This is the accessible text file for GAO report number GAO-13-520 
entitled 'Corporate Income Tax: Effective Tax Rates Can Differ 
Significantly from the Statutory Rate' which was released on July 1, 
2013. 

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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

May 2013: 

Corporate Income Tax: 

Effective Tax Rates Can Differ Significantly from the Statutory Rate: 

GAO-13-520: 

GAO Highlights: 

Highlights of GAO-13-520, a report to congressional requesters. 

Why GAO Did This Study: 

Proponents of lowering the U.S. corporate income tax rate commonly 
point to evidence that the U.S. statutory corporate tax rate of 35 
percent, as well as its average effective tax rate, which equals the 
amount of income tax corporations pay divided by their pretax income, 
are high relative to other countries. However, GAO's 2008 report on 
corporate tax liabilities [hyperlink, 
http://www.gao.gov/products/GAO-08-957] found that nearly 55 percent 
of all large U.S.-controlled corporations reported no federal tax 
liability in at least one year between 1998 and 2005. 

Given the difficult budget choices Congress faces and its need to know 
corporations’ share of the overall tax burden, GAO was asked to assess 
the extent to which corporations are paying U.S. corporate income tax. 
In this report, among other things, GAO (1) defines average corporate 
ETR and describes the common methods and data used to estimate this 
rate and (2) estimates average ETRs based on financial statement 
reporting and tax reporting. To conduct this work, GAO reviewed 
economic and accounting literature, analyzed income and expense data 
that large corporations report on the Schedules M-3 that they file 
with Internal Revenue Service (IRS), and interviewed IRS officials. 

What GAO Found: 

Effective tax rates (ETR) differ from statutory tax rates in that they 
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 and subsidies built into the law. Lacking access 
to detailed data from tax returns, most researchers have estimated 
ETRs based on data from financial statements. A common measure of tax 
liability used in past estimates has been the current tax expense-—
either federal only or worldwide (which comprises federal, foreign, 
and U.S. state and local income taxes). The most common measure of 
income for these estimates has been some variant of pretax net book 
income. GAO was able to compare book tax expenses to tax liabilities 
actually reported on corporate income tax returns. 

For tax year 2010 (the most recent information available), profitable 
U.S. corporations that filed a Schedule M-3 paid U.S. federal income 
taxes amounting to about 13 percent of the pretax worldwide 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 ETR for profitable filers increases to 
around 17 percent. The inclusion of unprofitable firms, which pay 
little if any tax, also raises the ETRs because the losses of 
unprofitable corporations greatly reduce the denominator of the 
measures. Even with the inclusion of unprofitable filers, which 
increased the average worldwide ETR to 22.7 percent, all of the ETRs 
were well below the top statutory tax rate of 35 percent. GAO could 
only estimate average ETRs with the data available and could not 
determine the variation in rates across corporations. The limited 
available data from Schedules M-3, along with prior GAO work relating 
to corporate taxpayers, suggest that ETRs are likely to vary 
considerably across corporations. 

Figure: Comparison of Alternative Measures of Average Effective Tax 
Rates for Schedule M-3 Filers, Tax Year 2010: 

[Refer to PDF for image: vertical bar graph] 

2010: 
Profitable Schedule M-3 Filers: 
Numerator of effective tax rate: 
Current federal book tax: 13.1%; 
Federal actual tax: 12.6%; 
Current worldwide book tax: 17.4%; 
Primarily actual worldwide tax: 16.9%. 

2010: 
All Schedule M-3 Filers: 
Numerator of effective tax rate: 
Current federal book tax: 16.4%; 
Federal actual tax: 16.6%; 
Current worldwide book tax: 22.3%; 
Primarily actual worldwide tax: 22.7%. 

Source: GAO analysis of IRS data. 

[End of figure] 

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. 

View [hyperlink, http://www.gao.gov/products/GAO-13-520]. For more 
information, contact James R. White at (202) 512-9110 or 
whitej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Past Studies Estimating Corporate Effective Tax Rates Used a Range of 
Data Sources and Methodologies for a Variety of Reasons: 

The Average Effective Tax Rates for Profitable Large Corporations Were 
Well Below the Statutory Rate and Well Below the Effective Rates for 
All Large Corporations in Tax Years 2008 through 2010: 

Financial and Tax Reporting Differ in Terms of Entities Included, 
Fundamental Treatment of Other Items, and Periods in which Certain 
Income and Expense Items Are Recorded: 

Agency Comments: 

Appendix I: Summary of Selected Past Estimates of Average Effective 
Tax Rates Based on Financial Statement Data: 

Appendix II: Copy of IRS Form 1120, Schedule M-3 (Tax Year 2010): 

Appendix III: Detailed Data on Book-Tax Differences for Tax Year 2010: 

Appendix IV: Descriptions of Income and Expense Items with the Largest 
Book-Tax Differences: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Data for Largest Book-Tax Differences for Part II Income 
Items: 

Table 2: Data for Largest Book-Tax Differences for Part III Expense 
Items: 

Figures: 

Figure 1: Federal Tax Revenues as a Percentage of Total Receipts, 1950 
to 2012 (2013 to 2018 Estimated): 

Figure 2: Federal Tax Revenues as a Percentage of GDP, 1950 to 2012 
(2013 to 2018 Estimated): 

Figure 3: A Comparison of Income Reported in Financial Statements and 
on Tax Returns by Profitable and Unprofitable Schedule M-3 Filers for 
Tax Year 2010: 

Figure 4: Average Federal Effective Tax Rates for Varying Populations 
of Schedule M-3 Filers and Definitions of the Effective Tax Rate, Tax 
Years 2008 through 2010: 

Figure 5: Average Worldwide Effective Tax Rates for Varying 
Populations of Schedule M-3 Filers and Definitions of the Effective 
Tax Rate, Tax Years 2006 through 2010: 

Figure 6: Adjustments Reported on Schedule M-3, Part I to Determine 
Net Book Income of All Entities Included in Tax Return, Tax Year 2010: 

Figure 7: Largest Book-Tax Differences for Income Items in Schedule M-
3 Part II, Tax Year 2010: 

Figure 8: Largest Book-Tax Differences for Expense Items in Schedule M-
3 Part III, Tax Year 2010: 

Figure 9: Average Effective Tax Rates for Selected Studies on U.S. 
Companies, Using Worldwide Pretax Net Book Income: 

[End of section] 

United States Government Accountability Office: 
GAO: 
441 G St. N.W. 
Washington, DC 20548: 

May 30, 2013: 

The Honorable Carl Levin: 
Chairman: 
Permanent Subcommittee on Investigations: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Tom Coburn, M.D. 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

Proponents of lowering the U.S. corporate income tax rate commonly 
point to evidence that the U.S. statutory federal corporate income tax 
rate of 35 percent, as well as its average effective tax rate (ETR), 
which equals the amount of income tax corporations pay divided by 
their pretax income, are high relative to other countries. However, 
our 2008 report on corporate income tax liabilities found that nearly 
55 percent of all large U.S.-controlled corporations reported no 
federal tax liability in at least one year between 1998 and 2005. 
[Footnote 1] 

Statutory tax rates provide only a limited measure of the share of 
income that businesses pay in taxes because many other aspects of the 
tax system, such as exemptions, deferrals, tax credits, and other 
forms of incentives, also determine the amount of tax that a business 
ultimately pays on its income. The average effective tax rate reflects 
the combined effects of all these tax system components. However, 
obtaining the data to calculate ETRs is challenging. The two typical 
sources, tax returns and financial statements, both have limitations. 

Given the difficult budget choices Congress faces and its need to know 
corporations' share of the overall tax burden, you asked us to assess 
the extent to which corporations are paying U.S. corporate income tax. 
In this report, we (1) explain the definition of average corporate ETR 
and the common methods and data used to estimate this rate, (2) 
estimate average ETRs based on financial statement reporting and tax 
reporting, and (3) describe the largest sources of the differences in 
income reported on financial statements and tax returns. 

To explain how the average corporate effective tax rate is defined and 
to describe the common methods and data used to estimate this rate, we 
reviewed and summarized the relevant economic literature. (See 
appendix I for a summary of past studies that used financial statement 
data to estimate average effective tax rates.) 

To report what available data indicate about the difference between 
average effective tax rates based on financial statement reporting 
versus those based on tax reporting, we computed a variety of such 
rates using income and expense data that large corporations report on 
the Schedules M-3 that they file with the Internal Revenue Service 
(IRS). (These schedules reconcile income and expense amounts the 
corporations report for financial statement purposes to amounts they 
report for tax purposes.) These data, which the joint Treasury-IRS M-3 
First Look Team compiles for a large sample of taxpayers, enabled us 
to estimate and compare U.S. and worldwide effective tax rates on 
worldwide income using only financial statement data; U.S. effective 
tax rates on worldwide income using only data reported for tax 
purposes; and U.S. and worldwide effective tax rates on worldwide 
income using income data from financial statements and tax return data 
for the amount of taxes paid.[Footnote 2] Our estimates of effective 
tax rates are limited to corporations with assets of $10 million or 
more (which are the ones that file Schedule M-3) and primarily to tax 
years 2008 through 2010 because those are the only years for which IRS 
has compiled data separately for corporations that had nonnegative 
values for net income on their financial statements.[Footnote 3] 

To identify common differences between financial statement reporting 
and tax reporting, we reviewed the relevant economic and accounting 
literature and obtained data from IRS on the dollar magnitude of those 
differences that are reported in detail on Schedule M-3. The data we 
report on differences between financial statement and tax return items 
cover tax years 2006 through 2010. While there are limitations to the 
data provided on the Schedule M-3 and general reporting problems with 
tax return data, we determined that the data were reliable for our 
purposes after reviewing relevant documentation and discussing quality 
control procedures with IRS officials. 

We conducted our work from March 2012 to May 2013 in accordance with 
all sections of GAO's Quality Assurance Framework that are relevant to 
our objectives. The framework requires that we plan and perform the 
engagement to obtain sufficient and appropriate evidence to meet our 
stated objectives and to discuss any limitations in our work. We 
believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings and conclusions 
in this product. 

Background: 

Corporate Income Tax: 

The base of the federal corporate income tax includes net income from 
business operations (receipts, minus the costs of purchased goods, 
labor, interest, and other expenses). It also includes net income that 
corporations earn in the form of interest, dividends, rent, royalties, 
and realized capital gains. The statutory rate of tax on net corporate 
income ranges from 15 to 35 percent, depending on the amount of income 
earned.[Footnote 4] The United States taxes the worldwide income of 
domestic corporations, regardless of where the income is earned, with 
a foreign tax credit for certain taxes paid to other countries. The 
timing of the tax liability depends on several factors. For example, 
income earned not by the domestic corporation, but by a foreign 
subsidiary is generally not taxed until a distribution--such as a 
dividend--is made to the U.S. corporation.[Footnote 5] 

At about $242 billion, corporate income taxes are far smaller than the 
$845 billion in social insurance taxes and $1.1 trillion in individual 
income taxes that the Office of Management and Budget (OMB) estimates 
were paid in fiscal year 2012 to fund the federal government.[Footnote 
6] Figure 1 shows the relative distribution of federal taxes. 

Figure 1: Federal Tax Revenues as a Percentage of Total Receipts, 1950 
to 2012 (2013 to 2018 Estimated): 

[Refer to PDF for image: stacked line graph] 

Fiscal year: 1950; 
Corporation income taxes: 26.5; 
Individual income taxes: 39.9%; 
Social insurance and retirement receipts: 11%; 
Excise taxes: 19.1%; 
Other: 3.4%. 

Fiscal year: 1951; 
Corporation income taxes: 27.3; 
Individual income taxes: 41.9%; 
Social insurance and retirement receipts: 11%; 
Excise taxes: 16.8%; 
Other: 3.1%. 

Fiscal year: 1952; 
Corporation income taxes: 32.1; 
Individual income taxes: 42.2%; 
Social insurance and retirement receipts: 9.7%; 
Excise taxes: 13.4%; 
Other: 2.6%. 

Fiscal year: 1953; 
Corporation income taxes: 30.5; 
Individual income taxes: 42.8%; 
Social insurance and retirement receipts: 9.8%; 
Excise taxes: 14.2%; 
Other: 2.7%. 

Fiscal year: 1954; 
Corporation income taxes: 30.3; 
Individual income taxes: 42.4%; 
Social insurance and retirement receipts: 10.3%; 
Excise taxes: 14.3%; 
Other: 2.7%. 

Fiscal year: 1955; 
Corporation income taxes: 27.3; 
Individual income taxes: 43.9%; 
Social insurance and retirement receipts: 12%; 
Excise taxes: 14%; 
Other: 2.8%. 

Fiscal year: 1956; 
Corporation income taxes: 28; 
Individual income taxes: 43.2%; 
Social insurance and retirement receipts: 12.5%; 
Excise taxes: 13.3%; 
Other: 3%. 

Fiscal year: 1957; 
Corporation income taxes: 26.5; 
Individual income taxes: 44.5%; 
Social insurance and retirement receipts: 12.5%; 
Excise taxes: 13.2%; 
Other: 3.3%. 

