account for regional differences in tax burdens?

While the question begins with households earning more than $250,000 a year in places like Boston, New York and San Francisco, the issue of fairness is not just for the top 2 percent to ponder. Workers at all income levels are affected by regional differences in federal taxes. Local taxes may also be high in these areas, though economists argue that residents at least get something for those taxes, like good schools and safe neighborhoods. According to David Yves Albouy, an assistant professor of economics at the University of Michigan and an expert on geographic tax inequality, teachers in New York may be among the highest paid in the country, but their salaries don’t give them any extra buying power because the cost of living is so high.

The average pay of a New York public school teacher in 2009-10 was $78,885. But rent for a two-bedroom apartment in Manhattan averages $3,715 a month.

In an article, “The Unequal Geographic Burden of Federal Taxation,” published in the Journal of Political Economy in 2009, Dr. Albouy wrote that wages in New York were 21 percent higher than the national average. At a 33 percent federal income tax rate, workers were paying a 7 percent federal surtax for working here. But even for someone making $50,000 a year, that surcharge worked out to about $3,500 extra a year, he said.

“A lot of the 1 percent lives in New York,” he said, “but I’d say 98 percent of the people who live in New York are part of the 99 percent, and they get the short end of the stick.”

But while one presidential candidate after another has been proposing new tax regimes, none so far has mentioned equalizing the regional differences.

“The system is not totally fair, but I guess the question is, who is it most unfair to?” said Mark Luscombe, principal federal tax analyst for CCH, a publisher of research and software for tax lawyers and accountants. “It’s most unfair to the New Yorker, and no one has much sympathy for the New Yorker.”

Or as Joseph J. Thorndike, the director of the tax history project at Tax Analysts, said, any regional adjustment “might as well be called the Bicoastal Elite Tax Relief Act.” He added, “It would shower all these benefits on Palo Alto and New York City, and the rest of the country would be outraged.”

Still, there are some interesting issues here that raise questions about how we think about fairness and taxation. If nothing else, they will help inform your next cocktail party conversation (or argument).

CURRENT SYSTEM The debate over regional differences is nothing new, Dr. Thorndike said. When the modern tax code went into effect in 1913, “it was viewed as a way to tax those rich Northerners, and to be fair, that’s what it was,” he said.

But starting in World War II, when the tax base widened beyond the wealthiest people, he said, the tax system had to be sold as a shared sacrifice. With this came the idea of horizontal equity — that people at the same level pay the same rate across America.

Today, residents of New York pay about $15 billion a year more in federal taxes than they receive in benefits, Dr. Albouy said. He noted that that money would make quite a dent in the cost of the Second Avenue subway line, which is estimated at $17 billion.

Still, the high earners living in expensive areas are able to take deductions that reduce some of their federal tax burden. These include breaks on mortgage interest, state income and property taxes and charitable gifts.

A flat tax may seem, at first glance, more equitable, but it may mean that people in high-cost areas would lose the deductions that lower their tax bills, Dr. Luscombe said.

GEOGRAPHICALLY FAIR SYSTEM So how would you make the tax system fairer for people who live in more expensive regions?

A cost-of-living adjustment is one way. The military offers that to soldiers stationed in different parts of the country. But measures of the cost of living are considered pretty inaccurate.

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Economix Blog: 99 Percenters and 53 Percenters Face Off

Welfare. Food stamps. Bankruptcy and minimum wage. Those are a few of the complaints of those in We Are the 99 Percent, a Tumblr blog recording the stories of those who sympathize with the Occupy Wall Street protests.

But wait. Those are also the complaints in We Are the 53%, a counterblog that is meant as a conservative retort to the protestors. The site, which mimics the 99 Percenters by having people write out their stories and hold them up to be photographed, says it is by “Those of us who pay for those of you who whine about all of that.”

What’s with all the percentages? The 99 Percenters are objecting to the fact that 1 percent of Americans control about a third of the country’s wealth. The 53 Percenters are portraying themselves as the responsible citizens who pay federal income tax, as opposed to the 47 percent of Americans who don’t. (Most who don’t are exempt because their incomes are too low or they get tax breaks aimed at low-income working families and other groups.) At The Washington Post Wonkblog, Ezra Klein pointed out that that many people paid no taxes because of conservative pressure to lower them.

The 99 Percenters, who have given a voice to the decentralized protests, tell of accumulated student debt, unaffordable health insurance and a sense of despair. “I followed the rules … now here I am,” wrote a 30-year-old unemployed woman who said she could not afford marriage or children.

The 53 Percenters, on the other hand, say things like, “My faith in God has always helped me weather the storms of life, not a government hand out.”

But the 53 Percent do not seem, by and large, to be doing much better than the 99 Percent. “I work 60+ hours a week with no guarantee of a paycheck,” wrote one contributor. “I didn’t blame Wall Street when I couldn’t find a living wage job or make it as a musician.”

Another self-employed man wrote, “I don’t get vacations, sick leave or comp time.”

The 53 Percent site was the brainchild of Erick Erickson, a CNN commentator and editor of RedState, Josh Treviño, a co-founder of RedState who is now at the Texas Public Policy Foundation, and Mike Wilson, the filmmaker behind “Michael Moore Hates America,” who started the Tumblr site after #iamthe53 became a popular Twitter hash tag for critics of the Wall Street protests.

“The distinction is that the people on the 99 side are saying, ‘We need to change it so that my life is easier,’ and the people on the 53 side say, ‘My life may not be easy, but it’s mine,’” Mr. Wilson said

Do the 53 percent find no fault with the banks? “A friend of mine said is best — he’s a conservative,” Mr. Wilson said. “He said, ‘They’re mad because these corporations got bailed out. We’re mad because our government bailed out the corporations.’”

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