The Great Corporate Tax Dodge

Occasionally we hear about massive US companies paying low or no federal income tax. Amazon is a recent example; it paid no federal tax in 2018 on $11.2 billion in profit. Instead, it received a federal tax rebate of $129 million. So, in 2019 the effective tax rate for Amazon was -1%.

Most Americans think corporations pay too little in taxes. For example, Gallup reports that 68% of US citizens believe corporations pay too little in federal taxes (average from 2004 through 2019).

Even FORTUNE magazine says corporate taxes are too low. They say Trump’s new tax bill made the deficit soared by 48% from 2017 to 2019. They took this position in late 2019 before the massive deficit spending now required to fight coronavirus.

A Simple, Bottom-Line Chart

How much do individuals pay in taxes versus corporations? This critical question is answered in Chart 1 below. It is justly titled “The Great Corporate Tax Dodge.”

Three Overall Observations

The most striking feature of the chart is: That’s a lot of blue!

Yes, individuals shoulder a huge, wildly disproportionate share of the tax burden. It does not take a rocket scientist to conclude individuals are getting the short end of the stick. The only parties that like seeing a lot of blue are corporate executives and their shareholders, and the parties hired or funded by corporations to help them. That’s not a lot of people compared to those who have to carry the bulk of the tax burden.

Second, the chart reveals a trend. In 1929, individuals paid 56% of total taxes. At the peak of our preparation for World War II (1941), individuals paid only 23% of the tax bill. Now individuals cover 90% of the total tax burden!

Third, the chart illustrates the zero-sum nature of tax revenue generation: either the people pay or corporations pay. At its core, tax policy stipulates how much tax will be paid by either individuals or corporations.

Do Corporations Use Government Services?

The simple answer is yes. Corporations use government expenditures in many ways. Indeed, it is hard to think of a single government service that does not benefit corporations. Let’s examine the three largest components of the federal budget: Social Security, Health Insurance, and Defense.

1. Social Security

Social Security is the single largest federal government expenditure at $1 trillion in 2019. Even though all of these funds go to individuals, corporations benefit tremendously. How? These payments help them cut employee pension plan costs.

In the early 1990s, 35% of the private-sector workforce had very attractive pension plans for retirement, called defined benefit plans. Now, only 18% of private-sector employees have them. Some companies eliminated their pension plans entirely. Most others cut their pension plan costs dramatically.

All of the savings from retirement plan cost-cutting is a transfer of responsibility from corporations to the government. In the good old days, corporations were responsible for funding employee retirement plans. Now they have shifted that responsibility over to the government, and they should help pay the cost.

In fact, as corporations cut their retirement benefits and transferred these costs to the government, the corporate tax bill should have increased, not decreased.

2. Health Insurance

The same logic applies to federal health insurance programs: Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and the Affordable Care Act (ACA) marketplace subsidies. These programs cost $1.1 trillion in 2019.

Fifty years ago, health insurance was provided by many company retirement plans. Now, more people than ever rely on government health insurance to reduce their health costs during retirement.

Corporations have cut their health insurance costs dramatically over the last 50 years. They have increased paycheck deductions for health insurance, increased deductibles, reduced coverage, and have shifted to part-time workers or independent contractors.

Just as was the case with retirement expenses, corporations have transferred responsibility for the cost of health insurance to the government. Because of this, their tax bill should have increased, not decreased.

3. Defense

US defense spending was $.7 trillion in 2019. Corporations benefit from defense spending in two ways. First, the US military ensures the safety of US business operations overseas. Second, much of the defense budget is allocated to corporations for equipment and supplies. In 2017, 67% of the defense budget was spent on outside contracts.

The Fair Corporate Share: 30% to 45%

The bottom line is that the fair share of the tax burden for corporations is somewhere between 30% and 45%.

With this range in mind, it is possible to define how much of the tax burden has been shifted from corporations to employees since 1929. Using the same BEA data from Chart 1, we can calculate how much corporations would have paid if:

1. They covered 30%, 35%, 40%, or 45% of the tax burden.
2. That money had been invested at an annual interest rate equal to the average return of the DOW during its lifetime: 5.42%.