Fiscal year: 1958; 
Corporation income taxes: 25.2; 
Individual income taxes: 43.6%; 
Social insurance and retirement receipts: 14.1%; 
Excise taxes: 13.4%; 
Other: 3.7%. 

Fiscal year: 1959; 
Corporation income taxes: 21.8%; 
Individual income taxes: 46.3%; 
Social insurance and retirement receipts: 14.8%; 
Excise taxes: 13.3%; 
Other: 3.7%. 

Fiscal year: 1960; 
Corporation income taxes: 23.2%; 
Individual income taxes: 44%; 
Social insurance and retirement receipts: 15.9%; 
Excise taxes: 12.6%; 
Other: 4.2%. 

Fiscal year: 1961; 
Corporation income taxes: 22.2%; 
Individual income taxes: 43.8%; 
Social insurance and retirement receipts: 17.4%; 
Excise taxes: 12.6%; 
Other: 4%. 

Fiscal year: 1962; 
Corporation income taxes: 20.6%; 
Individual income taxes: 45.7%; 
Social insurance and retirement receipts: 17.1%; 
Excise taxes: 12.6%; 
Other: 4%. 

Fiscal year: 1963; 
Corporation income taxes: 20.3%; 
Individual income taxes: 44.7%; 
Social insurance and retirement receipts: 18.6%; 
Excise taxes: 12.4%; 
Other: 4.1%. 

Fiscal year: 1964; 
Corporation income taxes: 20.9%; 
Individual income taxes: 43.2%; 
Social insurance and retirement receipts: 19.5%; 
Excise taxes: 12.2%; 
Other: 4.2%. 

Fiscal year: 1965; 
Corporation income taxes: 21.8%; 
Individual income taxes: 41.8%; 
Social insurance and retirement receipts: 19%; 
Excise taxes: 12.5%; 
Other: 4.9%. 

Fiscal year: 1966; 
Corporation income taxes: 23%; 
Individual income taxes: 42.4%; 
Social insurance and retirement receipts: 19.5%; 
Excise taxes: 10%; 
Other: 5.1%. 

Fiscal year: 1967; 
Corporation income taxes: 22.8%; 
Individual income taxes: 41.3%; 
Social insurance and retirement receipts: 21.9%; 
Excise taxes: 9.2%; 
Other: 4.7%. 

Fiscal year: 1968; 
Corporation income taxes: 18.7%; 
Individual income taxes: 44.9%; 
Social insurance and retirement receipts: 22.2%; 
Excise taxes: 9.2%; 
Other: 5%. 

Fiscal year: 1969; 
Corporation income taxes: 19.6%; 
Individual income taxes: 46.7%; 
Social insurance and retirement receipts: 20.9%; 
Excise taxes: 8.1%; 
Other: 4.7%. 

Fiscal year: 1970; 
Corporation income taxes: 17%; 
Individual income taxes: 46.9%; 
Social insurance and retirement receipts: 23%; 
Excise taxes: 8.1%; 
Other: 4.9%. 

Fiscal year: 1971; 
Corporation income taxes: 14.3%; 
Individual income taxes: 46.1%; 
Social insurance and retirement receipts: 25.3%; 
Excise taxes: 8.9%; 
Other: 5.4%. 

Fiscal year: 1972; 
Corporation income taxes: 15.5%; 
Individual income taxes: 45.7%; 
Social insurance and retirement receipts: 25.4%; 
Excise taxes: 7.5%; 
Other: 6%. 

Fiscal year: 1973; 
Corporation income taxes: 15.7%; 
Individual income taxes: 44.7%; 
Social insurance and retirement receipts: 27.3%; 
Excise taxes: 7%; 
Other: 5.2%. 

Fiscal year: 1974; 
Corporation income taxes: 14.7%; 
Individual income taxes: 45.2%; 
Social insurance and retirement receipts: 28.5%; 
Excise taxes: 6.4%; 
Other: 5.2%. 

Fiscal year: 1975; 
Corporation income taxes: 14.6%; 
Individual income taxes: 43.9%; 
Social insurance and retirement receipts: 30.3%; 
Excise taxes: 5.9%; 
Other: 5.4%. 

Fiscal year: 1976; 
Corporation income taxes: 13.9%; 
Individual income taxes: 44.2%; 
Social insurance and retirement receipts: 30.5%; 
Excise taxes: 5.7%; 
Other: 5.8%. 

Fiscal year: 1977; 
Corporation income taxes: 15.4%; 
Individual income taxes: 44.3%; 
Social insurance and retirement receipts: 29.9%; 
Excise taxes: 4.9%; 
Other: 5.3%. 

Fiscal year: 1978; 
Corporation income taxes: 15%; 
Individual income taxes: 45.3%; 
Social insurance and retirement receipts: 30.3%; 
Excise taxes: 4.6%; 
Other: 4.8%. 

Fiscal year: 1979; 
Corporation income taxes: 14.2%; 
Individual income taxes: 47%; 
Social insurance and retirement receipts: 30%; 
Excise taxes: 4%; 
Other: 4.8%. 

Fiscal year: 1980; 
Corporation income taxes: 12.5%; 
Individual income taxes: 47.2%; 
Social insurance and retirement receipts: 30.5%; 
Excise taxes: 4.7%; 
Other: 5.1%. 

Fiscal year: 1981; 
Corporation income taxes: 10.2%; 
Individual income taxes: 47.7%; 
Social insurance and retirement receipts: 30.5%; 
Excise taxes: 6.8%; 
Other: 4.8%. 

Fiscal year: 1982; 
Corporation income taxes: 8%; 
Individual income taxes: 48.2%; 
Social insurance and retirement receipts: 32.6%; 
Excise taxes: 5.9%; 
Other: 5.3%. 

Fiscal year: 1983; 
Corporation income taxes: 6.2%; 
Individual income taxes: 48.1%; 
Social insurance and retirement receipts: 34.8%; 
Excise taxes: 5.9%; 
Other: 5%. 

Fiscal year: 1984; 
Corporation income taxes: 8.5%; 
Individual income taxes: 44.8%; 
Social insurance and retirement receipts: 35.9%; 
Excise taxes: 5.6%; 
Other: 5.2%. 

Fiscal year: 1985; 
Corporation income taxes: 8.4%; 
Individual income taxes: 45.6%; 
Social insurance and retirement receipts: 36.1%; 
Excise taxes: 4.9%; 
Other: 5%. 

Fiscal year: 1986; 
Corporation income taxes: 8.2%; 
Individual income taxes: 45.4%; 
Social insurance and retirement receipts: 36.9%; 
Excise taxes: 4.3%; 
Other: 5.2%. 

Fiscal year: 1987; 
Corporation income taxes: 9.8%; 
Individual income taxes: 46%; 
Social insurance and retirement receipts: 35.5%; 
Excise taxes: 3.8%; 
Other: 4.9%. 

Fiscal year: 1988; 
Corporation income taxes: 10.4%; 
Individual income taxes: 44.1%; 
Social insurance and retirement receipts: 36.8%; 
Excise taxes: 3.9%; 
Other: 4.8%. 

Fiscal year: 1989; 
Corporation income taxes: 10.4%; 
Individual income taxes: 45%; 
Social insurance and retirement receipts: 36.3%; 
Excise taxes: 3.5%; 
Other: 4.9%. 

Fiscal year: 1990; 
Corporation income taxes: 9.1%; 
Individual income taxes: 45.2%; 
Social insurance and retirement receipts: 36.8%; 
Excise taxes: 3.4%; 
Other: 5.4%. 

Fiscal year: 1991; 
Corporation income taxes: 9.3%; 
Individual income taxes: 44.3%; 
Social insurance and retirement receipts: 37.5%; 
Excise taxes: 4%; 
Other: 4.8%. 

Fiscal year: 1992; 
Corporation income taxes: 9.2%; 
Individual income taxes: 43.6%; 
Social insurance and retirement receipts: 37.9%; 
Excise taxes: 4.2%; 
Other: 5.1%. 

Fiscal year: 1993; 
Corporation income taxes: 10.2%; 
Individual income taxes: 44.2%; 
Social insurance and retirement receipts: 37.1%; 
Excise taxes: 4.2%; 
Other: 4.4%. 

Fiscal year: 1994; 
Corporation income taxes: 11.2%; 
Individual income taxes: 43.1%; 
Social insurance and retirement receipts: 36.7%; 
Excise taxes: 4.4%; 
Other: 4.6%. 

Fiscal year: 1995; 
Corporation income taxes: 11.6%; 
Individual income taxes: 43.7%; 
Social insurance and retirement receipts: 35.8%; 
Excise taxes: 4.3%; 
Other: 4.6%. 

Fiscal year: 1996; 
Corporation income taxes: 11.8%; 
Individual income taxes: 45.2%; 
Social insurance and retirement receipts: 35.1%; 
Excise taxes: 3.7%; 
Other: 4.2%. 

Fiscal year: 1997; 
Corporation income taxes: 11.5%; 
Individual income taxes: 46.7%; 
Social insurance and retirement receipts: 34.2%; 
Excise taxes: 3.6%; 
Other: 4%. 

Fiscal year: 1998; 
Corporation income taxes: 11%; 
Individual income taxes: 48.1%; 
Social insurance and retirement receipts: 33.2%; 
Excise taxes: 3.3%; 
Other: 4.4%. 

Fiscal year: 1999; 
Corporation income taxes: 10.1%; 
Individual income taxes: 48.1%; 
Social insurance and retirement receipts: 33.5%; 
Excise taxes: 3.9%; 
Other: 4.4%. 

Fiscal year: 2000; 
Corporation income taxes: 10.2%; 
Individual income taxes: 49.6%; 
Social insurance and retirement receipts: 32.2%; 
Excise taxes: 3.4%; 
Other: 4.5%. 

Fiscal year: 2001; 
Corporation income taxes: 7.6%; 
Individual income taxes: 49.9%; 
Social insurance and retirement receipts: 34.9%; 
Excise taxes: 3.3%; 
Other: 4.3%. 

Fiscal year: 2002; 
Corporation income taxes: 8%; 
Individual income taxes: 46.3%; 
Social insurance and retirement receipts: 37.8%; 
Excise taxes: 3.6%; 
Other: 4.3%. 

Fiscal year: 2003; 
Corporation income taxes: 7.4%; 
Individual income taxes: 44.5%; 
Social insurance and retirement receipts: 40%; 
Excise taxes: 3.8%; 
Other: 4.3%. 

Fiscal year: 2004; 
Corporation income taxes: 10.1%; 
Individual income taxes: 43%; 
Social insurance and retirement receipts: 39%; 
Excise taxes: 3.7%; 
Other: 4.2%. 

Fiscal year: 2005; 
Corporation income taxes: 12.9%; 
Individual income taxes: 43.1%; 
Social insurance and retirement receipts: 36.9%; 
Excise taxes: 3.4%; 
Other: 3.8%. 

Fiscal year: 2006; 
Corporation income taxes: 14.7%; 
Individual income taxes: 43.4%; 
Social insurance and retirement receipts: 34.8%; 
Excise taxes: 3.1%; 
Other: 4%. 

Fiscal year: 2007; 
Corporation income taxes: 14.4%; 
Individual income taxes: 45.3%; 
Social insurance and retirement receipts: 33.9%; 
Excise taxes: 2.5%; 
Other: 3.9%. 

Fiscal year: 2008; 
Corporation income taxes: 12.1%; 
Individual income taxes: 45.4%; 
Social insurance and retirement receipts: 35.7%; 
Excise taxes: 2.7%; 
Other: 4.2%. 

Fiscal year: 2009; 
Corporation income taxes: 6.6%; 
Individual income taxes: 43.5%; 
Social insurance and retirement receipts: 42.3%; 
Excise taxes: 3%; 
Other: 4.7%. 

Fiscal year: 2010; 
Corporation income taxes: 8.9%; 
Individual income taxes: 41.5%; 
Social insurance and retirement receipts: 40%; 
Excise taxes: 3.1%; 
Other: 6.5%. 

Fiscal year: 2011; 
Corporation income taxes: 7.9%; 
Individual income taxes: 47.4%; 
Social insurance and retirement receipts: 35.5%; 
Excise taxes: 3.1%; 
Other: 6.1%. 

Fiscal year: 2012; 
Corporation income taxes: 9.6%; 
Individual income taxes: 46.2%; 
Social insurance and retirement receipts: 34.5%; 
Excise taxes: 3.2%; 
Other: 6.2%. 

Fiscal year: 2013; 
Corporation income taxes: 10.6%; 
Individual income taxes: 45.5%; 
Social insurance and retirement receipts: 35.1%; 
Excise taxes: 3.1%; 
Other: 5.7%. 

Fiscal year: 2014; 
Corporation income taxes: 11%; 
Individual income taxes: 45.6%; 
Social insurance and retirement receipts: 34%; 
Excise taxes: 3.5%; 
Other: 6%. 

Fiscal year: 2015; 
Corporation income taxes: 11.3%; 
Individual income taxes: 46.6%; 
Social insurance and retirement receipts: 32.6%; 
Excise taxes: 3.4%; 
Other: 6.2%. 

