StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Taxes: U.S. Multinationals Paid An Average 27.7% Effective Rate As Compared To 19.5% For Their Foreign Competitors

15 Apr 2011
Posted by Pete Davis

That's according to a Business Roundtable commissioned study by PricewaterhouseCoopers LLC of 2006 through 2009 financial data from the S&P Global Vantage database for the 2,000 largest world companies listed by Forbes. That's quite a gap for U.S. headquartered firms to make up versus their competitors in 58 countries, but it ranks 6th in effective tax rates behind Japan, Morocco, Italy, Indonesia, and Germany.

There are all sorts of problems in calculating comparable tax rates across countries, but the tax economists at PWC, many of whom I have worked with, are very qualified to do so. They aggregated total income tax provision plus change in deferred taxes at all levels of government divided by worldwide net income before taxes, minority interest, and extraordinary items. Companies reporting zero or negative tax rates in any year were excluded in that year, and companies with substantial oil and gas operations were excluded because those operations are usually subject to higher rates in countries where oil and gas is a large share of GDP.

The U.S. is almost alone in taxing worldwide income of U.S. headquartered firms and in deferring tax on overseas income until it is repatriated, greatly complicating international comparisons. Breaking out domestic effective tax rates from foreign effective tax rates would provide more interesting comparisons. The study also carefully avoided identifying or quantifying how many U.S. firms paid little or no tax in one or more of these years.

Nonetheless, this study will arm firms pushing Congress to lower the 35% corporate income tax rate. Although Congress is holding lots of hearings on tax reform, in my opinion, we're unlikely to see enactment of any major tax reform until after the 2012 election, if then.

Call me cynical, but the

Call me cynical, but the exclusions sound darned important--high taxed oil (other extraction industries too?) to lower foreign rates and I wouldn't be surprised excluding 0s raises the effective us rate. How did the score GE's nigh impenetrable taxes?

And PWC finding results its client wants is hardly remarkable.


"The study also carefully

"The study also carefully avoided identifying or quantifying how many U.S. firms paid little or no tax in one or more of these years."

That pretty much shows what a con job this study really is.


Why honor the fiscal year?

Since the study covered 4 years, why not include the zero and negative years? Certainly the tax amount includes credits for loss carry forward/backward, why not include the income in the denominator?


"Companies reporting zero or

"Companies reporting zero or negative tax rates in any year were excluded in that year"

Wow, can we apply this methodology to the federal budget? "Excluding years where it ran a deficit, the government has always run a surplus!" And it would help immensely with NCLB: "excluding students who failed, everybody passed the standardized tests!"


Very interesting post

US companies also have the not so hidden tax that healthcare costs in the US, including for their employees are the highest in the world, and with the US being a mature market, that's a second cost as well. Third, I'd put the fact that everyone knows the US federal deficit is enormous, and taxes here will almost certainly have to be raised for this reason. We'll be extraordinarily lucky if US interest rates, and thus the interest component of the federal deficit don't rise substantially. How likely do you think it is that there will be a new reserve currency besides the dollar as the BRICS want? If so, how soon, and what will this mean for the U.S. dollar and the U.S.


Aswath Damodaran, a NYU

Aswath Damodaran, a NYU professor, has a spread sheet you can download that breaks down effective rates by industry. The total market has an effective tax rate of 14.07% according to his data.


I've always wondered why we

I've always wondered why we even have a seperate corporate income tax. Why not just pass the income through to the shareholders as we do with S corps. If the corporation reinvested its profits, I would not tax the income. I would tax the income once it is paid out as dividends. I'm sure this is simplistic and has many ramifications. I just wonder if this could be a starting point for a new discussion.


why the separate corporate tax

I've always wondered why we even have a seperate corporate income tax. Why not just pass the income through to the shareholders as we do with S corps.

