In partnership with Economic Policy Institute
Report By Frank Clemente, Hunter Blair, and Nick Trokel
To view the full chartbook, download the PDF above or click here.
Introduction and key findings
The June 1, 2017, version of this report corrects Chart 1. The original chart reported first-quarter data for each year; the chart has been corrected to show annual data instead.
In recent years, corporate profits have reached record highs, and so too has the amount of untaxed profits U.S. corporations have stashed offshore: $2.4 trillion. And it is estimated corporations could owe as much as $700 billion on those profits. In short, corporations are dodging more and more of their tax responsibilities.
While the statutory tax rate on corporate income is 35 percent, estimates of the rate corporations actually pay put the effective rate at about half the statutory rate. Driving this divergence between what corporations are supposed to pay and what they actually pay is a combination of offshore profit shifting and tax avoidance. Multinational corporations pay taxes on between just 3.0 and 6.6 percent of the profits they book in tax havens.
And corporations have become increasingly adept at making their profits appear to be earned in these tax havens; the share of offshore profits booked in tax havens rose to 55 percent in 2013. Almost half of offshore profits are held by health care companies (mostly pharmaceutical companies) and information technology firms. Because of the inherent difficulty in assigning a precise price to intellectual property rights, it is relatively easy for these companies to manipulate the rules so that U.S. profits show up in tax havens.
The use of offshore profit-shifting hinges on a single corporate tax loophole: deferral. Multinational companies are allowed to defer paying taxes on profits from an offshore subsidiary until they pay them back to the U.S. parent as a dividend. Proponents of cutting the corporate tax rate refer to profits held offshore as “trapped.” This characterization is patently false. Nothing prevents corporations from returning these profits to the United States except a desire to pay lower taxes. In fact, corporations overall return about two-thirds of the profits they make offshore, and pay the taxes they owe on them.
Further, there are numerous U.S. investments that these companies can undertake without triggering the tax. In short, deferral provides a mammoth incentive for multinational corporations to disguise their U.S. profits as profits earned in tax havens. And they have responded to this incentive: 82 percent of the U.S. tax revenue loss from income shifting is due to profit shifting to just seven tax-haven countries.
Firms have also become increasingly adept at manipulating the rules here in the United States to avoid taxation. Lower tax rates on “pass-through” business entities and poor regulatory responses have given firms the chance to reorganize as “S-corporations” or opaque partnerships in order to avoid paying any corporate income tax at all.
This intentional erosion of the U.S. corporate income tax base has real consequences. Rich multinational corporations avoiding their fair share of U.S. taxes means that domestic firms and American workers have to foot the bill. It also means that corporations are not paying their fair share for our infrastructure, schools, public safety, and legal systems, despite depending on all of these services for their profitability.
This chartbook details the extent of corporate tax avoidance.
Key findings include:
- Corporate profits are way up, and corporate taxes are way down. In 1952, corporate profits were 5.5 percent of the economy, and corporate taxes were 5.9 percent. Today, corporate profits are 8.5 percent of the economy, and corporate taxes are just 1.9 percent of GDP.
- Corporations used to contribute $1 out of every $3 in federal revenue. Today, despite very high corporate profitability, it is $1 out of every $9.
- Many corporations pay an effective tax rate that is one-half (or less) of the official 35 percent tax rate.
- As of 2015, U.S. corporations had $2.4 trillion in untaxed profits offshore. Another study, looking at S&P 500 companies, found they held $2.1 trillion as of 2014. This roughly five-fold increase from $434 billion in 2005 stems largely from anticipation of a tax holiday.
- Just two industries—high-tech and pharmaceutical/health care—hold half the untaxed offshore profits.
- Just 50 companies hold over 75 percent of untaxed offshore profits. Ten companies hold 39 percent of these profits. Just four companies—Apple, Pfizer, Microsoft, and General Electric—hold one-quarter of all untaxed offshore profits.
- About 55 percent of U.S. corporate offshore profits are in tax-haven countries. Corporations pay an average tax rate of between just 3.0 percent and 6.6 percent on profits in tax havens.
- U.S. corporations pay very low tax rates—6 percent to 10 percent, mainly to foreign governments—on all their offshore profits. A tax break known as “deferral” allows them to delay paying U.S. taxes until the profits are repatriated to the parent corporation in the United States.
- The U.S. Treasury will lose $1.3 trillion over 10 years—about $126 billion a year—due to the deferral of taxes on offshore profits.
- Income shifting—making profits earned in the United States look as if they were earned offshore—erodes our corporate tax base by over $100 billion a year. U.S. corporations increasingly manipulate transfer pricing and bilateral tax agreements to make their U.S. profits appear to be earned in tax havens.
- Corporations owe up to $695 billion in U.S. taxes on their $2.4 trillion in offshore profits. Having paid just 6 percent to 10 percent in taxes to foreign governments, they owe between 29 percent and 25 percent in U.S. taxes, based on a 35 percent tax rate with foreign tax credits.
- President Obama has proposed taxing the current stock of offshore profits at 14 percent (less foreign taxes paid), which could give corporations a tax cut of $500 billion on their offshore profits. (Republicans propose an even bigger tax break.) A 14 percent tax rate would raise just $195 billion. This is $500 billion less than the up to $695 billion they owe. That’s a tax cut of up to 72 percent for the country’s worst tax dodgers.
- Some large multinationals adept at tax dodging would receive huge tax breaks under Obama’s plan. Apple would get a tax break of $36.5 billion, Microsoft $20.7 billion, and Citigroup $7.1 billion (based on the profits they had stashed offshore at the end of 2015).
- U.S. corporate offshore profits are not “trapped” overseas. Companies can invest these untaxed profits in any U.S. firm, deposit them in any U.S. bank, or use them to purchase any government security as long as it is not directly invested in the U.S. parent. A congressional study found that 46 percent of the offshore profits of 27 companies were invested in the United States in 2010. And, of course, nothing stops them from simply returning profits home—except for a desire to not pay taxes.
- Corporate reorganization here in the United States likely further erodes the corporate tax base by $100 billion a year. In the United States, the business sector has substantially reorganized as pass-through entities in search of lower tax bills.
To view the full chartbook, download the PDF above or click here.