Fiscal year: 2016; 
Corporation income taxes: 11.3%; 
Individual income taxes: 47.7%; 
Social insurance and retirement receipts: 32.6%; 
Excise taxes: 3.2%; 
Other: 5.2%. 

Fiscal year: 2017; 
Corporation income taxes: 11.4%; 
Individual income taxes: 49%; 
Social insurance and retirement receipts: 32.4%; 
Excise taxes: 3.1%; 
Other: 4%. 

Fiscal year: 2018; 
Corporation income taxes: 11.3%; 
Individual income taxes: 49.8%; 
Social insurance and retirement receipts: 32.2%; 
Excise taxes: 3.1%; 
Other: 3.6%. 

Source: GAO representation of OMB data. 

[End of figure] 

Figures 1 and 2 show the trend in corporate income tax revenues since 
1950. According to tax experts, corporate income tax revenues fell 
from the 1960s to the early 1980s for several reasons. For example, 
corporate income became a smaller share of gross domestic product 
(GDP) during these years, partly due to the fact that corporate debt, 
and therefore deductible interest payments, increased relative to 
corporate equity, reducing the tax base. In addition, tax 
expenditures, such as more generous depreciation rules also grew over 
that period.[Footnote 7] Since the early 1980s, the corporate income 
tax has accounted for about 6 to 15 percent of federal revenue. 
Consequently, although not the largest, it remains an important source 
of federal revenue. Relative to GDP, the corporate income tax has 
ranged from a little over 1 percent to just under 2.7 percent during 
those same years, as shown in figure 2. The Congressional Budget 
Office (CBO) recently projected that despite the recent uptick, 
corporate income tax revenue for the next 10 years as a percentage of 
GDP is expected to stay within this same range.[Footnote 8] 

Figure 2: Federal Tax Revenues as a Percentage of GDP, 1950 to 2012 
(2013 to 2018 Estimated): 

[Refer to PDF for image: multiple line graph] 

Fiscal year: 1950; 
Corporate income taxes: 3.8%; 
Individual income taxes: 5.8%; 
Social insurance and retirement receipts: 1.6%; 
Excise and other: 3.3%. 

Fiscal year: 1951; 
Corporate income taxes: 4.4%; 
Individual income taxes: 6.8%; 
Social insurance and retirement receipts: 1.8%; 
Excise and other: 3.2%. 

Fiscal year: 1952; 
Corporate income taxes: 6.1%; 
Individual income taxes: 8%; 
Social insurance and retirement receipts: 1.8%; 
Excise and other: 3%. 

Fiscal year: 1953; 
Corporate income taxes: 5.7%; 
Individual income taxes: 8%; 
Social insurance and retirement receipts: 1.8%; 
Excise and other: 3.2%. 

Fiscal year: 1954; 
Corporate income taxes: 5.6%; 
Individual income taxes: 7.8%; 
Social insurance and retirement receipts: 1.9%; 
Excise and other: 3.1%. 

Fiscal year: 1955; 
Corporate income taxes: 4.5%; 
Individual income taxes: 7.3%; 
Social insurance and retirement receipts: 2%; 
Excise and other: 2.8%. 

Fiscal year: 1956; 
Corporate income taxes: 4.9%; 
Individual income taxes: 7.5%; 
Social insurance and retirement receipts: 2.2%; 
Excise and other: 2.8%. 

Fiscal year: 1957; 
Corporate income taxes: 4.7%; 
Individual income taxes: 7.9%; 
Social insurance and retirement receipts: 2.2%; 
Excise and other: 2.9%. 

Fiscal year: 1958; 
Corporate income taxes: 4.4%; 
Individual income taxes: 7.5%; 
Social insurance and retirement receipts: 2.4%; 
Excise and other: 2.9%. 

Fiscal year: 1959; 
Corporate income taxes: 3.5%; 
Individual income taxes: 7.5%; 
Social insurance and retirement receipts: 2.4%; 
Excise and other: 2.8%. 

Fiscal year: 1960; 
Corporate income taxes: 4.1%; 
Individual income taxes: 7.8%; 
Social insurance and retirement receipts: 2.8%; 
Excise and other: 3.1%. 

Fiscal year: 1961; 
Corporate income taxes: 4%; 
Individual income taxes: 7.8%; 
Social insurance and retirement receipts: 3.1%; 
Excise and other: 2.9%. 

Fiscal year: 1962; 
Corporate income taxes: 3.6%; 
Individual income taxes: 8%; 
Social insurance and retirement receipts: 3%; 
Excise and other: 2.9%. 

Fiscal year: 1963; 
Corporate income taxes: 3.6%; 
Individual income taxes: 7.9%; 
Social insurance and retirement receipts: 3.3%; 
Excise and other: 2.9%. 

Fiscal year: 1964; 
Corporate income taxes: 3.7%; 
Individual income taxes: 7.6%; 
Social insurance and retirement receipts: 3.4%; 
Excise and other: 2.8%. 

Fiscal year: 1965; 
Corporate income taxes: 3.7%; 
Individual income taxes: 7.1%; 
Social insurance and retirement receipts: 3.2%; 
Excise and other: 2.9%. 

Fiscal year: 1966; 
Corporate income taxes: 4%; 
Individual income taxes: 7.3%; 
Social insurance and retirement receipts: 3.4%; 
Excise and other: 2.6%. 

Fiscal year: 1967; 
Corporate income taxes: 4.2%; 
Individual income taxes: 7.6%; 
Social insurance and retirement receipts: 4%; 
Excise and other: 2.6%. 

Fiscal year: 1968; 
Corporate income taxes: 3.3%; 
Individual income taxes: 7.9%; 
Social insurance and retirement receipts: 3.9%; 
Excise and other: 2.5%. 

Fiscal year: 1969; 
Corporate income taxes: 3.9%; 
Individual income taxes: 9.2%; 
Social insurance and retirement receipts: 4.1%; 
Excise and other: 2.5%. 

Fiscal year: 1970; 
Corporate income taxes: 3.2%; 
Individual income taxes: 8.9%; 
Social insurance and retirement receipts: 4.4%; 
Excise and other: 2.5%. 

Fiscal year: 1971; 
Corporate income taxes: 2.5%; 
Individual income taxes: 8%; 
Social insurance and retirement receipts: 4.4%; 
Excise and other: 2.4%. 

Fiscal year: 1972; 
Corporate income taxes: 2.7%; 
Individual income taxes: 8.1%; 
Social insurance and retirement receipts: 4.5%; 
Excise and other: 2.4%. 

Fiscal year: 1973; 
Corporate income taxes: 2.8%; 
Individual income taxes: 7.9%; 
Social insurance and retirement receipts: 4.8%; 
Excise and other: 2.1%. 

Fiscal year: 1974; 
Corporate income taxes: 2.7%; 
Individual income taxes: 8.3%; 
Social insurance and retirement receipts: 5.2%; 
Excise and other: 2.2%. 

Fiscal year: 1975; 
Corporate income taxes: 2.6%; 
Individual income taxes: 7.8%; 
Social insurance and retirement receipts: 5.4%; 
Excise and other: 2.1%. 

Fiscal year: 1976; 
Corporate income taxes: 2.4%; 
Individual income taxes: 7.6%; 
Social insurance and retirement receipts: 5.2%; 
Excise and other: 2%. 

Fiscal year: 1977; 
Corporate income taxes: 2.8%; 
Individual income taxes: 8%; 
Social insurance and retirement receipts: 5.4%; 
Excise and other: 1.9%. 

Fiscal year: 1978; 
Corporate income taxes: 2.7%; 
Individual income taxes: 8.2%; 
Social insurance and retirement receipts: 5.5%; 
Excise and other: 1.7%. 

Fiscal year: 1979; 
Corporate income taxes: 2.6%; 
Individual income taxes: 8.7%; 
Social insurance and retirement receipts: 5.6%; 
Excise and other: 1.6%. 

Fiscal year: 1980; 
Corporate income taxes: 2.4%; 
Individual income taxes: 9%; 
Social insurance and retirement receipts: 5.8%; 
Excise and other: 1.9%. 

Fiscal year: 1981; 
Corporate income taxes: 2%; 
Individual income taxes: 9.4%; 
Social insurance and retirement receipts: 6%; 
Excise and other: 2.2%. 

Fiscal year: 1982; 
Corporate income taxes: 1.5%; 
Individual income taxes: 9.2%; 
Social insurance and retirement receipts: 6.3%; 
Excise and other: 2.1%. 

Fiscal year: 1983; 
Corporate income taxes: 1.1%; 
Individual income taxes: 8.4%; 
Social insurance and retirement receipts: 6.1%; 
Excise and other: 1.9%. 

Fiscal year: 1984; 
Corporate income taxes: 1.5%; 
Individual income taxes: 7.8%; 
Social insurance and retirement receipts: 6.2%; 
Excise and other: 1.9%. 

Fiscal year: 1985; 
Corporate income taxes: 1.5%; 
Individual income taxes: 8.1%; 
Social insurance and retirement receipts: 6.4%; 
Excise and other: 1.8%. 

Fiscal year: 1986; 
Corporate income taxes: 1.4%; 
Individual income taxes: 7.9%; 
Social insurance and retirement receipts: 6.4%; 
Excise and other: 1.6%. 

Fiscal year: 1987; 
Corporate income taxes: 1.8%; 
Individual income taxes: 8.4%; 
Social insurance and retirement receipts: 6.5%; 
Excise and other: 1.6%. 

Fiscal year: 1988; 
Corporate income taxes: 1.9%; 
Individual income taxes: 8%; 
Social insurance and retirement receipts: 6.7%; 
Excise and other: 1.6%. 

Fiscal year: 1989; 
Corporate income taxes: 1.9%; 
Individual income taxes: 8.3%; 
Social insurance and retirement receipts: 6.7%; 
Excise and other: 1.5%. 

Fiscal year: 1990; 
Corporate income taxes: 1.6%; 
Individual income taxes: 8.1%; 
Social insurance and retirement receipts: 6.6%; 
Excise and other: 1.6%. 

Fiscal year: 1991; 
Corporate income taxes: 1.7%; 
Individual income taxes: 7.9%; 
Social insurance and retirement receipts: 6.7%; 
Excise and other: 1.6%. 

Fiscal year: 1992; 
Corporate income taxes: 1.6%; 
Individual income taxes: 7.6%; 
Social insurance and retirement receipts: 6.6%; 
Excise and other: 1.6%. 

Fiscal year: 1993; 
Corporate income taxes: 1.8%; 
Individual income taxes: 7.7%; 
Social insurance and retirement receipts: 6.5%; 
Excise and other: 1.5%. 

Fiscal year: 1994; 
Corporate income taxes: 2%; 
Individual income taxes: 7.8%; 
Social insurance and retirement receipts: 6.6%; 
Excise and other: 1.6%. 

Fiscal year: 1995; 
Corporate income taxes: 2.1%; 
Individual income taxes: 8%; 
Social insurance and retirement receipts: 6.6%; 
Excise and other: 1.7%. 

Fiscal year: 1996; 
Corporate income taxes: 2.2%; 
Individual income taxes: 8.5%; 
Social insurance and retirement receipts: 6.6%; 
Excise and other: 1.5%. 

Fiscal year: 1997; 
Corporate income taxes: 2.2%; 
Individual income taxes: 9%; 
Social insurance and retirement receipts: 6.6%; 
Excise and other: 1.5%. 

Fiscal year: 1998; 
Corporate income taxes: 2.2%; 
Individual income taxes: 9.6%; 
Social insurance and retirement receipts: 6.6%; 
Excise and other: 1.6%. 

Fiscal year: 1999; 
Corporate income taxes: 2%; 
Individual income taxes: 9.6%; 
Social insurance and retirement receipts: 6.6%; 
Excise and other: 1.7%. 

Fiscal year: 2000; 
Corporate income taxes: 2.1%; 
Individual income taxes: 10.2%; 
Social insurance and retirement receipts: 6.6%; 
Excise and other: 1.6%. 

Fiscal year: 2001; 
Corporate income taxes: 1.5%; 
Individual income taxes: 9.7%; 
Social insurance and retirement receipts: 6.8%; 
Excise and other: 1.4%. 

Fiscal year: 2002; 
Corporate income taxes: 1.4%; 
Individual income taxes: 8.1%; 
Social insurance and retirement receipts: 6.6%; 
Excise and other: 1.3%. 

Fiscal year: 2003; 
Corporate income taxes: 1.2%; 
Individual income taxes: 7.2%; 
Social insurance and retirement receipts: 6.5%; 
Excise and other: 1.3%. 

Fiscal year: 2004; 
Corporate income taxes: 1.6%; 
Individual income taxes: 6.9%; 
Social insurance and retirement receipts: 6.3%; 
Excise and other: 1.3%. 

Fiscal year: 2005; 
Corporate income taxes: 2.2%; 
Individual income taxes: 7.5%; 
Social insurance and retirement receipts: 6.4%; 
Excise and other: 1.3%. 

Fiscal year: 2006; 
Corporate income taxes: 2.7%; 
Individual income taxes: 7.9%; 
Social insurance and retirement receipts: 6.3%; 
Excise and other: 1.3%. 

