In the first year of the law, the amount corporations paid in federal taxes on their incomes — their “effective rate” — was 11.3 percent on average, possibly its lowest level in more than three decades, according to a report by the Institute on Taxation and Economic Policy, a left-leaning think tank.
From 2008 to 2015, under the previous tax code, the corporations’ effective rate was about 21 percent, according to the ITEP’s prior research.
The report also found that 91 corporations in the Fortune 500, many worth billions of dollars, paid no federal taxes last year.
The findings come amid an intense debate about whether the 2017 tax law was tilted too far towards extending benefits for corporations. Some of the tax law’s benefits for individuals and families expire in a few years, but the cuts for corporations will stay in place. Some Democratic presidential candidates have called for scaling back some of the tax cuts for businesses, but the White House has not expressed any support for changes.
These tax cuts, combined with big spending increases, have led to an explosion in the federal deficit, which this year rose to almost $1 trillion. In October, the U.S. Treasury Department announced the deficit had grown $205 billion, or 26 percent, in the past year, an unusual occurrence during a period of strong economic growth.
Corporate tax revenue fell markedly during the first year of the tax law, from about $300 billion in 2017 to $204 billion in 2018, according to federal data, although it increased slightly from 2018 to 2019.
“When drafting the tax law, lawmakers could have eliminated special breaks and loopholes in the corporate tax to offset the cost of reducing the statutory rate,” the ITEP report says. “Instead, the new law introduced many new breaks and loopholes, though it eliminated some old ones.”
Republicans and conservative tax experts contend that the cut in corporate tax rates helped generate economic growth and boost business investment in the economy. Before the tax law was enacted, they cited statistics showing the United States’ official corporate tax rate was significantly higher than in many other developed nations. Now, they point to low unemployment and strong hiring numbers as evidence the tax cut worked.
“Despite the struggling global economy, the U.S. labor market is stronger than ever,” said Rep. Kevin Brady (R-Tex.), who helped author the 2017 tax law. “Wages for blue-collar workers are rising, and there are more job openings in our country than there are people looking for work.”
Democrats, meanwhile, maintain that the rate cut went too far and primarily helped enrich stockholders and corporate executives. Many companies said a big drop in corporate tax rates would allow them to invest more in capital and equipment, but the uptick in new investment appears to have been short-lived. Much of the extra capital went into record stock buybacks, which increase share prices without requiring new investment or hiring.
The 91 profitable Fortune 500 corporations that paid no federal tax in 2018 earned a combined $101 billion last year.
Those paying no federal tax include many household names: Online retailer Amazon, for instance, received a $129 million rebate on $10.8 billion in profits, primarily because of how the tax code treats stock options included in pay packages. Amazon’s chief executive is Jeff Bezos, the world’s richest man and owner of The Washington Post.
Video game maker Activision Blizzard had $447 million in profits but received a tax rebate of $243 million, resulting in an effective tax rate of -54.4 percent. The company went on to shed 800 jobs in the early weeks of 2019.
Spokespeople for Amazon and Activision Blizzard did not return requests for comment.
Negative corporate tax rates can occur “because a corporation carries back excess tax deductions and/or credits to an earlier year or years and receives a tax refund check from the U.S. Treasury Department,” according to the report.
Other tax breaks and loopholes companies use to decrease their tax burdens include accelerated depreciation, which allow companies to take larger upfront write-offs on the expected wear and tear of newly purchased equipment, and special deductions for the stock options included in executive compensation packages.
The ITEP looked at the 379 companies in the Fortune 500 that were profitable in 2018 and provided enough information to calculate their tax rates. Had they paid a 21 percent tax rate on their profits, they would have collectively owed the federal government an additional $73.9 billion, the report said.
Researchers excluded taxes incurred by corporations under a one-time “repatriation tax” on money they brought back from overseas because of the tax law, according to Matt Gardner, an analyst at the ITEP.
The 11.3 percent statistic amounts to the lowest effective corporate tax rate the ITEP has found since it started evaluating this data in 1984.
Globally, countries have struggled to tax corporations as multinational firms have grown increasingly effective at shifting their profits to foreign tax havens. A 2018 study found that in the past three decades, the average corporate tax rate globally plummeted from about 49 percent in 1985 to 24 percent in 2018.
The result is that nations worldwide have lowered their official tax rates to try to remain competitive internationally. In the United States, corporate taxes have plunged dramatically as a share of the federal budget, from more than 4 percent to around 1 percent, putting strain on other sources of revenue. Only two other times since 1980 have corporate tax revenue represented such a small share of the federal budget, including in 2009 during the Great Recession.
The ITEP’s report calls for several measures to ensure against corporations paying such low effective tax rates, including a new minimum tax on all corporations “to act as a backstop” on their federal bills. The report also calls for limiting the ability of tech and other companies to classify executive stock options as “costs” that allow them to reduce their taxes.