Charts of the day, corporate income-tax edition

By Felix Salmon
November 17, 2011
chart of corporate income tax as a percentage of total corporate profits, and it's the main thing you should bear in mind when people start saying that the US corporate income tax is too high.

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fredgraph2.png

This is a chart of corporate income tax as a percentage of total corporate profits, and it’s the main thing you should bear in mind when people start saying that the US corporate income tax is too high. And while you’re at it, you should remember this chart, too, showing corporate income tax as a percentage of GDP.

fredgraph.png

Once upon a time, the corporate income tax generated a significant share of tax revenues; now, it’s bumping along in the 2%-of-GDP range. Yes, the marginal rate of corporate income tax is high, at 35%. But US companies are extremely good at not paying that.

But at least we know the aggregate amount that corporations pay in taxes. What we don’t know — because they won’t say, and no one’s forcing them to say — is how much any given public company pays.

Allan Sloan has a very good column on this today. Companies already report 16 different tax metrics; they should simply be required to add a 17th — the amount they pay the IRS in taxes — which in many ways is most important. The companies already file tax returns; the number’s right there, on lines 31 and 32. They just refuse to say what it is.

Here’s Sloan:

During the past few months I’ve repeatedly asked three big companies in the tax-wars cross hairs — GE, Verizon, and Exxon Mobil — to voluntarily disclose information that would refute allegations that they incurred no U.S. federal income tax for 2010. All have refused, saying they won’t disclose anything not legally required. They still manage to complain about the allegations, however. I suspect that if I called the rest of the Fortune 500, I’d get 497 similar responses.

As a society, we need the “taxes incurred” information to inform our current tax debate. Investors, too, would benefit; knowing the tax that companies actually incur would be a useful analytical tool.

Once the taxes-paid number was public, we could start dividing it into the company’s GAAP profits, to get an idea of what kind of tax rate companies are really paying right now. And of course, companies would be more than welcome, if they were so inclined, to reveal how much tax they were paying in other jurisdictions as well. But for the time being, all we can do is look at the aggregate numbers. Which are showing, very clearly, that corporate income taxes in America are very low and falling.

Update: Kevin Drum creates the chart I should have led with: corporate taxes as a percentage of pretax profit.

25 comments

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Is there any relationship between this and inequality (the rise of the 1%)?

Most of the academic studies I know of suggest taxes on corporate profits eventually impinge upon workers (because they lower investment which lowers labour productivity), and I am not aware of anything from economists arguing that if you cut corporate taxes it goes into shareholders and senior executives’ pockets … but it is kind of hard to resist the idea that one thing has something to do with the other.

Does anybody know of any research on this question?

Posted by Luis_Enrique | Report as abusive

Exxon paid about $1.2 billion in US federal current taxes in 2010 on $7.7 billion of US earnings. Exxon does not make much money in US because they don’t drill for much oil here — although the amount is increasing due to shale.

Exxon’s refineries and chemical plants in the US make very little.

Exxon does pay large amounts of foreign tax: $21 billion of current taxes in 2010 on $45 billion of income. If you tax these earnings twice at high rates, the projects just won’t make any sense. There are many multinational oil companies that can do the projects without incurring additional domestic taxes.

Posted by Nicostrata | Report as abusive

Uh…maybe I’m missing what you’re actually asking for, but I think you just want cash taxes, which is found in SEC filings in the cash flow statement. Just going to google finance and checking out cash flow section for GE, see cash taxes for 2010 was 2.6 billion, compared to operating income (pre-tax) of $14.2 billion, tax rate of 14%.

Posted by vm5 | Report as abusive

Felix, congrats! Entering this path will bring you on more consistent findings. Hint: corporate receivers of government spending. Another nice check ? Map the value chain of the american health system. At the end you’ll be convinced that we need a serious overhaul of the financial system.

Posted by FBreughel1 | Report as abusive

I think the footnote reconciling statutory tax rate to effective tax rate already does a pretty good job answering this question. It gets you to the effective federal tax rate and highlights the major reasons that number is lower than 35%.

