Tax Cut! Yardeni Research Calculates Effective Corporate Tax Rate Already Fallen To 13%

In March 2017, The Institution on Taxation and Economic Policy (ITEP) released its latest report examining the corporate tax filings for Fortune 500 companies. It looked at 258 of the companies which had been "consistently profitable" from 2008 to 2015. The report concluded that these companies were collectively paying far less than the statutory 35% federal corporate tax rate – in fact the average effective tax rate was 21.2%. According to the ITEP report.

Many profitable corporations are finding ways to zero out their corporate taxes.  Of the 258 profitable Fortune 500 companies in our sample:

  • 18 paid ZERO in taxes over the full eight-year period.
  • 100 paid zero—or less—in at least one profitable year during the eight-year period, 58 of those companies had multiple zero-tax years.
  • 24 companies zeroed out their taxes in at least four of the eight years. 
  • 48 companies paid a rate between 0 and 10 percent over eight years.

In general, it found that utility, oil, gas and pipeline companies tend to pay low tax rates. Only about a quarter of the companies paid a tax rate of at least 30% and about 60% of those companies were in two sectors, retail and health care.
The report found that the 258 corporations enjoyed tax breaks of $526 billion during the eight years 2008-15. More than half of this total, $286 billion, went to just 25 companies.

If you thought that was bad, you’re in for a shock because analysis by Yardeni Research suggests that the situation could already be even worse…and Congress hasn’t even passed the tax reform bill. According to CNBC.

U.S. companies on balance already are paying well below the 20 percent tax level targeted in the Republican reform plan, according to an analysis by Yardeni Research. In fact, the typical effective tax rate - the amount paid minus deductions - could be as low as 13 percent over the past years, Yardeni concluded when looking at a cleaner number of how much the government is really collecting. That's well below other estimates that sought to clarify the impact of the tax reform proposal that would take the current nominal rate from 35 percent to 20 percent. Multiple firms have concluded the benefits will tilt to specific sectors and provide a limited aggregate windfall.

Delving in to the data, Yardeni uses the example of the Q3 2017 GDP release from the Bureau of Economic Analysis. The data shows that corporations paid $472.9 billion in taxes during the past four quarter on pre-tax profits of $2281.4 billion. This implied an effective tax rate of 20.7%, which was obviously very close to the effective tax rate calculated by ITEP.

However, Yardeni wasn’t done. Noting that corporate tax revenues collected by the IRS are consistently less than corporate taxes included in the GDP measure of corporate profits. Using the Treasury’s data of corporate tax collected in the four quarters through Q3 2017 - $297 billion and 37% lower than the $472.9 billion in the GDP measure – Yardeni concluded.

The shocking result is that the effective corporate tax rate based on actual tax collections was only 13.0% during Q3, and has been mostly well below 20.0% since the start of the previous decade. What gives? I’m not sure, but I am inclined to follow the money, which tends to support the story told by the IRS data. If so, then Congress may be about to cut a tax that doesn’t need cutting. Or else, the congressional plan is actually reform aiming to stop US companies from using overseas tax dodges by giving them a lower statutory rate at home. We may not be able to see the devil in the details of the bill until it is actually enacted.

Here are Yardeni’s ugly findings in chart form…

…although, as CNBC reports him saying.

"The bottom line is that getting to the bottom line when it comes to matters of taxation is a very taxing exercise"