In 2017, federal policymakers passed the Tax Cuts and Jobs Act (TCJA), which included provisions that reduced the federal corporate tax rate from a top rate of 35 percent to a single rate of 21 percent and eliminated the corporate alternative minimum tax. As components of the TCJA are due to expire in 2025, policymakers should
reconsider whether profitable corporations are doing their part to fund crucial public services that everyday folks across the country value and count on.
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report by the Institute on Taxation and Economic Policy (ITEP) asserts that many profitable U.S. corporations pay a lower effective corporate income tax rate than the federal tax rate of 21 percent, mainly because of the special breaks and loopholes that have been left in place or introduced in the TCJA.
ITEP estimates the federal corporate taxes paid from 2018 to 2022 by the largest profitable corporations in relation to their U.S. profits. According to the report:
- The 342 companies studied paid an average effective income tax rate of only 14.1 percent during that five-year period. In other words, they paid 14.1 percent of their U.S. profits in federal corporate taxes;
- 87 companies paid corporate effective tax rates less than 10 percent;
- 55 paid effective corporate tax rates less than 5 percent, and
- 109 corporations paid no federal corporate tax in at least one of the five years analyzed.
Like individuals, families, and other kinds of businesses, corporations pay taxes to fund important things like roads, bridges, schools, health care, and other public services that improve the lives of everyday folks and promote the overall well-being of society.
Corporate taxes are the third largest source of federal revenue, raising $425 billion in FY 2022, which was 8.7 percent of all federal revenues. Federal corporate tax revenues have shrunk substantially, measured as a share of the nation’s economy, over time.
The amount of corporate tax a company pays is based on how much profit they make in a year. Businesses structured as corporations pay federal corporate taxes based on the amount of revenues they bring in, minus various expenses of doing business such as wages and employee compensation, depreciation, and the cost of various inputs that went into making their products.
The ITEP report points to the methods allowed in our current tax laws that corporations use to reduce their taxes.
- Accelerated depreciation allows companies to write off the cost of investments in equipment faster than the equipment loses value. Under the TCJA, companies can write off the full cost of investments immediately.
- Tax breaks for stock options, which is a type of compensation typically paid to executives.
- Other tax credits such as the research tax credit, which proponents argue promotes innovation but may simply reward companies for research they would have done regardless.
- Offshore profit shifting is a means by which companies move the apparent location of their profits from the U.S. to lower-tax countries.
This report shows that the rules in place are not working very well to make sure companies pay their share of taxes to fund important public services. This situation raises concerns about the effectiveness of the existing tax framework and highlights the need for further reforms.
In 2022, President Joe Biden signed a new law that aims to reduce the amount of taxes corporations can avoid paying. The law includes a minimum corporate tax and increased funding for enforcing tax laws. The hope is that these measures are a first step in substantial reforms so that corporations contribute more to fund essential public services and the overall well-being of the country.