That said, the company might not actually pay the effective amount on its federal return for a given tax year. I’m not sure it would be particularly meaningful to know the federal tax liability in an arbitrary tax year, since for a large corporation there are going to be a lot of deferrals and other timing distortions.

Posted by loudnotes | Report as abusive

The first chart would seem to indicate that, in the early 1950s, about 95% of profits went to the taxman. Is that really accurate? Are you sure this represents actual tax revenues and actual profits, not some marginal or statutory rate? It’s hard to imagine many businesses continuing if you confiscate all but 5% of their profits.

Posted by DCWright | Report as abusive

@DCWright – I believe it’s because they’re using a stupid ratio of Taxes/After-Tax Income. So, in a world where 50% of your pre-tax profit was paid in taxes, the ratio would be 100%.

From Marginal Revolution comments, this seems to be a more appropriate graph using taxes relative to pre-tax income:
http://research.stlouisfed.org/fredgraph .png?g=3pv

Posted by Beer_numbers | Report as abusive

The first chart is seriously in error. Quote from Charlie over at Marginal Revolution.

“Charlie November 17, 2011 at 3:30 pm

The first graph illustrates federal taxes paid by corporations as a percent of total after-tax corporate profits. Poorly done. Obviously corporations did not pay 90% of their profits to taxes in the 1950s. A better graph shows total corporate taxes paid as a percent of total before-tax corporate profits: http://research.stlouisfed.org/fredgraph .png?g=3pv

This shows, more realistically, that corporations used to pay about 50% of their before-tax profits to taxes and now pay about 22%.”

You can get the same data from http://www.bea.gov/national/nipaweb/Sele ctTable.asp

Posted by pschaeffer | Report as abusive

@DCWright – You are correct. Go to Marginal Revolution. Several blog comments show that Felix is using the wrong data.

Posted by pschaeffer | Report as abusive

@Beer,

I think you are correct. The chart appears to be taxes divided by after tax corporate income. You can get the raw data from http://www.bea.gov/national/nipaweb/Sele ctTable.asp.

Posted by pschaeffer | Report as abusive

@Felix,

You really need to take the first chart down. It is not “This is a chart of corporate income tax as a percentage of total corporate profits”. It appears to be a chart of corporate income tax as a percentage of after tax corporate profits (as Beer_numbers noted).

Posted by pschaeffer | Report as abusive

Ignoring the after/before tax issue (which is important, but you ignored it so let’s forget that for now), can you explain more what you thought chart #1 is supposed to convey. Contrary to your description, it’s surely not a percentage (it’s not just under 1% down to .2%!); it’s some sort of fraction. And the fraction _you_ give shows 23% or so at this moment which is less than 35% but not ridiculously so and not out of line internationally.

The fact that it started near 95% thought should trigger your b.s. detector, but you thought this chart is nevertheless useful and informative…

Please, aside from the fact that it shows a falling level from a “makes no sense at all” starting value, can you say more about how we are supposed to read this chart. But this time, be a bit clearer about what values it is actually plotting and what the magnitudes mean?

The second graph, tax/gdp is a bit crazy. Absent other data, the most obvious explanation is that we have such an efficient market that corporate profits are not growing in proportion to economic activity – which (if true) would be regarded as a good thing since we’d rather consumers capture surplus rather than corporations. Well, that’s probably not what is going on, but you need to look beyond this graph to argue this. On the face of it, with no other context, the second graph shows a great success story for the 99%.

Posted by bxg6 | Report as abusive

Felix,

I think it would be helpful to dive in how the companies who are all showing massive taxes paid on their financial statements end up not paying taxes. Is it just that they are somehow deffering them?

Lets avoid the confusion of the international stuff that muddies the waters at XOM or GE,(both of which legitamitly earn much more outside of the U.S. than inside it. I looked at a dozen S&P companies for ones that seem to have the greatest % of sales in the states, TJX looks like the most US centric I could find in 5 minutes.

In on TJX’s most recent year they paid $824,562,000 in tax on $2,164,092,000 pre-tax income. That works out to 38% – above the max rate.

They showed roughly similar rates in the two prior years. So what’s up. If those checks aren’t making their way to the treasury then why are those numbers on their audited financials.