Fiscal year: 2007; 
Corporate income taxes: 2.7%; 
Individual income taxes: 8.4%; 
Social insurance and retirement receipts: 6.3%; 
Excise and other: 1.2%. 

Fiscal year: 2008; 
Corporate income taxes: 2.1%; 
Individual income taxes: 8%; 
Social insurance and retirement receipts: 6.3%; 
Excise and other: 1.2%. 

Fiscal year: 2009; 
Corporate income taxes: 1%; 
Individual income taxes: 6.6%; 
Social insurance and retirement receipts: 6.4%; 
Excise and other: 1.1%. 

Fiscal year: 2010; 
Corporate income taxes: 1.3%; 
Individual income taxes: 6.3%; 
Social insurance and retirement receipts: 6%; 
Excise and other: 1.5%. 

Fiscal year: 2011; 
Corporate income taxes: 1.2%; 
Individual income taxes: 7.3%; 
Social insurance and retirement receipts: 5.5%; 
Excise and other: 1.4%. 

Fiscal year: 2012; 
Corporate income taxes: 1.6%; 
Individual income taxes: 7.3%; 
Social insurance and retirement receipts: 5.4%; 
Excise and other: 1.5%. 

Fiscal year: 2013; 
Corporate income taxes: 1.8%; 
Individual income taxes: 7.6%; 
Social insurance and retirement receipts: 5.9%; 
Excise and other: 1.4%. 

Fiscal year: 2014; 
Corporate income taxes: 2%; 
Individual income taxes: 8.1%; 
Social insurance and retirement receipts: 6.1%; 
Excise and other: 1.7%. 

Fiscal year: 2015; 
Corporate income taxes: 2.1%; 
Individual income taxes: 8.7%; 
Social insurance and retirement receipts: 6%; 
Excise and other: 1.7%. 

Fiscal year: 2016; 
Corporate income taxes: 2.1%; 
Individual income taxes: 9%; 
Social insurance and retirement receipts: 6.1%; 
Excise and other: 1.6%. 

Fiscal year: 2017; 
Corporate income taxes: 2.2%; 
Individual income taxes: 9.2%; 
Social insurance and retirement receipts: 6.1%; 
Excise and other: 1.4%. 

Fiscal year: 2018; 
Corporate income taxes: 2.1%; 
Individual income taxes: 9.4%; 
Social insurance and retirement receipts: 6.1%; 
Excise and other: 1.3%. 

Source: GAO representation of OMB data. 

[End of figure] 

Financial and Tax Reporting Requirements for Corporations: 

Businesses operating as publicly traded corporations in the United 
States are required to report the income they earn and the expenses 
(including taxes) they incur each year according to two separate 
standards. First, they must produce financial statements in accordance 
with generally accepted accounting principles (GAAP), based on 
standards established by the Financial Accounting Standards Board. 
Income and expense items reported in these statements are commonly 
known as book items. Second, in general, domestic corporations, 
including publicly traded corporations, must file corporate income tax 
returns on which they report income, expenses, and tax liabilities 
according to rules set out in the Internal Revenue Code (IRC) and 
associated Department of Treasury regulations.[Footnote 9] 

The IRC generally requires that a corporation's taxable year and 
overall method of accounting conform to those used for financial 
reporting purposes. However, many specific differences are permitted 
(and, in some cases, required) between financial accounting and tax 
accounting. The differences are referred to as book-tax differences. 
The primary purpose of financial reporting is to provide GAAP 
information to investors and creditors, recognizing that some of that 
information must be based on judgment and estimates.[Footnote 10] In 
contrast, the primary purpose of tax accounting is to measure income 
for the purpose of imposing the federal income tax. Tax reporting 
rules incline towards objectivity, administrability, and consistency 
among taxpayers. The tax code is also used as a fiscal and social 
policy tool, incorporating incentives to encourage certain taxpayer 
behaviors, such as investment and research. Such incentives generally 
cause deviations between book income and taxable income. In addition, 
the federal income tax expenses that corporations report in their 
financial statements for a given year do not necessarily reflect the 
actual tax liabilities and payments that they reported on their 
federal tax return for that year. In financial statements, income tax 
expense includes the estimated future tax effects attributable to 
temporary differences between book and tax income. 

Prior to 2004, corporations were required to reconcile their book net 
income with tax net income reporting on Schedule M-1 of their income 
tax returns by comparing the book and tax return amounts of a limited 
number of income and expense items. Concern over the growing 
difference observed between pretax book net income and tax net income 
and the lack of detail available from the Schedule M-1 on the sources 
of these differences led to the development of the more extensive 
reporting on book-tax differences that is now required on Schedule 
M-3.[Footnote 11] One important concern with Schedule M-1 arose from 
the fact that GAAP governing which components of large multinational 
corporate groups need to be included in financial statements differ 
from tax rules that specify which of those components need to be 
included in consolidated tax returns. Consequently, the financial 
statement data that taxpayers reported on their M-1s could relate to a 
much different business entity from the one covered by the tax return. 
A Schedule M-3 filer is now required to report the worldwide income of 
the entity represented in its financial statements and then follow a 
well-defined series of steps--subtracting out income and losses of 
foreign and U.S. entities that are included in the financial 
statements but not in consolidated tax returns; adding in the income 
and losses of entities that are included in consolidated tax returns 
but not in financial statements; and making other adjustments to 
arrive at the book income of tax-includable entities. The Schedule M-3 
also requires filers to report many more specific income and expense 
items according to both financial statement and tax rules than the M-1 
required. The items causing the largest book-tax differences are 
identified later in this report. (See appendix II for a copy of the 
Schedule M-3.) 

Past Studies Estimating Corporate Effective Tax Rates Used a Range of 
Data Sources and Methodologies for a Variety of Reasons: 

Alternative Corporate Effective Tax Rates Are Designed to Address 
Different Questions: 

Effective tax rates on corporate income can be defined in a variety of 
ways, each of which provides insights into a different issue. These 
rates fall into two broad categories--average rates and marginal 
rates. An average corporate effective tax rate, which is the focus of 
this report, is generally computed as the ratio of taxes paid or tax 
liabilities accrued in a given year over the net income the 
corporation earned that year; it is a good summary of the 
corporation's overall tax burden on income earned during that 
particular period. "Burden" in this context refers to what the 
corporation remits to the Treasury, also called statutory burden. 
However, statutory burden may differ from economic burden, which 
measures the loss of after-tax income due to a tax. The economic 
burden of some or all of the taxes on a corporation may be shifted to 
the firm's customers or workers, as well as to other firms and other 
workers. Any remaining burden is borne by the corporation's 
shareholders or other owners of capital. A marginal effective tax rate 
focuses on the tax burden associated with a specific investment 
(usually over the full life of that investment) and is a better 
measure of the effects that taxes have on incentives to invest. 
[Footnote 12] Effective rates differ from statutory tax rates in that 
they 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 and subsidies built into the law. The statutory 
tax rate of 35 percent applying to most large U.S. corporations is 
sometimes referred to as the "headline rate," because it is the rate 
most familiar to the public. 

Data from Schedule M-3 of the Federal Corporate Income Tax Return 
Allow for More Accurate Comparisons of Effective Tax Rates Based on 
Alternative Reporting Rules: 

Until recently, data constraints have inhibited comparisons of 
effective tax rate estimates based on the alternative reporting 
systems. Access to tax return data is tightly restricted by law; 
consequently, most researchers who have estimated average effective 
tax rates for U.S. corporations have used either firm-level or 
aggregated data compiled from corporate financial statements for their 
measures of both tax liability and income. Even those with access to 
tax data could not easily determine how effective tax rates based on 
financial statements would differ from those based on actual tax 
returns because, as noted above, the scope of the business entity 
represented in a corporation's financial statement can be quite 
different from that covered by its consolidated federal tax return. 
[Footnote 13] Researchers with access to data from Schedule M-3 and 
other parts of corporate income tax returns will now be able to 
directly compare effective tax rates based on the different data 
sources for a consistent population of large corporate income 
taxpayers, as we do in the following section. 

Various Measures of Taxes and Income Have Been Used to Estimate 
Effective Tax Rates: 

The two essential components of a methodology for estimating an 
average effective tax rate are the measure of tax liabilities to be 
used as the numerator of the rate and the measure of income to be used 
as the denominator. 

Tax Liability: Broader Measures Include Taxes Payable in the Future 
and to Other Governments: 

A common measure of tax liability used in estimates based on financial 
statement data has been the current tax expense--either federal only 
or worldwide (which comprises federal, foreign, and U.S. state and 
local income taxes); however, some studies have used the total tax 
expense, and others have used cash taxes paid during the year. 
[Footnote 14] Corporations that filed Schedules M-3 for tax year 2010 
reported a total of $185 billion in current U.S. federal income tax 
expense and $225 billion in total federal income tax expense, compared 
to the total of $187 billion in actual tax paid after credits that 
they reported owing IRS for that year.[Footnote 15] Our data from IRS 
do not include a measure of cash taxes paid. 

Income: The Treatment of Losses Can Significantly Affect Effective Tax 
Rate Estimates: 

The typical measure of income for effective tax rate estimates based 
on financial statements has been some variant of pretax net book 
income. Figure 3 shows the value of this book income measure for 
corporations that filed Schedules M-3 for tax year 2010 and shows the 
separate values for profitable and unprofitable filers.[Footnote 16] 
Profitable filers had aggregate pretax net book income of $1.4 
trillion while unprofitable filers had losses totaling $315 billion, 
resulting in total net book income of $1.1 trillion for the full 
population.[Footnote 17] As these numbers suggest, average effective 
tax rates can vary significantly depending on the population of 
corporations covered by the estimate. The inclusion of unprofitable 
firms, which pay little if any actual tax, can result in relatively 
high estimates because the losses of unprofitable corporations greatly 
reduce the denominator of the effective rate. Such estimates do not 
accurately represent the tax rate on the profitable corporations that 
actually pay the tax. Some prior studies have excluded unprofitable 
corporations; others have not. 

Figure 3: A Comparison of Income Reported in Financial Statements and 
on Tax Returns by Profitable and Unprofitable Schedule M-3 Filers for 
Tax Year 2010: 

[Refer to PDF for image: horizontal bar graph] 

Income measure: Pretax net book income (loss)of all entities included 
in tax return; 
Unprofitable Schedule M-3 Filers: -$315 billion; 
Profitable Schedule M-3 Filers: $1.443 trillion; 
All Schedule M-3 Filers: $1.128 trillion. 

Income measure: Income (loss) per tax return (before loss carry 
forwards and special deductions); 
Unprofitable Schedule M-3 Filers: -$154 billion; 
Profitable Schedule M-3 Filers: $891 billion; 
All Schedule M-3 Filers: $737 billion. 

Income measure: U.S. federal taxable income; 
Unprofitable Schedule M-3 Filers: $38 billion; 
Profitable Schedule M-3 Filers: $863 billion; 
All Schedule M-3 Filers: $901 billion. 

Source: GAO analysis of IRS data.                

[End of figure] 

Figure 3 also shows the value of two income measures defined by tax 
rules for the same population of taxpayers. The first measure, income 
(loss) before net operating loss deductions and special deductions, is 
the tax return measure to which Schedule M-3 filers are required to 
reconcile their net book income (we refer to this measure as net tax 
income). It represents total income minus all deductions, except for 
losses carried over from other tax years and the special deductions 
relating to intercorporate dividends. The positive values of this 
measure for profitable filers, negative values for unprofitable 
filers, and net value for all filers are all of a lower magnitude 
relative to book net income.[Footnote 18] The final measure shown in 
figure 3 is taxable income, which equals net tax income minus losses 
carried over from other years and special deductions. Taxable income 
is higher than tax net income for the full population of Schedule M-3 
filers, even after the additional deductions, because it is defined to 
be no less than zero. Therefore there are no current-year losses to 
offset positive income amounts. For the profitable subpopulation 
taxable income is lower than net tax income. 

The Average Effective Tax Rates for Profitable Large Corporations Were 
Well Below the Statutory Rate and Well Below the Effective Rates for 
All Large Corporations in Tax Years 2008 through 2010: 

For tax year 2010, profitable Schedule M-3 filers actually paid U.S. 
federal income taxes amounting to 12.6 percent of the worldwide income 
that they reported in their financial statements (for those entities 
included in their tax returns). This tax rate is slightly lower than 
the 13.1 percent rate based on the current federal tax expenses that 
they reported in those financial statements; it is significantly lower 
than the 21 percent effective rate based on actual taxes and taxable 
income, which itself is well below the top statutory rate of 35 
percent.[Footnote 19] The relatively low federal effective tax rate 
cannot be explained by income taxes paid to other countries. Even when 
foreign, state, and local corporate income taxes are included in the 
numerator, for tax year 2010, profitable Schedule M-3 filers actually 
paid income taxes amounting to 16.9 percent of their reported 
worldwide income. 