As we can see in Chart 2 above, the amount of money transferred through the great corporate tax dodge ranges from a low of $12 trillion to a high of almost $40 trillion.

These are shockingly large numbers. For example, the market capitalization of the entire Dow Jones Industrial Average is $8 trillion. So, the value of the corporate tax savings from 1929 through 2018 is greater than what it would cost to buy all 30 companies in the Dow.

Why Do Corporations Pay So Little?

There are many complicated answers to the question, but only one simple one: We let them. Or, we let our politicians shift the tax burden onto us. Or, we let ourselves be duped.

For the most part, taxes are set by politicians. Occasionally, state and local governments use referendums to set tax levels. But for the most part, it involves elected officials to the executive and legislative branches of government. Which begs the question: Which political party is to blame for unfair taxation?

Republicans are Much Worse

A critical step in demystifying taxes involves a third chart. It relies on the same data used for Charts 1 and 2, and then:

1. Sorts the data by the 15 presidential administrations since 1929.
2. Sets the corporate tax burden at 35% (and individuals at 65%).
3. Invests the amount under or overpaid at an annual interest rate of 5.42%.

The columns show how much of the tax burden was shifted relative to the 65%/35% standard for each president’s administration and for each political party. The purple (Democrat) and red (Republican) columns are negative, indicating the tax burden shifted from corporations to individuals.

The blue or pink columns are positive, indicating bad news for corporations and good news for individual taxpayers. Unfortunately, there are very few blue or pink bars, and they are quite small compared to the red and purple bars.

Three Democratic administrations shifted tax costs substantially toward individuals. The worst was Clinton, followed by Obama and Carter. Two Democratic presidents shifted taxes to corporations: Truman and FDR. In total from 1929 to 2016, Democrats shifted a total of $3.8 trillion in taxes (in 2018 dollars) from corporations to individuals.

Five of seven Republican presidents made individuals pay more than 65% of the tax burden. Reagan was the worst, followed by the two Bush presidents and Trump. But Trump has two years remaining in this data series, and his tax policies are likely to rival those of Reagan. In total from 1929 through 2018, Republican presidents made individuals pay $8.3 trillion more than a fair share of 65%.

Surprisingly, Democrats have not successfully represented individual interests very well over the last nine decades. They too have reduced the corporate share of taxes. But the Republican shift of nearly $13 trillion is almost 60% higher than the transfer caused by Democrats.

Corporate Excuses

US corporations have been generating arguments for reducing their tax burden for more than a century. They have hired the best and the brightest minds to tell a biased, one-sided story about why they should pay lower taxes. Two of the most common of these biased rationalizations are debunked below.

The “Invisible Hand” Theory

Contrary to many economists’ assertions, taxes are not regulated by some mythical force such as Adam Smith’s “invisible hand” of the market. In fact, taxes are governed by politicians, who are elected by voters.

Voters can be divided into two camps: those who win when corporate taxes are reduced, and those who lose. Politicians have increasingly made tax policy decisions that favor corporate interests over individuals.

The Global Economy Theory

Corporations tell US governments they must cut corporate taxes because other countries have lower corporate taxes. They insist that the US must compete for the privilege of hosting their companies. They say they will take their profits to other low-tax countries if the US is not competitive.

Two points. First, corporations already shelter vast quantities of profits from taxes, despite receiving low tax rates. The IMF estimates that countries lose over $500 billion in tax revenue every year through tax havens and schemes. In other words, US companies did not stop using tax havens once they won low tax rates. They are in a constant race to the bottom. For them, the only acceptable tax is a tax rebate.

Second, it does not make sense that the largest economy in the world should be held hostage to empty threats from corporations. What are they going to do, not do business in the US? Do they think the US is powerless to enforce tariffs on US imports?

The Bottom Line

Like so many political issues, the outcome depends on the voter. The only way Americans will pay less and corporations more is by voting for politicians who are willing to increase corporate taxes. It is the fair thing to do, but whether it is done depends on voters.