Because that makes it vastly more difficult to both compute and collect the final tax due. First you still have to go through all the same calculations at the corporate level of how much income was earned of each kind, as different kinds are taxed different ways. And that's really the hard part. Then you have to distribute the income to millions of different shareowners, figure the different amount of tax due separately in each case and collect it all. Huge complications.

It also violates the illusion that corporations pay tax *instead* of people. Underlying all the politics that corporations don't pay enough tax is the belief that somehow if corporations paid more tax then we people wouldn't have to pay that tax. After all, if corporations paying more tax left the amoung of tax we people pay unchanged, who'd care?

Yet, obviously, in reality, we people pay *all* the tax paid by corporations -- people in the form of owners, employees, customers, suppliers, creditors, etc.
Inanimate entities pay no tax.

The problem with the corporate tax is that by the incidence of taxation the corporate tax lands on different people in differnt amounts in each case, all in a manner that is totally opaque. Thus the corporate tax badly violates two of the principles of "good" taxation: transparency, so everyone knows who is being taxes; and equity, people in like situations being taxed in the same amount.

Along the lines of your suggestion, a simpler and better proposal would be to eliminate the corporation tax entirely and simply assess the amount of tax you'd want to get from it directly from the people you want to pay it. If you want to tax shareholders, put a tax on capital; if you want to tax employees, up the payroll tax, etc.

Ah, but that destroys the illusion that "nobody" pays the corporate tax, and worse, makes it clear *who* you are taxing. They don't like it, complain "why tax us??" and politically organize to resist. That's very difficult to overcome.

So the corporate tax, as inferior as it is on every count, is the easiest to impose and collect, both administratively and politically.

In essence, it's like Willie Sutton said about banks. Why tax them? Because they are the choke point where the money is.


We Ain't Your Average Bear

And I hear abortions are well over 90% of what Planned Parenthood does. We'll be at 2.something unemployment in 11 years. The Bush tax cuts will create $10 trillion in surpluses. Saddam Hussein has an ongoing WMD program. Obama is from Kenya.

Put onother one on the pile.


PWC Methodology

A number of posters here have objected to the exclusion of oil extraction companies and years that specific companies had zero or negative tax rates.

The main point of the survey is, I think, that contrary to popular belief, US multinationals pay a higher effective tax rate than competitors incorporated in other countries. This puts the US multinationals at a competitive disadvantage. The comparison of effective tax rates (US versus foreign multinationals) should not be significantly affected by excluding the zero or negative tax rate years so long as the methodology was used consistently for all companies in the survey. As to oil extraction companies, Forbes magazine recently reported that the US companies paying the highest effective rates of tax were those in the oil business. For example, Exxon's effective rate was in excess of 40 percent and, if I recall correctly, the top five in effective tax rates were in the oil business. Since the US companies are major players in this business, including them would likely have increased the discrepancy between US and foreign rates even further.

Eliminating the corporate income tax is good, in theory, but I think it would be quite difficult to administer in practice. One practical difficulty would be that large, particularly publicly traded companies (those that tend to be taxable "C" corporations), would need to distribute book profits in the form of cash in order to enable shareholders to pay the tax in question. Also, our international tax regime (not only our's, but the world's) attempts to place domestic and foreign investors on equal footing. It would be difficult to tax foreign investors in the same manner as domestic investors given existing international tax rules and treaties.

A better way to approach the problem might be to eliminate the shareholder tax and to impose income tax on corporations at a rate equal to the marginal individual tax rate. Thus, corporations would effectively pay, by proxy, income tax on behalf of shareholders. The tax code would also need to undergo major reform so that the credits, exemptions, deductions, etc. of an organization doing business as a C corporation equal in every major respect those available to those doing business as sole proprietors, S corporations, partnerships or limited liability companies.


The PWC "methodology" is an

The PWC "methodology" is an exercise in cherry-picking the data. I'm sure PWC could have arrived at any percentage for the average effective corporate tax rate by simply selecting a different subset of the set of corporations than the one they actually used to arrive at the figure quoted in the title.