The Average Effective Tax Rates Based on Book Income Are Lower When 
Unprofitable Corporations Are Excluded: 

All of the effective tax rates based on book income for profitable 
filers are lower than the equivalent measures computed for all 
Schedule M-3 filers, shown on the right side of figure 4, because the 
inclusion of losses reduces the aggregate income for all Schedule M-3 
filers. This difference was particularly large for tax year 2009 
because the aggregate losses of unprofitable filers were considerably 
larger in that year than in 2010.[Footnote 20] Aggregate book losses 
were even larger for tax year 2008; however, because these losses more 
than offset the income of profitable corporations, resulting in an 
overall net loss, we could not compute meaningful average effective 
tax rates based on book income for all corporations for that year. 

Figure 4: Average Federal Effective Tax Rates for Varying Populations 
of Schedule M-3 Filers and Definitions of the Effective Tax Rate, Tax 
Years 2008 through 2010: 

[Refer to PDF for image: vertical bar graph] 

Profitable Schedule M-3 filers: 

2008: 
Definition of Effective Tax Rate: 
Total book tax over book income: 20.7%; 
Current book tax over book income: 17.6%; 
Actual tax paid over book income: 15.3%; 
Actual tax paid over taxable income: n/a. 

2009: 
Definition of Effective Tax Rate: 
Total book tax over book income: 17.5%; 
Current book tax over book income: 13.8%; 
Actual tax paid over book income: 13%; 
Actual tax paid over taxable income: n/a. 

2010: 
Definition of Effective Tax Rate: 
Total book tax over book income: 17%; 
Current book tax over book income: 13.1%; 
Actual tax paid over book income: 12.6%; 
Actual tax paid over taxable income: 21%. 

All Schedule M-3 filers: 

2008: 
Definition of Effective Tax Rate: 
Total book tax over book income: n/a; 
Current book tax over book income: n/a; 
Actual tax paid over book income: n/a; 
Actual tax paid over taxable income: 22.6%. 

2009: 
Definition of Effective Tax Rate: 
Total book tax over book income: 24.2%; 
Current book tax over book income: 22.1%; 
Actual tax paid over book income: 28.4%; 
Actual tax paid over taxable income: 21.7%. 

2010: 
Definition of Effective Tax Rate: 
Total book tax over book income: 19.9%; 
Current book tax over book income: 16.4%; 
Actual tax paid over book income: 16.6%; 
Actual tax paid over taxable income: 20.7%. 

Source: GAO analysis of IRS data. 

Note: The measure of pretax net book income used in computing these 
rates is equal to worldwide net book income plus the total tax expense. 

[End of figure] 

With access to only aggregated data, we were not able to provide any 
information on the distribution of effective rates across individual 
filers; however, past work we have done suggest that there could be 
significant variation in effective rates across taxpayers.[Footnote 
21] Nor could we compare effective tax rates for different types of 
corporations, such as U.S. controlled corporations and foreign 
controlled corporations. 

The Average Effective Tax Rates for Profitable Corporations Were Well 
Below the Federal Statutory Rate Even When Foreign and State and Local 
Income Taxes Were Included: 

Past empirical studies comparing average effective tax rates across 
countries have focused on worldwide taxes (which add foreign and state 
and local income taxes to federal income taxes in the numerator). Our 
estimates for these worldwide rates ranged between 2 to 6 percent 
higher than the U.S. federal rates we present above, but the 
relationships between the different measures (total, current, and 
actual) within each year remained similar. (See figure 5.) It is 
difficult to make close comparisons between our results and estimates 
from prior studies based on financial statement data because most of 
the latter estimates are averaged over multiple years for which we 
have no data. (See figure 9 in appendix I.) Our estimated rates for 
the full population of filers for tax year 2010 are generally lower 
than the estimates presented in earlier studies while our estimated 
rates for other years are generally higher.[Footnote 22] 

Figure 5: Average Worldwide Effective Tax Rates for Varying 
Populations of Schedule M-3 Filers and Definitions of the Effective 
Tax Rate, Tax Years 2006 through 2010: 

[Refer to PDF for image: vertical bar graph] 

Profitable Schedule M-3 filers: 

2008: 
Numerator of Effective Tax Rate: 
Total book tax: 26.2%; 
Current book tax: 22.8%; 
Primarily actual tax paid: 20.8%. 

2009: 
Numerator of Effective Tax Rate: 
Total book tax: 22%; 
Current book tax: 18.0%; 
Primarily actual tax paid: 17.5%. 

2010: 
Numerator of Effective Tax Rate: 
Total book tax: 21.5%; 
Current book tax: 17.4%; 
Primarily actual tax paid: 16.9%. 

All Schedule M-3 filers: 

2006: 
Numerator of Effective Tax Rate: 
Total book tax: 31.0%; 
Current book tax: 30.7%; 
Primarily actual tax paid: 28.2%. 

2007: 
Numerator of Effective Tax Rate: 
Total book tax: 36.9%; 
Current book tax: 37.8%; 
Primarily actual tax paid: 36.9%. 

2008: 
Numerator of Effective Tax Rate: 
Total book tax: not available; 
Current book tax: not available; 
Primarily actual tax paid: not available. 

2009: 
Numerator of Effective Tax Rate: 
Total book tax: 34.1%; 
Current book tax: 31.9%; 
Primarily actual tax paid: 39.8%. 

2010: 
Numerator of Effective Tax Rate: 
Total book tax: 26.2%; 
Current book tax: 22.3%; 
Primarily actual tax paid: 22.7%. 

Source: GAO analysis of IRS data. 

Note: The denominator for all of the effective tax rates in this 
figure is pretax worldwide net book income. The measure "Primarily 
actual taxes paid" equals the sum of actual U.S. federal and state and 
local income taxes paid, as reported on federal tax returns, plus the 
current foreign tax expenses and foreign withholding tax expenses from 
financial statements. We use the book amounts for foreign taxes paid, 
rather than the tax return amounts, because the latter does not 
include all of the foreign taxes paid on foreign income. 

[End of figure] 

Financial and Tax Reporting Differ in Terms of Entities Included, 
Fundamental Treatment of Other Items, and Periods in which Certain 
Income and Expense Items Are Recorded: 

As noted above, it can be difficult to compare financial statements 
with tax returns because entities included under each type of 
reporting can differ.[Footnote 23] IRS developed Schedule M-3 Part I 
to help delineate book-tax differences related to consolidation and to 
standardize the definition of the financial, or book, income of the 
tax consolidated group. As shown in figure 6, for tax year 2010 
Schedule M-3 filers reported that they earned a total of $1.3 trillion 
from U.S. and foreign entities that were included in their 
consolidated financial statement but not in their consolidated tax 
returns (which, therefore, had to be subtracted out on the Schedule M-
3). They also reported $420 billion in losses from such entities. 
(These losses also had to be subtracted out, meaning that net income 
increased by $420 billion.) In contrast, they reported less than $10 
billion in either income or losses from entities that are included in 
their tax returns but not in their financial statements. These 
corporations also reported $762 billion in positive adjustments and 
$20 billion in negative adjustments relating to transactions between 
excluded and included entities.[Footnote 24] The corporations must 
also report several other types of adjustments, such as for any 
difference between the time period covered by their financial 
statements and the period covered by their tax years, that they make 
in order to arrive at a final amount that represents the net book 
income or loss of all of their entities that are included in their tax 
returns. For tax year 2010, this population of Schedule M-3 filers 
reported a total of $1.1 trillion in net book income for entities 
included in their tax returns and a total of $300 billion in losses 
for such entities.[Footnote 25] 

Figure 6: Adjustments Reported on Schedule M-3, Part I to Determine 
Net Book Income of All Entities Included in Tax Return, Tax Year 2010: 

[Refer to PDF for image: horizontal bar graph] 

Income, loss, or adjustment: 

Adjustments or income type: Worldwide consolidated net income (loss) 
per the financial statement of the M-3 filer; 
Loss or adjustment that reduces income: -$282 billion; 
Income or adjustment that increases income: $1.172 trillion. 

Adjustments or income type: Worldwide consolidated net income (loss) 
per the financial statement of the M-3 filer; 
Loss or adjustment that reduces income: -$1.293 trillion; 
Income or adjustment that increases income: $420 billion. 

Adjustments or income type: Addition of income (loss) of entities 
included for tax purposes; 
Loss or adjustment that reduces income: -$2 billion; 
Income or adjustment that increases income: $5 billion. 

Adjustments or income type: Adjustment to eliminations of transactions 
between includable entities and nonincludable entities; 
Loss or adjustment that reduces income: -$20 billion; 
Income or adjustment that increases income: $762 billion. 

Adjustments or income type: Other adjustments; 
Loss or adjustment that reduces income: -$39 billion; 
Income or adjustment that increases income: $108 billion. 

Adjustments or income type: Net book income of all entities included 
in tax return; 
Loss or adjustment that reduces income: -$300 billion; 
Income or adjustment that increases income: $1.133 trillion. 

Source: GAO analysis of IRS data. 

[End of figure] 

Schedule M-3 Parts II and III report book-tax differences related to 
income and expenses, respectively, for the tax consolidated group 
only. The largest category of differences for both income and expense 
items was "other." IRS officials told us that their reviews of the 
detailed documentation that filers are required to submit along with 
their Schedules M-3 indicate three broad subtypes of reporting in 
these other categories: 

1. Some common income and expense categories have no line of their own 
on the M-3, so they have to be reported as other. This was the case 
for research and development expenses prior to 2010; those expenses 
now have their own line. 

2. Taxpayers report miscellaneous items in these categories but do not 
provide details on what they include. 

3. Taxpayers record items in these categories that clearly should have 
been reported on more specific lines of the M-3. The officials 
suggested some taxpayers do this because they do not take the time or 
trouble to fill out the form properly; others may be trying to hide 
details from the IRS. 

As a consequence, there is over-reporting in the two "other" 
categories and under-reporting in some of the more specific 
categories. Figures 7 and 8 identify the 10 largest categories of book-
tax differences for both income and expense items in tax year 2010. 
[Footnote 26] 

Book-tax differences caused by the inclusion of an income or expense 
item by one accounting system but not the other are known as permanent 
differences. One of the largest permanent book-tax income differences 
reported in tax year 2010 arose from the section 78 gross-up, as shown 
in figure 7. Section 78 of the IRC requires U.S. corporations electing 
to claim the foreign tax credit to gross-up (i.e., increase) their 
dividend income by the amount of creditable foreign income taxes 
associated with the dividends they received.[Footnote 27] Given that 
corporations are not required to make this type of adjustment for book 
income purposes, the amount of any gross-up is a permanent positive 
difference between tax income and book income. 

Figure 7: Largest Book-Tax Differences for Income Items in Schedule M-
3 Part II, Tax Year 2010: 

[Refer to PDF for image: horizontal bar graph] 

Tax amount minus book amount, not netted across taxpayers: 

Part II income item: Other income (loss) items with differences; 
Book amount temporarily larger than tax amount: -$119.669 billion; 
Book amount permanently larger than tax amount: -1$21.190 billion; 
Book amount permanently smaller than tax amount: $35.432 billion; 
Book amount temporarily smaller than tax amount: $63.160 billion; 
Absolute value total difference: $339.5 billion. 

Part II income item: Income statement disposition of assets other than 
inventory; 
Book amount temporarily larger than tax amount: -$67.925 billion; 
Book amount permanently larger than tax amount: -$79.033 billion; 
Book amount permanently smaller than tax amount: $19.653 billion; 
Book amount temporarily smaller than tax amount: $41.489 billion; 
Absolute value total difference: $208.1 billion. 

Part II income item: Interest income; 
Book amount temporarily larger than tax amount: -$135.223 billion; 
Book amount permanently larger than tax amount: -$34.750 billion; 
Book amount permanently smaller than tax amount: $1.598 billion; 
Book amount temporarily smaller than tax amount: $15.199 billion; 
Absolute value total difference: $186.7 billion. 

Part II income item: Cost of goods sold; 
Book amount temporarily larger than tax amount: -$80.543 billion; 
Book amount permanently larger than tax amount: -$5.148 billion; 
Book amount permanently smaller than tax amount: $9.319 billion; 
Book amount temporarily smaller than tax amount: $82.667 billion; 
Absolute value total difference: $177.7 billion. 

Part II income item: Gross foreign dividends not previously taxed; 
Book amount temporarily larger than tax amount: -$2.324 billion; 
Book amount permanently larger than tax amount: -$64.976 billion; 
Book amount permanently smaller than tax amount: $65.580 billion; 
Book amount temporarily smaller than tax amount: $10.136 billion; 
Absolute value total difference: $143.0 billion. 

Part II income item: Income (loss) from U.S. partnerships; 
Book amount temporarily larger than tax amount: -$59.887 billion; 
Book amount permanently larger than tax amount: -$4.621 billion; 
Book amount permanently smaller than tax amount: $18.886 billion; 
Book amount temporarily smaller than tax amount: $40.424 billion; 
Absolute value total difference: $123.8 billion. 

Part II income item: Income (loss) from equity method U.S. corps; 
Book amount temporarily larger than tax amount: -$4.599 billion; 
Book amount permanently larger than tax amount: -$83.544 billion; 
Book amount permanently smaller than tax amount: $6.957 billion; 
Book amount temporarily smaller than tax amount: $2.932 billion; 
Absolute value total difference: $98.0 billion. 

