Avoiding US Corporate Income Tax Is Literally As Easy As Changing Your Name

I always get a little confused when people start banging the table about how high corporate taxes are in the United States. A lot of pundits and politicians do this as an adorable routine, I'm guessing when they need a vote or two to stay in office.

The best of them do it in a well-meaning quest to ensure that the US remains competitive in the global economy. This makes sense in a world where a corporation can sell its products and run a headquarters from basically anywhere thanks to the internet and (relatively) inexpensive communication and travel.

But it's an oversimplification to say that lower corporate taxes will accomplish anything meaningful.

The problem is that while the highest US marginal tax rate looks pretty high (35%), very few US corporations pay the majority of their income tax at this rate. There are two reasons: first, a simple mix-up of nomenclature between the highest marginal rates (35%) and the effective tax rates of US companies (probably closer to 15%). Second, an abundance of tax loopholes, credits, and creative accounting by an entire industry of extremely intelligent tax attorneys whose paycheck and bonus depend on their ability to eliminate or defer taxes.

According to this Forbes article, in 2013 the top fifteen most profitable companies paid a weighted average US corporate income tax of 27.3% on average net income (after expenses) of $19.3 billion. If we look at gross income, these top 15 brought in revenues averaging $157.6 billion each (totaling $2.4 trillion, or about 15% of the entire US economy).

However, unlike corporations, US individuals like you and me are taxed on a gross (total) income basis. So for comparison purposes and plain old fun, if we divide what the top-15 US corporations paid in income tax in 2013 ($79 billion) by their gross income of $2,363 billion, we end up with an effective gross corporate tax rate of 3.3%. Granted, this figure is pretty meaningless because that's not how we tax corporations, but that is how we tax individuals, so it's an interesting comparison.

Note that all of these data are the MOST profitable companies in the US, and thus their effective rate is just about the highest. According to the Government Accountability Office, the sum of all profitable US corporations paid an effective tax rate of 13% in tax year 2010. And that's excluding the unprofitable ones!

In fact, relative to individual income tax and social insurance taxes (payroll taxes, which are "for" Social Security, Medicare), corporate income tax as a percentage of US GDP has hovered between 1%-3% since the early 1970s and is the source of only about 10% of total US Federal revenues in tax year 2013.

I suppose I do understand the competitive / game theory aspect - if US corporations choose to do business elsewhere because of non-competitive tax rates, that has serious consequences from an economic policy perspective.

Yet I'd find US corporation's plight much more compelling if they actually paid tax on their income. Investigating this world is actually a really fun activity - if you don't believe me, do a search for "Double Irish Dutch Sandwich." To give you an idea of how easy it is to avoid or defer US corporate income tax, consider that Caterpillar probably saves about $300 million in taxes per year by simply routing their sales through an overseas subsidiary instead of their parent company. These sort of shenangians are simply unavailable to Jane and Joe Taxpayer here in the US, yet are available to multi-national corporations.

I'm not sure if this is a good thing or a bad thing, but I'm pretty sure that simply lowering US marginal tax rates isn't going to accomplish anything. After all, it's tough to compete with paying zero: if a US corporation can defer paying tax on profits held in its foreign subsidiary indefinitely, why wouldn't it continue to do so indefinitely?

Even if, in a twist straight from a Joseph Heller novel, the foreign profits are held in US bank accounts, making them offshore in name only.