Global warming deniers also do this sort of cherry-picking with the global temperature anomaly and periodically predict that the global temperature anomaly shows we're headed for a reduction of global temperature.


Yes, but they didn't

Yes, but they didn't. As the post clearly indicates, the study was done using the 2,000 largest global corporations (irrespective of place of incorporation). That sounds to me like an appropriate sample, and a pretty big one, too. i don't think this is accurately referred to as a "subset".

Since you seem to fell strongly about this, which group of corporations would you have chosen for such a study?

As regards excluding years with a zero tax rate or losses, I can well imagine that these years were excluded because the point of the survey was to determine what effective tax rate corporations pay on their income---not the effective tax rate they pay on their losses. Suppose you have two corporations, one with taxable income of $100 and tax of $35 and another with a loss of $100 and a tax of zero. Would you say that the average effective tax rate on income is 17.5 percent? Although I don't have any inside information on the study or its methodology, it appears quite likely to me that, if anything, the methodology gives a more accurate picture of the effective tax rate on income. For example, if the corporation that had a loss of $100 in the first example would have income of $200 in the following year and that prior loss were carried forward, the income would be $100 and the tax $35. If the second corporation also had income of $100 and tax of $35 (in the second year), the survey would have shown the following for two years:

Total net income $ 300
Total tax $ 105

Effective rate on income is 35.0 percent

Your global warming comment is completely irrelevant to this discussion.


PWC study on effective tax rates

There are more than a few problems with this study:

1. The most serious is that the study was commissioned by a group (The Business Roundtable) with a vested interest in the outcome; PWC also would be unlikely to provide results that would be contrary to their client's (multinationals) interests.

2. Where's the raw data?

3. Are the adjustments material (exclusion of oil and 0/negative tax years)? Without the unadjusted results its impossible to determine.

4. What about S corps?

5. It this result the effective rate of home nation income tax or across all nations the multinational files returns?

6. Is this "book" income taxes or actual taxes paid?

7. Two other recent studies (one by the Bush II era CBO and the OECD) yielded significantly different results:
The CBO study: http://www.cbo.gov/ftpdocs/69xx/doc6902/11-28-CorporateTax.pdf measured corporate taxes a a percentage of GDP; US taxes were the 2nd lowest of all the OECD members;
The OECD study (attempted to calculate an effective statutory rate on dividend income): http://www.oecd.org/document/60/0,3746,en_2649_34897_1942460_1_1_1_1,00.... ; US rate was the 4th lowest of OECD members.

This study may use significant "smoke and mirrors" to arrive at this result and the study was commissioned by a lobbying organization. Its simply impossible to determine if the results are accurate.


Yet Another Budget Wonk on Effective Tax Rates

Regarding "your problems", I'd say they are too numerous to mention. But, let's take the listed ones in the order you presented them.

1. PWC was commissioned to do the study. Perhaps you could suggest someone (yourself?) less biased re-do the study with more appropriate methodology and report back here. I'm interested to see your report.

2. Read the study summary. "The S&P Global Vantage database was used to obtain total income taxes and pretax income from company financial statements for each year in the four- year period 2006-2009 for each of the 2000 companies for which data were available." So, go ahead and contact S&P for the data set. It is available for purchase, I'm sure, and would be necessary for you to re-do the study using your own, improved and un-biased methods as per #1);

3. Again, the point of this type of survey is to measure effective tax rates on income--not losses. Explain to me why excluding consistently across the board loss companies is going to skew the results more than excluding them.

4. What about S corps? Indeed, the fact you ask this suggests you don't know much about our tax system. Here are just a few reasons why they would't be included. S corporations are not taxable as separate entities---they don't pay tax (with very limited exceptions all income is taxed directly to the shareholders). Also, S corporations are not allowed to be publicly traded and can't have more than 75 shareholders (none of whom can be non-residents of the US). Thus, the data would not be publicly available. The top 2000 business entities by income or assets (or the US portion of the top 2,000) would not include any S corporation, I'm sure. Finally, how are you going to include foreign "equivalents" if there are any?