Part II income item: Net gain/loss reported on Form 4797, line 17; 
Book amount temporarily larger than tax amount: -$38.236 billion; 
Book amount permanently larger than tax amount: -$1.412 billion; 
Book amount permanently smaller than tax amount: $1.947 billion; 
Book amount temporarily smaller than tax amount: $55.249 billion; 
Absolute value total difference: $96.8 billion. 

Part II income item: Section 78 gross-up; 
Book amount temporarily larger than tax amount: -$4.0 billion; 
Book amount permanently larger than tax amount: 0; 
Book amount permanently smaller than tax amount: $77.599 billion; 
Book amount temporarily smaller than tax amount: $4.796 billion; 
Absolute value total difference: $82.4 billion. 

Part II income item: Gross capital gains Schedule D, excluding flow-
through entities; 
Book amount temporarily larger than tax amount: -$1.740 billion; 
Book amount permanently larger than tax amount: -$0.73 billion; 
Book amount permanently smaller than tax amount: $9.626 billion; 
Book amount temporarily smaller than tax amount: $63.990 billion; 
Absolute value total difference: $75.4 billion. 

Source: GAO analysis of IRS data. 

Note: Within some of these categories a single filer can have both 
negative and positive amounts (e.g., positive income from some of its 
partnerships and losses from other partnerships). The aggregate 
positive differences shown for each category in this figure represent 
the sum of the net positive differences across those M-3 filers with 
net positive amounts in the particular category. Similarly, the 
negative differences represent the sums across all filers with net 
negative differences. 

[End of figure] 

Book-tax differences caused by differences in the timing of when an 
income or expense item is recognized under each accounting approach 
are known as temporary differences because, over time, the total 
income and expense recognized for these items, as measured in 
undiscounted nominal dollars, is the same under the two systems. As 
shown in figure 8, a prominent temporary difference is depreciation. 
Accelerated depreciation generally result in depreciation deductions 
being reflected in taxable income earlier than when the depreciation 
expense for the same asset is recognized in net book income. Another 
significant temporary difference relates to losses from uncollectible 
receivables (e.g., bad debts). For book purposes, firms recognize 
losses on uncollectible receivables when the losses are probable and 
reasonably estimable. This may be applied in relation to individual 
receivables or groups of similar types of receivables, even though the 
particular receivables that are uncollectible may not be identifiable. 
In contrast, for tax purposes, firms must wait until a specific 
receivable is known to be uncollectible before it can be deducted. 

Figure 8: Largest Book-Tax Differences for Expense Items in Schedule M-
3 Part III, Tax Year 2010: 

[Refer to PDF for image: horizontal bar graph] 

Tax amount minus book amount, not netted across taxpayers: 

Part II expense item: Other expense or deduction items with 
differences; 
Book amount temporarily larger than tax amount: -$117.07 billion; 
Book amount permanently larger than tax amount: -$30.882 billion; 
Book amount permanently smaller than tax amount: $43.58 billion; 
Book amount temporarily smaller than tax amount: $85.973 billion; 
Absolute value total difference: $277.5 billion. 

Part II expense item: Interest expense; 
Book amount temporarily larger than tax amount: -$24.102 billion; 
Book amount permanently larger than tax amount: -$4.437 billion; 
Book amount permanently smaller than tax amount: $24.556 billion; 
Book amount temporarily smaller than tax amount: $141.538 billion; 
Absolute value total difference: $194.6 billion. 

Part II expense item: Depreciation; 
Book amount temporarily larger than tax amount: -$145.129 billion; 
Book amount permanently larger than tax amount: -$0.22 billion; 
Book amount permanently smaller than tax amount: $0.56 billion; 
Book amount temporarily smaller than tax amount: $36.016 billion; 
Absolute value total difference: $181.9 billion. 

Part II expense item: Other amortization or impairment write-offs; 
Book amount temporarily larger than tax amount: -$35.669 billion; 
Book amount permanently larger than tax amount: -$1.355 billion; 
Book amount permanently smaller than tax amount: $6.170 billion; 
Book amount temporarily smaller than tax amount: $60.363 billion; 
Absolute value total difference: $103.6 billion. 

Part II expense item: Bad debt expenses; 
Book amount temporarily larger than tax amount: -$45.638 billion; 
Book amount permanently larger than tax amount: -$3.01 billion; 
Book amount permanently smaller than tax amount: $0.648 billion; 
Book amount temporarily smaller than tax amount: $27.274 billion; 
Absolute value total difference: $77.1 billion. 

Part II expense item: Amortization or impairment of goodwill; 
Book amount temporarily larger than tax amount: -$26.885 billion; 
Book amount permanently larger than tax amount: -$0.899 billion; 
Book amount permanently smaller than tax amount: $23.976 billion; 
Book amount temporarily smaller than tax amount: $11.042 billion; 
Absolute value total difference: $62.8 billion. 

Part II expense item: Pension and profit-sharing; 
Book amount temporarily larger than tax amount: -$38.247 billion; 
Book amount permanently larger than tax amount: -$1.73 billion; 
Book amount permanently smaller than tax amount: $0.373 billion; 
Book amount temporarily smaller than tax amount: $14.065 billion; 
Absolute value total difference: $54.4 billion. 

Part II expense item: Stock option expense; 
Book amount temporarily larger than tax amount: -$10.851 billion; 
Book amount permanently larger than tax amount: -$23.999 billion; 
Book amount permanently smaller than tax amount: $3.47 billion; 
Book amount temporarily smaller than tax amount: $11.875 billion; 
Absolute value total difference: $50.2 billion. 

Part II expense item: Foreign current income tax expense (other than 
withholding); 
Book amount temporarily larger than tax amount: -$1.385 billion; 
Book amount permanently larger than tax amount: -$1.487 billion; 
Book amount permanently smaller than tax amount: $31.156 billion; 
Book amount temporarily smaller than tax amount: $0.509 billion; 
Absolute value total difference: $34.5 billion. 

Part II expense item: Other equity-based compensation; 
Book amount temporarily larger than tax amount: -$5.42 billion; 
Book amount permanently larger than tax amount: -$8.545 billion; 
Book amount permanently smaller than tax amount: $4.74 billion; 
Book amount temporarily smaller than tax amount: $9.651 billion; 
Absolute value total difference: $28.4 billion. 

Source: GAO analysis of IRS data. 

Note: Within some of these categories a single filer can have both 
negative and positive amounts (e.g., tax depreciation can exceed book 
depreciation for some assets while the converse can be true for other 
assets). The aggregate positive differences shown for each category in 
this figure represent the sum of the net positive differences across 
those M-3 filers with net positive amounts in the particular category. 
Similarly, the negative differences represent the sums across all 
filers with net negative differences. 

[End of figure] 

The magnitudes of some book-tax differences varied significantly 
between 2006 and 2010.For example, the excess of tax depreciation over 
book depreciation increased from about $69 billion in 2006 to over 
$145 billion in 2010. As another example, the excess of tax income 
over book income relating to the section 78 gross-up increased from 
about $36 billion in 2006 to over $77 billion in 2010. 

As the details presented in figures 7 and 8 indicate, the direction of 
the book-tax differences in all of the income and expense categories 
varies across corporations. The book amount is greater for some 
corporations, while the tax amount is greater for others. As a 
consequence, the aggregate net difference in many categories (shown in 
tables 1 and 2 in appendix III) are significantly smaller than the 
absolute value of the differences. Moreover, the net difference is 
positive for some categories and negative for others. The offsetting 
of negative and positive differences across categories and across 
corporations within categories means that the relatively small 
difference between aggregate net book income ($833 billion) and 
aggregate net tax income ($737 billion) for the population of Schedule 
M-3 filers for tax year 2010 may hide considerable differences between 
book and tax income and between effective tax rates based on book 
income and those based on tax income for individual corporations. 
Given the aggregate nature of our data, we were not able to examine 
the range of potential differences across corporations. 

Agency Comments: 

We provided a draft of this report to IRS on April 25, 2013, for 
review and comment. After reviewing the draft report, IRS provided 
technical comments which we incorporated as appropriate. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to interested 
congressional committees, the Secretary of the Treasury, the 
Commissioner of Internal Revenue, and other interested parties. In 
addition, the report also will be available at no charge on the GAO 
website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-9110 or whitej@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix V. 

Signed by: 

James R. White 
Director, Tax Issues Strategic Issues: 

[End of section] 

Appendix I: Summary of Selected Past Estimates of Average Effective 
Tax Rates Based on Financial Statement Data: 

Results from past studies, presented in Figure 9, use financial 
statement data to estimate average effective tax rates for U.S. 
corporations, employed pretax worldwide book income as the denominator 
of their effective rate, and covered at least one tax year since 
2001.[Footnote 28] As indicated in the figure, these studies used a 
variety of measures of worldwide taxes for their numerator. Five of 
the estimates were based on data that excluded all corporations with 
negative book income.[Footnote 29] Most of the studies reported their 
results as averages across multiple years. 

Other recent studies used aggregate measures of tax receipts received 
by the U.S. Treasury and profits before taxes from the Bureau of 
Economic Analysis's (BEA) National Income and Product Account (NIPA) 
data to estimate average corporate effective tax rates.[Footnote 30] 
The BEA profits measure is created using an aggregate income amount 
using tax data adjusted by two components: inventory valuation 
adjustment and capital consumption adjustment. Due to the aggregate 
nature of the profits before taxes, the denominator includes 
corporations with positive and negative profits before taxes. Another 
recent study by Citizens for Tax Justice and the Institute on Taxation 
and Economic Policy used financial statement data but focused on the 
effective rate of the federal income tax on U.S. domestic income, 
rather than worldwide taxes on worldwide income. They estimated a 
three-year (2008 to 2010) average effective tax rate of 18.5 percent 
for a sample of 280 of the largest U.S. corporations.[Footnote 31] 

Figure 9: Average Effective Tax Rates for Selected Studies on U.S. 
Companies, Using Worldwide Pretax Net Book Income: 

[Refer to PDF for image: horizontal bar graph] 

Study: PricewaterhouseCoopers; 
Years reported: 2006-2009 
Percentage: 27.7%; 
Numerator of effective tax rate: Total book tax. 

Study: Markle & Shackelford (1); 
Years reported: 2005-2009; 
Percentage: 27.2%; 
Numerator of effective tax rate: Current book tax. 

Study: Costa & Gravelle; 
Years reported: 2007; 
Percentage: 30.2%; 
Numerator of effective tax rate: Primarily actual tax. 

Study: Lee & Swenson; 
Years reported: 2006-2007; 
Percentage: 29.5%; 
Numerator of effective tax rate: Total book tax. 

Study: Markle & Shackelford (2); 
Years reported: 2003-2007; 
Percentage: 31.3%; 
Numerator of effective tax rate: Total book tax. 

Study: Blouin & Tuna; 
Years reported: 1999-2004; 
Percentage: 22%; 
Numerator of effective tax rate: Cash book tax. 

Study: Blouin & Tuna; 
Years reported: 1999-2004; 
Percentage: 29.7%; 
Numerator of effective tax rate: Total book tax. 

Study: Hanlon & Maydew; 
Years reported: 1995-2004; 
Percentage: 29.8%; 
Numerator of effective tax rate: Current book tax. 

Study: Dyreng, Hanlon, & Maydew (1); 
Years reported: 1995-2004; 
Percentage: 29.6%; 
Numerator of effective tax rate: Cash book tax. 

Study: Dyreng, Hanlon, & Maydew (2); 
Years reported: 1995-2004; 
Percentage: 27%; 
Numerator of effective tax rate: Cash book tax. 

Source: GAO analysis of selected studies. 

Notes: The full citations for the included studies are 
PricewaterhouseCoopers LLP, Global Effective Tax Rates (April 14, 
2011); Kevin S. Markle and Douglas A. Shackelford (1), "Cross-Country 
Comparisons of Corporate Income Taxes," National Tax Journal, vol. 65, 
no. 3 (2012) 493-528; Melissa Costa and Jennifer Gravelle, "Taxing 
Multinational Corporations: Average Tax Rates," Symposium on 
International Taxation and Competitiveness, 65 Tax L. Rev. 391 (2012); 
Namryoung Lee and Charles Swenson, "Is It a Level Playing Field? An 
Analysis of Effective Tax Rates," Tax Notes International (May 25, 
2009) 685-693; Kevin S. Markle and Douglas Shackelford (2), Do 
Multinationals or Domestic Firms Face Higher Effective Tax Rates?, 
National Bureau of Economic Research, Working Paper 15091 (June 2009); 
Jennifer L. Blouin and Irem Tuna, Tax Contingencies: Cushioning the 
Blow to Earnings?, Working Paper (April 2007); Michelle Hanlon and 
Edward L. Maydew, "Book-Tax Conformity: Implications for Multinational 
Firms," National Tax Journal, vol. 62, no. 1 (March 2009) 127-153; 
Scott D. Dyreng, Michelle Hanlon, and Edward L. Maydew, "Long-Run 
Corporate Tax Avoidance," The Accounting Review, vol. 83, no. 1 (2008) 
61-82. 

