Those who focus exclusively on tax rates tend to forget that two factors determine how much tax a corporation pays: taxable income and rates. A low rate can result in a high effective tax if all revenue is taxable; on the other hand, a high rate can result in low taxes if there are numerous deductions from revenue to determine taxable income. The U.S. is an example of the latter approach: relatively high rates and a relatively narrow base. The narrow base results from Congress’s using the tax code to incentivize certain behaviors such as home ownership, borrowing money, capital expenditures, R&D, retirement savings, etc.
To call these “loopholes” overstates the case. They are not “ambiguities or omissions”—rather, they are intentional subsidies for favored activities. That is why it is so difficult to modify our system of taxation: each “tax expenditure” has a vocal constituency who benefits from it and will fight ferociously to keep it. In theory, all of the deficit reduction commissions so far agree that reducing tax rates and broadening the tax base would benefit the economy; in practice, Congress cannot agree to do it. Perhaps the current congressional “Super Committee” will be different?
A recent study released by the left-leaning Citizens for Tax Justice and the Institute on Taxation and Economic Policy has created extensive public comment. The study found that many of the most profitable companies in the United States—General Electric, Boeing, DuPont, Wells Fargo, Verizon, etc.—paid little or no corporate income tax over the three-year period 2008-10. In fact, 78 of the 280 companies studied paid zero tax or less in at least one of the three years. The average effective tax rate for all 280 companies studied for the period was 18.5%—slightly over half of the 35% statutory tax rate, and 6.1% less than the effective tax rate that companies with overseas operations paid on their foreign profits. The study blamed “corporate tax subsidies” or “loopholes” such as accelerated depreciation Big Fat Finance, stock options, industry-specific tax breaks, and deferral of foreign income for this result.
Any tax advice contained herein was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax penalties.
On the other (right) hand Big Fat Finance, however, there are those who believe that U.S. corporate tax rates need to be reduced significantly: the U.S. statutory rate of 35% is the second highest (behind Japan) in the world, even ignoring the effects of state and local income taxes in increasing the statutory rate even further. In this view, the combination of high rates, worldwide taxation, and a competitive global marketplace makes the U.S. corporate tax system punitive.
Loophole:
1 a: a small opening through which small arms may be fired
b: a similar opening to admit light and air or to permit observation
2: a means of escape; especially: an ambiguity or omission in the text through which the intent of a statute, contract, or obligation may be evaded
Example: She took advantage of a loophole in the tax law.
—Merriam Webster Dictionary
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