'From 2006 to 2012,
at least two-thirds of
all active corporations
had no federal
income tax liability,'
states the GAO.
The American Spark
Two-Thirds of Active Corporations Pay No Federal Income Tax
By Cliff Montgomery - Apr. 18th, 2017
There is a real difference between a corporation’s statutory tax rate - in short, the amount of money U.S. law
says a corporation should pay on its income - and what it actually pays after it utilizes America’s generous
corporate tax deductions.
Though a corporation’s statutory tax rate on its net income may range from 15 to 35 percent, “in each year
from 2006 to 2012 [the most recent data available], at least two-thirds of all active corporations had no federal
income tax liability,” declares a recently released study from the Government Accountability Office (GAO).
And though “larger corporations were more likely to owe tax,” adds the GAO, “42.3 percent [of corporations
with a high likelihood of possessing at least $10 million in assets] paid no federal income tax in 2012.”
Below, the American Spark quotes the ‘Highlights’ from this eye-opening GAO report:
Why GAO Did This Study
Congress and the administration continue to express interest in reforming the U.S. corporate income tax and
the rate at which U.S. corporations’ income is taxed.
Currently, the top statutory corporate income tax rate is 35 percent.
[But] GAO’s 2013 report on corporate ETRs [Effective Tax Rates] found that in tax year 2010, whether for all
large corporate filers or only profitable ones, the average ETRs were significantly below the statutory rate.
To provide an update, GAO was asked to assess the extent to which U.S. corporations pay federal income tax
and the percentage that had no federal income tax liability.
In this report, GAO estimates (1) the percentage of all and large corporations that had no federal income tax
liability and (2) average ETRs based on financial statement reporting and tax reporting. [...]
What GAO Found
In each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability.
Larger corporations were more likely to owe tax. Among large corporations (generally those with at least $10
million in assets) less than half—42.3 percent—paid no federal income tax in 2012.
Of those large corporations whose financial statements reported a profit, 19.5 percent paid no federal income
tax that year. Reasons why even profitable corporations may have paid no federal tax in a given year include
the use of tax deductions for losses carried forward from prior years and tax incentives, such as depreciation
allowances that are more generous in the federal tax code than those allowed for financial accounting
Corporations that did have a federal corporate income tax liability for tax year 2012 owed $267.5 billion.
These reasons also explain why corporate Effective Tax Rates (ETRs) can differ substantially from statutory
tax rates. ETRs attempt to measure taxes paid as a proportion of economic income, while statutory rates
indicate the amount of tax liability (before any credits) relative to taxable income, which is defined by tax law
and reflects tax benefits built into the law.
The statutory tax rate on net corporate income ranges from 15 to 35 percent, depending on the amount of
income earned. For tax years 2008 to 2012, profitable large U.S. corporations paid, on average, U.S. federal
income taxes amounting to about 14 percent of the pre-tax net income that they reported in their financial
statements (for those entities included in their tax returns).
When foreign and state and local income taxes are included, the average ETR across all of those years
increases to just over 22 percent.
GAO also computed ETRs that combine large profitable corporations and those large corporations with
current year losses, which pay little if any actual tax. Over tax years 2008 to 2012, all large corporations—
profitable and those that reported current year losses—paid [an average of] 25.9 percent of their pre-tax net
income in U.S. federal income taxes, and 40.1 percent when foreign and state and local taxes are included.
Including corporations with losses results in a more comprehensive estimate, but makes the results difficult to
interpret because ETR is not meaningful for a corporation in a year in which it has a net loss.
GAO could not examine the variation in ETRs across corporations with the aggregated data available,
although GAO’s prior work suggests that ETRs are likely to vary considerably.
What GAO Recommends
GAO does not make recommendations in this report. GAO provided a draft of this report to IRS for review and
comment. IRS provided technical comments, which were incorporated, as appropriate.
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