The two studies by Markle and Shackelford report their estimates 
separately for domestic and multinational firms. For each study we use 
data on the pretax book income of each subpopulation of firms to 
report a weighted average effective rate for the entire population. 

[End of figure] 

[End of section] 

Appendix II: Copy of IRS Form 1120, Schedule M-3 (Tax Year 2010): 

[Refer to PDF for image: IRS Form 1120, Schedule M-3 (Tax Year 2010): 
3 pages] 

Source: IRS. 

[End of figure] 

[End of section] 

Appendix III: Detailed Data on Book-Tax Differences for Tax Year 2010: 

Table 1: Data for Largest Book-Tax Differences for Part II Income 
Items: 

Part II income items: Other income (loss) items with differences; 
Book amount temporarily higher than tax amount: -$119.7 billion; 
Book amount permanently higher than tax amount: -$121.2 billion; 
Book amount permanently lower than tax amount: $35.4 billion; 
Book amount temporarily lower than tax amount: $63.2 billion; 
Absolute value total difference: $339.5 billion; 
Net difference: -$142.3 billion. 

Part II income items: Income statement disposition of assets other 
than inventory; 
Book amount temporarily higher than tax amount: -$67.9 billion; 
Book amount permanently higher than tax amount: -$79.0 billion; 
Book amount permanently lower than tax amount: $19.7 billion; 
Book amount temporarily lower than tax amount: $41.5 billion; 
Absolute value total difference: $208.1 billion; 
Net difference: -$85.8 billion. 

Part II income items: Interest income; 
Book amount temporarily higher than tax amount: -$135.2 billion; 
Book amount permanently higher than tax amount: -$34.8 billion; 
Book amount permanently lower than tax amount: $1.6 billion; 
Book amount temporarily lower than tax amount: $15.2 billion; 
Absolute value total difference: $186.8 billion; 
Net difference: -$153.2 billion. 

Part II income items: Cost of goods sold (revised); 
Book amount temporarily higher than tax amount: -$80.5 billion; 
Book amount permanently higher than tax amount: -$5.1 billion; 
Book amount permanently lower than tax amount: $9.3 billion; 
Book amount temporarily lower than tax amount: $82.7 billion; 
Absolute value total difference: $177.7 billion; 
Net difference: $6.3 billion. 

Part II income items: Gross foreign dividends not previously taxed; 
Book amount temporarily higher than tax amount: -$2.3 billion; 
Book amount permanently higher than tax amount: -$65.0 billion; 
Book amount permanently lower than tax amount: $65.6 billion; 
Book amount temporarily lower than tax amount: $10.1 billion; 
Absolute value total difference: $143.0 billion; 
Net difference: $8.4 billion. 

Part II income items: Income (loss) from U.S. partnerships; 
Book amount temporarily higher than tax amount: -$59.9 billion; 
Book amount permanently higher than tax amount: -$4.6 billion; 
Book amount permanently lower than tax amount: $18.9 billion; 
Book amount temporarily lower than tax amount: $40.4 billion; 
Absolute value total difference: $123.8 billion; 
Net difference: -$5.2 billion. 

Part II income items: Income (loss) from equity method U.S. corps; 
Book amount temporarily higher than tax amount: -$4.6 billion; 
Book amount permanently higher than tax amount: -$83.5 billion; 
Book amount permanently lower than tax amount: $7.0 billion; 
Book amount temporarily lower than tax amount: $2.9 billion; 
Absolute value total difference: $98.0 billion; 
Net difference: -$78.3 billion. 

Part II income items: Net gain/loss reported on Form 4797, line 17; 
Book amount temporarily higher than tax amount: -$38.2 billion; 
Book amount permanently higher than tax amount: -$1.4 billion; 
Book amount permanently lower than tax amount: $1.9 billion; 
Book amount temporarily lower than tax amount: $55.2 billion; 
Absolute value total difference: $96.8 billion; 
Net difference: $17.5 billion. 

Part II income items: Section 78 gross-up; 
Book amount temporarily higher than tax amount: 0.0; 
Book amount permanently higher than tax amount: 0.0; 
Book amount permanently lower than tax amount: $77.6 billion; 
Book amount temporarily lower than tax amount: $4.8 billion; 
Absolute value total difference: $82.4 billion; 
Net difference: $82.4 billion. 

Part II income items: Gross capital gains Schedule D, excluding flow-
through entities; 
Book amount temporarily higher than tax amount: -$1.7 billion; 
Book amount permanently higher than tax amount: -$0.1 billion; 
Book amount permanently lower than tax amount: $9.6 billion; 
Book amount temporarily lower than tax amount: $64.0 billion; 
Absolute value total difference: $75.4 billion; 
Net difference: $71.8 billion. 

Source: GAO analysis of IRS data. 

[End of table] 

Table 2: Data for Largest Book-Tax Differences for Part III Expense 
Items: 

Part III expense items: Other expense/deduction items with differences; 
Book amount temporarily lower than tax amount: -$117.1; 
Book amount permanently lower than tax amount: -$30.9 billion; 
Book amount permanently higher than tax amount: $43.6 billion; 
Book amount temporarily higher than tax amount: $86.0 billion; 
Absolute value total difference: $277.5 billion; 
Net difference: -$18.4 billion. 

Part III expense items: Interest expense; 
Book amount temporarily lower than tax amount: -$24.1 billion; 
Book amount permanently lower than tax amount: -$4.4 billion; 
Book amount permanently higher than tax amount: $24.6 billion; 
Book amount temporarily higher than tax amount: $141.5 billion; 
Absolute value total difference: $194.6 billion; 
Net difference: $137.6 billion. 

Part III expense items: Depreciation; 
Book amount temporarily lower than tax amount: -$145.1 billion; 
Book amount permanently lower than tax amount: -$0.2 billion; 
Book amount permanently higher than tax amount: $0.6 billion; 
Book amount temporarily higher than tax amount: $36.0 billion; 
Absolute value total difference: $181.9 billion; 
Net difference: -$108.8 billion. 

Part III expense items: Other amortization or impairment write-offs; 
Book amount temporarily lower than tax amount: -$35.7 billion; 
Book amount permanently lower than tax amount: -$1.4 billion; 
Book amount permanently higher than tax amount: $6.2 billion; 
Book amount temporarily higher than tax amount: $60.4 billion; 
Absolute value total difference: $103.6 billion; 
Net difference: $29.5 billion. 

Part III expense items: Bad debt expense; 
Book amount temporarily lower than tax amount: -$45.6 billion; 
Book amount permanently lower than tax amount: -$3.5 billion; 
Book amount permanently higher than tax amount: $0.6 billion; 
Book amount temporarily higher than tax amount: $27.3 billion; 
Absolute value total difference: $77.1 billion; 
Net difference: -$21.2 billion. 

Part III expense items: Amortization/impairment of goodwill; 
Book amount temporarily lower than tax amount: -$26.9 billion; 
Book amount permanently lower than tax amount: -$0.9 billion; 
Book amount permanently higher than tax amount: $24.0 billion; 
Book amount temporarily higher than tax amount: $11.0 billion; 
Absolute value total difference: $62.8 billion; 
Net difference: $7.2 billion. 

Part III expense items: Pension and profit-sharing; 
Book amount temporarily lower than tax amount: -$38.2 billion; 
Book amount permanently lower than tax amount: -$1.7 billion; 
Book amount permanently higher than tax amount: $0.4 billion; 
Book amount temporarily higher than tax amount: $14.1 billion; 
Absolute value total difference: $54.4 billion; 
Net difference: -$25.5 billion. 

Part III expense items: Stock option expense; 
Book amount temporarily lower than tax amount: -$10.9 billion; 
Book amount permanently lower than tax amount: -$24.0 billion; 
Book amount permanently higher than tax amount: $3.5 billion; 
Book amount temporarily higher than tax amount: $11.9 billion; 
Absolute value total difference: $50.2 billion; 
Net difference: -$19.5 billion. 

Part III expense items: Foreign current income tax expense (other than 
withholding); 
Book amount temporarily lower than tax amount: -$1.4 billion; 
Book amount permanently lower than tax amount: -$1.5 billion; 
Book amount permanently higher than tax amount: $31.2 billion; 
Book amount temporarily higher than tax amount: $0.5 billion; 
Absolute value total difference: $34.5 billion; 
Net difference: $28.8 billion. 

Part III expense items: Other equity-based compensation; 
Book amount temporarily lower than tax amount: -$5.4 billion; 
Book amount permanently lower than tax amount: -$8.5 billion; 
Book amount permanently higher than tax amount: $4.7 billion; 
Book amount temporarily higher than tax amount: $9.7 billion; 
Absolute value total difference: $28.4 billion; 
Net difference: $0.4 billion. 

Source: GAO analysis of IRS data. 

[End of table] 

[End of section] 

Appendix IV: Descriptions of Income and Expense Items with the Largest 
Book-Tax Differences: 

Income item: Income statement disposition of assets other than 
inventory and pass-through entities; 
Description: Differences in this category and the one below relating 
to Form 4797 arise from differences in book and tax reporting of gains 
or losses arising from the sale or other disposition of business 
assets. One such difference arises when accumulated tax depreciation 
for an asset is higher than accumulated book depreciation, which would 
make the gain upon sale higher for tax purposes than book purposes. 

Income item: Interest income; 
Description: Certain qualified interest income, such as that from 
municipal bonds, is exempt for tax purposes but must be reported as 
income in financial statements. Also some items may be treated as 
interest income for tax purposes but as some other form of income for 
financial accounting purposes. 

Income item: Cost of goods sold; 
Description: Cost of goods sold comprises numerous items, some of 
which have their own lines on the M-3, like depreciation and stock 
options expense, and other which do not. Among the differences 
reported on this line are those relating to differences in inventory 
accounting. 

Income item: Gross foreign dividends not previously taxed; 
Description: This line includes any difference between the amount of 
foreign dividends that corporations report on their tax returns and 
the amounts they report in their financial statements, unless those 
dividends have already been taxed by the United States. 

Income item: Income (loss) from U.S. partnerships; 
Description: This line relates to differences between the book and tax 
treatment of any interest owned by the filer or a member of the U.S. 
consolidated tax group that is treated as an investment in a 
partnership for U.S. income tax purposes (other than an interest in a 
disregarded entity). 

Income item: Income (loss) from equity method U.S. corporations; 
Description: This line relates to differences between the treatment of 
income and losses from equity investments under financial statement 
rules and tax accounting rules . 

Income item: Net gain/loss reported on Form 4797, line 17; 
Description: See description relating to income statement disposition 
of assets. 

Income item: Section 78 gross-up; 
Description: Section 902 of the Internal Revenue Code (IRC) permits a 
U.S. corporation that owns at least 10 percent of the voting stock of 
a foreign corporation to take an indirect credit for foreign income 
taxes associated with dividends that it receives from that foreign 
corporation. Section 78 of the IRC requires U.S. corporations electing 
to claim the foreign tax credit to gross up (i.e., increase) their 
dividend income by the amount of creditable foreign income taxes 
associated with the dividends they received. 

Income item: Gross capital gains Schedule D, excluding pass-through 
entities; 
Description: This line covers differences in the book and tax 
reporting of capital gains, other than those arising from partnerships 
and other pass-through entities. 

Expense item: Interest expense; 
Description: One reason for differences on this line is that certain 
amounts that are treated as tax deductions for tax purposes are 
treated as some other form of expense for financial accounting 
purposes, or vice versa. 

Expense item: Depreciation; 
Description: For tax purposes a firm depreciates its assets using the 
modified accelerated cost recovery system method, which allows the 
write-off of an asset at a much faster rate than straight-line 
depreciation, the most commonly used method for financial accounting 
purposes. 

Expense item: Other amortization or impairment write-offs; 
Description: This category covers differences in book and tax 
amortization rules for items other than those relating to goodwill or 
acquisition, reorganization and start-up costs. 

Expense item: Bad debt expenses; 
Description: Under Generally Accepted Accounting Principles, firms are 
required to estimate the proportion of sales that will ultimately 
become uncollectible and expense this amount in the same period as the 
recognition of the sale in revenue. In contrast, for tax purposes 
firms must wait until a specific receivable is known to be 
uncollectible before it can be deducted. 

Expense item: Amortization or impairment of goodwill; 
Description: Prior to 2002, goodwill was amortized over a maximum of 
40 years for book purposes; 
after 2001 financial accounting changed to the impairment method, 
whereby goodwill is only written down if it is judged by management 
and auditors to be impaired. For tax purposes, goodwill was not 
deductible prior to 1994; 
since 1994 goodwill must be amortized over 15 years. These differences 
between book and tax treatments can be either temporary or permanent. 

Expense item: Pension and profit-sharing; 
Description: This line covers all expenses attributable to any pension 
plans, profit-sharing plans, or any other retirement plans. 

Expense item: Stock option expense; 
Description: A stock option expense generally is recorded in a 
financial statement as the estimated fair value of the option over the 
period of time that the stock option vests. The exercise of the stock 
option does not affect the corporation's net book income. In contrast, 
the IRC recognizes two types of stock options--qualified and 
nonqualified stock options. Firms cannot take deductions for qualified 
stock options (unless the stock is held for less than 2 years), 
although recipients get special beneficial tax treatment. For 
nonqualified stock options, the firm granting the option can deduct 
the fair market value when the recipient has an unrestricted right to 
the property and the fair market value can be reasonably ascertained. 

