From the U.S. Government Accountability Office, www.gao.gov

Transcript for: Corporate Income Tax

Description: Audio interview by GAO staff with Jessica Lucas-Judy,
Director, Strategic Issues

Related GAO Work: GAO-16-363: Corporate Income Tax: Most Large
Profitable U.S. Corporations Paid Tax but Effective Tax Rates Differed
Significantly from the Statutory Rate

Released: April 2016


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[ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and
information from the U.S. Government Accountability Office. It's April
2016. The corporate federal income tax rate tops out at 35 percent but
what do corporations actually pay? A team led by Jessica Lucas-Judy, a
director in GAO's Strategic Issues team, recently ran the numbers. GAO's
Jacques Arsenault sat down with Jessica to talk about what they found.

[ Jacques Arsenault: ] Corporate income taxes can be pretty confusing. I
feel like on the news I'll hear some people say that the U.S. has very
high corporate taxes and other people saying that corporations don't pay
much in tax. You looked at corporate income tax and what corporations
are really paying. But can we take it back a couple of steps? What is
corporate income tax?

[ Jessica Lucas-Judy: ] So, corporate income tax is very similar to
individual income tax. A corporation earns money; it takes deductions
for things like salaries and expenses. You multiply what's left, the
taxable income, with the statutory tax rate which, for most U.S.
corporations, the maximum is 35 percent. And then take off any credits
such as for foreign taxes paid and what's left is the actual tax
liability.

[ Jacques Arsenault: ] So that actually sounds really simple. You looked
at what the corporations were actually paying. Can you talk about how
you found those rates?

[ Jessica Lucas-Judy: ] Sure. We got data from the IRS for tax years
2006 to 2012 which is the most recent available. And it's important to
note that we were looking at aggregated tax payments. We didn't have
individual tax data. So we got the data that companies report on a
schedule M-3 which is required of all corporations that have $10 million
in assets or more, or what we call large corporations. And we use that
to calculate their effective tax rate in a number of different ways. And
what we found is that the actual federal effective tax rate for large
profitable corporations was averaging about 14 percent over the courses
of the years that we studied. So for example, in 2012 it was 16.1
percent. In addition, we calculated a number of different ways, such as
by looking at what's called book tax, which is what companies report on
their financial statements. And that was a little bit higher because it
doesn't include some of the taxable credits. And we also included in
some of our calculations not just profitable corporations but also those
that operated at a loss, and as you can expect, there we ended up with
slightly higher effective tax rates of about 20, 21, 22 percent.

[ Jacques Arsenault: ] One of the other things that you found though was
that many corporations are not paying any corporate income tax at all.
How did that work?

[ Jessica Lucas-Judy: ] That was the second part of our study where we
were looking at corporations that had zero tax liability for each of the
years 2006 to 2012. And here we were looking at all corporations not
just large corporations. And we found about at least two-thirds of
corporations in a given year that had 0 tax liability. But once you
started to break that down more into just the large corporations, that
percentage gets smaller. So, for example, in 2012, it was 42 percent
that had 0 tax liability. And that number gets even smaller still when
you're looking at just the profitable large corporations. So that was
19.5 percent in 2012.

[ Jacques Arsenault: ] So in many cases, the corporations that weren't
paying taxes it was because they weren't making profits or they maybe
hadn't --

[ Jessica Lucas-Judy: ] Right.

[ Jacques Arsenault: ] -- made profits in prior years.

[ Jessica Lucas-Judy: ] Right. So that could be one of the reasons they
were operating at a loss which about half of the companies were in the
years that we were looking at. Or if they're carrying losses over from
prior years, and in addition, as we mentioned you know, the different
tax credits can also reduce the taxable income.

[ Jacques Arsenault: ] So it sounds like if a corporation pays something
lower than the statutory tax rate as their effective tax rate that, in
many cases, it's because they have lower or no profits or they are
taking advantage of credits and deductions in the same way that happens
with the individual income tax.

[ Jessica Lucas-Judy: ] Right. It's very similar to the individual
income tax.

[ Jacques Arsenault: ] Now one other thing that your report looked at
was even for corporations that are not paying federal corporate income
taxes, that they may be paying other taxes. What kinds of taxes might
those be?

[ Jessica Lucas-Judy: ] So in addition to federal taxes, they could have
state taxes, local taxes, or if they're earning money overseas they
could have foreign taxes. And when we included all those different tax
rates into what we called the worldwide tax rate, that increases our
averages by about 3.5 to 8.5 percentage points.

[ Jacques Arsenault: ] Okay. So then, finally, for American corporations
and for those of us that are just trying to figure this out, what would
you say is the bottom line of this report?

[ Jessica Lucas-Judy: ] The bottom line is that while two-thirds of all
the corporations that we looked at had no tax liability, the larger
profitable corporations were more likely to owe tax. And in addition,
while we found a lot of variability in the average effective tax rates
depending on how we calculated them, almost all of them were
significantly below the statutory tax rate of 35 percent. And we think
that that's important context for anyone who's considering any changes
to corporate tax policy.

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