Posted by y2kurtus | Report as abusive

y2kurtus, the GAAP earnings may be different from the IRS earnings. My guess is that TJX, as a US-centric business, pays essentially 35% of their earnings in federal income tax.

The greater dilemma is how to treat international earnings. Imagine a business that reaps half of its segment earnings from the US and half of its segment earnings overseas, with “corporate office” expenses equal to half its segment earnings. If I understand the present tax law correctly, they would report the US half of their earnings and *all* of the corporate expenses to the IRS — for zero net tax liability. The international earnings would remain in an off-shore subsidiary and would not be taxed until repatriated.

I suspect the other reason why corporate income taxes (for 2010) have been depressed is writeoffs from the recession. Even when you take an immediate charge to earnings (likely in 2009), you might be forced to carry over the tax benefit until you can show a matching profit. I know that Wells Fargo is continuing to apply losses reaped by Wachovia against current income.

There are other dodges/credits/exclusions also in play. But don’t blame the corporations for the fact that our tax system is a complete mess. Blame the Congressmen who sold out to them.

Posted by TFF | Report as abusive

We can’t continue to talk about corporate taxes like we live in some kind of economic bubble where America is the only country.

No one has denied that the corporate tax rate in America is lower than it used to be (especially compared to the 1950s) and I wouldn’t claim that these graphs are misleading, because they aren’t.

However, I think it is more telling to look at this interactive graph The Guardian put together of the history of corporate tax rates around the world and realize that in general corporate tax rates have been trending downward. http://bit.ly/qAvkIE

We can argue all we want over how high corporate tax rate should be; but to lament about how low the rate is compared to what it used to be does nothing to advance the corporate tax discussion.

Posted by DaveEngAmerica | Report as abusive

DaveEng, we are in a very odd situation with corporate taxes where the MARGINAL tax rate is quite high (35% is sufficient to distort behavior) yet the revenue raised is inconsequential.

My takeaway from this is that the corporate income tax ought to be eliminated entirely. It may have worked 50 years ago, but it cannot be effective in a global economy. Corporations can game the system too easily.

Make up the revenue by repealing the preferential treatment for dividends and capital gains.

Posted by TFF | Report as abusive

Kudos to Felix for his straight-up correction.

Posted by DCWright | Report as abusive

TFF,

I think you make a great point about the corporate tax not being effective in this day and age. By eliminating the corporate income tax and only taxing capital gains and dividends (at higher rates than currently) we will eliminate the double taxation of corporate profits.

One thing I wish the expert bloggers would do is talk about how globalization, due to the emergence of many developing economies, has changed the way businesses operate and interact with different governments. To me this is the most important question going forward.

Without reevaluating America’s role in the new global economy we will all get left behind.

Posted by DaveEngAmerica | Report as abusive

> Kudos to Felix for his straight-up correction

Maybe I miss your sarcasm, but if so let me be the sucker and play it straight… BULLSHIT.

He doesn’t fix anything, the article and lead remain as they are; he adds an appendix: “oh by the way if you read this far I kind of screwed up and here’s what I should have said…”. Except that it isn’t even this transparent or apologetic. And anyway, the lead in to the article with the broken-for-its-purpose graphs remain as is (in the 50′s we taxed almost 95% of all profits???).

Kudos would be to him if he fixed the article, fixed the headline, and removed the search engine bait. But he won’t do this, he’s going to hide behind some convenient “ethics” which will preempavely paraphrase as “whatever I blog, however wrong it its, must stay there forever in its original form, and the best I can do is to publish SEPARATE corrections and apologies – yes I could get the source material corrected too but that is morally impossible for me to even contemplate because it’s a mortal sin to change what has been published however evil or wrong my initial drunk rantings were.”

Felix, can you revise the article to put WHAT YOU CONCEDE is the _right_ graph as the front of the article and rewrite the first paragraph to reference it instead?

To people other than Felix: please not that he’s not going to respond this this, and he’s certainly not going to do it (11′th commandment to Moses, though shouldnt no show weakness and admit errors other than by addendum, else thoust historical record be muddied).

Posted by bxg6 | Report as abusive

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