Expense item: Foreign current income tax expense (other than 
withholding); 
Description: This line shows the difference between the amounts of 
foreign income taxes that corporations report as expenses in their 
financial statements and the amounts that they claim as deductions for 
tax purposes. U.S. corporations typically claim foreign tax credits, 
rather than deductions, for most of the foreign income taxes they pay. 
Consequently, the book tax expenses typically far exceed the tax 
deductions. 

Expense item: Other equity-based compensation; 
Description: Examples of the types of compensation that taxpayers are 
required to report on this line are payments attributable to employee 
stock purchase plans, phantom stock options, phantom stock units, 
stock warrants, stock appreciation rights, and restricted stock, 
regardless of whether such payments are made to employees or non-
employees, or as payment for property or compensation for services. 

Source: GAO summary based on IRS documents and accounting literature. 

[End of table] 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. White, (202) 512-9110 or whitej@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, James Wozny (Assistant 
Director), Elizabeth Fan, Robert MacKay, Donna Miller, Karen O'Conor, 
Max Sawicky, and Andrew J. Stephens made key contributions to this 
report. 

[End of section] 

Footnotes: 

[1] GAO, Tax Administration: Comparison of the Reported Tax 
Liabilities of Foreign-and U.S.-Controlled Corporations, 1998-2005 
(Washington, D.C.: July 24, 2008). 

[2] The measure of worldwide income from the Schedule M-3 represents 
the worldwide financial statement income of the U.S. corporation 
filing the M-3 and any entities included in its tax return. 

[3] The Schedule M-3 data are drawn from IRS's Statistics of Income 
division's annual stratified random samples of corporate tax returns. 
The results we present based on these samples are subject to sampling 
error. We do not have the detailed information needed to estimate the 
size of the sampling error; however, we believe these errors are 
negligible because a significant proportion of the Schedule M-3 filers 
is sampled at a 100 percent rate and the remaining M-3 filers are 
sampled at rates of 27 percent or more. Those sampled at the 100 
percent rate accounted for 99 percent of the total assets of this 
population for 2010. The data sets for the Schedule M-3 differ from 
the Statistics of Income corporate sample data sets in that only 
returns reporting assets of $10 million or more are considered in the 
Schedule M-3 data sets, and returns that do not meet simple 
reconciliation rules between M-3 Parts I and II and between M-3 Parts 
III and II are dropped from those data sets. Our analysis excludes 
pass-through entities, which do not pay income tax. Their income is 
passed through to their shareholders or partners where it is taxed 
under applicable income tax. [Pass through entities include 
partnerships, which do not have shareholders. Also, corporations or 
other entities can be partners or shareholders in pass through 
entities.] 

[4] 26 U.S.C. § 11. In addition, present law imposes an alternative 
minimum tax (AMT) on certain corporations to the extent that their 
minimum tax liability exceeds their regular tax liability. 26 U.S.C. § 
56. In general, the AMT applies a lower tax rate to a broader tax 
base. Specifically, the regular tax base is increased for AMT purposes 
by adding back certain items treated as tax preferences and 
disallowing certain deductions and credits. Also, marginal rates are 
higher over limited income ranges to recapture the benefits of the 
rates below 35 percent. 

[5] Taxable income is total income, including taxable income from 
foreign sources, minus deductions such as for salaries and wages, 
depreciation, and net operating loss carryovers. The next step is to 
calculate the tentative tax owed (taxable income times the applicable 
rate). The last step is to subtract any tax credits, including the 
foreign tax credit, to get the taxes owed. 

[6] Office of Management and Budget, Historical Tables, Budget of the 
United States Government, Fiscal Year 2014 (Washington, D.C.: Apr. 
2013). 

[7] C. Eugene Steuerle, Contemporary U.S. Tax Policy (Washington, 
D.C.: The Urban Institute Press, 2004); and Jane G. Gravelle, "The 
Corporate Tax: Where Has It Been and Where Is It Going?" National Tax 
Journal, vol. 57, no. 4 (2004): 903-23. 

[8] Congressional Budget Office, The Budget and Economic Outlook: 
Fiscal Years 2013-2023 (Washington, D.C.: February 2013). 

[9] Except as otherwise noted, references to tax accounting refer to 
this second set of rules. Also, unless otherwise noted, we use the 
term taxes actually paid in reference to the income tax liabilities 
(after credits) that corporations report on their federal income tax 
return each year. 

[10] The measurement of business net income is inherently difficult 
and some components of both tax and book net income are estimates 
subject to some imprecision. (Net income equals total income minus 
expenses.) One important source of imprecision is the difficulty of 
measuring costs associated with the use of capital assets. Both book 
and tax depreciation rules allocate capital costs over the expected 
useful lives of different types of assets. The actual useful life of 
specific assets may differ from the expected lives used for purposes 
of either book or tax depreciation. 

[11] These requirements, which apply to all corporations with assets 
that equal or exceed $10 million, became effective December 2004. 

[12] In contrast, the income included in an average effective tax rate 
computation may be derived from investments made in many different 
past years in addition to all those made in the current year; it does 
not include estimates of any income to be earned in the future. Some 
researchers have also developed a measure they call the effective 
average tax rate, which is a weighted average of the statutory tax 
rate and the effective marginal tax rate to study the effects of taxes 
on decisions relating to large, discrete investments in contrast to 
those about small differences in the size of a particular investment. 
(See, for example, Michael Devereux and Rachel Griffith, "Taxes and 
the Location of Production: Evidence from a Panel of US 
Multinationals," Journal of Public Economics, vol. 68 (June 1998): 335-
367.) 

[13] George Plesko employed a labor-intensive approach to link tax 
return data from IRS with financial statement data from Compustat, 
using each firm's employer identification number. Consolidation 
differences between financial statements and tax returns, along with 
other discrepancies, forced the author to drop many cases before 
arriving at his final study population of 1,116 firms. (George A. 
Plesko, "An Evaluation of Alternative Measures of Corporate Tax 
Rates," Journal of Accounting and Economics (2003).) 

[14] The total tax expense is the sum of current taxes and deferred 
taxes. Deferred taxes represent estimated taxes that will be paid (or 
refunded) in a future year as timing differences between book and tax 
reporting reverse themselves and carryforwards are recognized. For 
example when tax depreciation is more rapid than book depreciation a 
company in effect postpones part of its actual tax liability on this 
year's book income because in the current year its net income for tax 
purposes (after the depreciation deduction) will be lower than its 
income for book purposes. The postponed taxes will be paid in later 
years when book depreciation deductions become larger than those for 
tax purposes. The amount of postponed taxes associated with current 
year income is reported as a deferred tax expense. Taxes which are 
reported as deferred in one year are included in current tax expenses 
and cash taxes paid in future years (which is why some studies choose 
to exclude them from their effective tax rate measures). The cash 
taxes paid, as reported in statement of cash flows or notes to the 
financial statements, represents what companies actually pay to the 
IRS in the current year; however, they do not necessarily relate to 
the current year's income. For example, those amounts can include 
additional payments for earlier tax years resulting from IRS audit 
adjustments. The actual tax liability reported on a corporation's form 
1120 is the amount of tax that it actually owes to IRS for income 
earned in that tax year. The actual tax liability can differ from the 
current tax expense for a number of reasons, including the fact that 
corporations include an amount for "uncertain tax positions" in their 
current tax expenses. These amounts are not paid to IRS in the current 
year; they simply indicate to shareholders how much additional tax may 
have to be paid to IRS, such as taxes due as the result of a future 
audit. 

[15] We use the term actual tax paid to refer to what corporations 
report as their income tax liability after credits on line 7 of 
Schedule J of Form 1120. The relationship between book and actual 
taxes can change from year to year, depending on economic conditions. 
For example the aggregate current income tax expense for Schedule M-3 
filers in tax year 2006 was $310 billion, compared to $278 billion in 
actual taxes paid after credits. 

[16] We use the term profitable to refer to those Schedule M-3 filers 
that had nonnegative amounts for net book income reported on that 
schedule. To compute pretax net book income we start with the net book 
income reported in financial statements and add back in the total tax 
expense. 

[17] In the other two years for which we had data for profitable and 
unprofitable filers aggregate losses were considerably larger. In 2009 
the $619 billion of losses for unprofitable filers offset more than 
half of the $1.2 trillion of income for profitable filers, resulting 
in aggregate net income of only $568 billion. In 2008 the losses of 
unprofitable filers actually exceeded the income of profitable ones, 
resulting in an aggregate net loss for the full population. 

[18] Some of this difference is due to the fact that some of the 
filers that were categorized as profitable on the basis of their book 
net income actually had negative tax net income, which offsets some of 
the positive tax net income for that subpopulation. The converse is 
true for the subpopulation of unprofitable filers. Also, net tax 
income reflects the deduction of state and local income taxes and 
foreign taxes that are deducted (rather than offset by credits); 
pretax book income is before these deductions. 

[19] The book taxes and incomes that we obtained from the Schedule M-3 
data represent the totals for entities included in the filers' tax 
returns. These amounts can be different from the totals reported in 
publicly available financial statements due to differing consolidation 
rules for book and tax purposes, which are discussed in the following 
section. 

[20] This fact explains how it is possible that during an economic 
downturn the number of corporations not paying taxes can increase at 
the same time that estimated average effective tax rates increase. 

[21] In an earlier study, we found considerable variation in the U.S. 
effective tax rate on the domestic income of large corporations for 
tax year 2004. At one extreme, 32.9 percent of the taxpayers had 
effective rates of 10 percent or less, and at the other extreme, 25.6 
percent of taxpayers had effective rates over 50 percent (GAO, U.S. 
Multinational Corporations: Effective Tax Rates Are Correlated With 
Where Income Is Reported, [hyperlink, 
http://www.gao.gov/products/GAO-08-950] (Washington, D.C.: Aug. 12, 
2008)). Moreover, in another study, we found that for tax year 2005 
about 19 percent of the foreign-controlled domestic corporations that 
did not pay federal income tax and about 27 percent of the U.S.-
controlled domestic corporations that paid no tax had positive net tax 
income (before loss carryforwards and special deduction). These 
corporations had ETRs of zero, which could have significantly reduced 
the average ETR for the population of profitable corporations. (GAO, 
Tax Administration: Comparison of the Reported Tax Liabilities of 
Foreign-and U.S.-Controlled Corporations, 1998-2005, [hyperlink, 
http://www.gao.gov/products/GAO-08-957] (Washington, D.C.: July 24, 
2008). 

[22] Five out of the ten effective tax rate estimates shown in figure 
9 were computed for populations that excluded all corporations with 
negative book income. 

[23] The thresholds for consolidating entities are different for book 
and tax purposes, so the entities included under each can differ. 

[24] For example, adjustments are made to reverse the elimination of 
intercompany dividends involving entities removed at an earlier point 
on the schedule. 

[25] The difference between this final income measure and the first 
income measure shown in figure 3 is that this measure is after 
subtracting the total book tax expense, while the figure 3 measure is 
before that subtraction. 

[26] These categories are ranked in terms of the absolute value of the 
differences for all Schedule M-3 filers. Tables 1 and 2 in appendix 
III show the separate dollar amounts for the negative and positive, 
temporary and permanent differences in each category, as well as the 
net difference, which offsets the negative differences against the 
positive differences. 

[27] 26 U.S.C. § 78. Section 902 of the IRC permits a U.S. corporation 
that owns at least 10 percent of the voting stock of a foreign 
corporation to take an indirect credit for foreign income taxes 
associated with dividends that it receives from that foreign 
corporation. 26 U.S.C. § 902. 

[28] These are all the studies we found as of March 2013 that met 
these criteria. 

[29] The five are: PricewaterhouseCoopers, the two Markle and 
Shackelfords, Lee and Swenson, and the second Dyreng, Hanlon, and 
Maydew. Costa and Gravelle, who made use of Schedule M-3 data, 
excluded corporations if both their book net income and their tax net 
income were negative. The Hanlon and Maydew estimate and the first of 
the Dyreng, Hanlon, and Maydew estimates include corporations for 
which the sum of their net income over a 10-year period was positive. 

[30] See, for example, Steven Maguire, Average Effective Corporate Tax 
Rates: 1959 to 2005, Congressional Research Service (Sept. 6, 2006); 
Martin A. Sullivan, "The Effective Corporate Tax Rate is Falling," Tax 
Notes (Jan. 22, 2007): 280-282; and Mark P. Keightley, Reasons for the 
Decline in Corporate Tax Revenues, Congressional Research Service 
(Dec. 8, 2011). 

[31] Robert S. MacIntyre, Matthew Gardner, Rebecca J. Wilkins, and 
Richard Phillips, Corporate Taxpayers & Corporate Tax Dodgers 2008-10 
(Washington, D.C.: Citizens for Tax Justice and the Institute on 
Taxation and Economic Policy, November 2011). 

[End of section] 

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