5. Read the study, "Total income taxes is defined to be the sum of all taxes imposed on income by local, provincial or state, national, and foreign governments during the year. It is the total tax provision and includes current taxes as well as the change in net deferred tax liabilities for the year. Pretax income is defined to be worldwide net income before income taxes, minority interest, and extraordinary items". That is, worldwide income and worldwide taxes. The fact that you have not even bothered to read the report suggests your method of critiquing others is seriously flawed.

6. Ditto. See same sentence quoted in #5.

7. Corporate income tax as a percentage of GDP is an entirely different measure. One of the reasons the US corporate income tax as a measure of GDP is low is because the majority of US business income is now earned through business vehicles that are not subject to tax as "C corporations", i.e., corporations that are taxed as separate entities. Most business income earned in the US is through S corporations (see above), partnerships, limited liability companies (LLC's) and sole proprietorships. The percent of gross income earned through C corporations has, in particular, decreased very substantially over the past 30 years. Why do you suppose that is? A big reason is that the business income of C corporations is taxed twice---once at the corporate level and once at the shareholder level. Any person with an ounce of sense is going to do business through a vehicle that will only be taxed at one level, if he can. That explains the very popular use of the limited liability company. Problem is the very largest US companies are stuck with being taxed as separate entities because you have to do that to be publicly listed.

Your comment about dividend taxation, while on its face off point, is actually quite relevant. Since the business income of a US C corporation is taxed twice (at the entity level and the shareholder level), please add 15 percent to the effective rate for US corporations as calculated under the PWC study.


Another Problem

As to the other "problem" of excluding oil companies from the survey, as noted by a few commenters above, see here the run down on the effective tax rates paid by the top US oil companies (all of which would have been excluded from the PWC survey under their methodology):

http://www.tax.com/taxcom/taxblog.nsf/Permalink/MSUN-8DVR7U?OpenDocument

Given the US over-representation globally in this industry, excluding them surely drove down the effective rate as calculated by PWC, not up.


Viv, I "clicked through" to

Viv,

I "clicked through" to the link; I'm assuming you read and (at least) minimally vouch for the accuracy. The writer claimed Exxon had an effective income tax rate of 47%; it not clear whether this is US, ex-US or global; though the the writer does at least by inference suggests the 47% effective income tax rate is US only.

Unfortunately, he is quite mistaken.

The 2009 Exxon 10-K, note 18: http://www.sec.gov/Archives/edgar/data/34088/000119312510042929/d10k.htm...
In 2009 Exxon paid $15.119 billion ($34.777 billion profits) in global income taxes for a 43.4% global effective income tax rate; on US profits of $3.509 billion, Exxon paid ($46) million in income taxes, or an effective US income tax rate (federal and local) of -1.3%.

Your conclusion is exactly wrong as to the impact of including Exxon in the study.

FYI, the profit rate in the US was much lower than ex-US; a cursory review indicated Exxon was "off-shoring" their profits to avoid US income taxes.

I'm not even going to bother to respond to your previous comments as I would guess your reply is similarly accurate.


He is Not Mistaken

Sorry, but "the writer" at Tax.com was *not* mistaken. As he reported, the effective tax rate for Exxon in 2009, 2008 and 2007 was 47 percent, 46 percent and 44 percent, respectively. For that you merely need to scroll down to the bottom of page 92 of Note 18. Sometimes it helps to read the entire thing. It is very clear that both the PWC study (see study itself and my comment in the earlier post regarding same) and the Tax.com data (as well as the financials in Exxon's K-1). All refer to the effective tax rate on *worldwide income*. So, we are comparing apples with apples. Claiming that you "don't know", or can't figure out whether these effective rates are on US income or worldwide income suggests either that you are obfuscating or that you don't know any better.

So, I am exactly right as to the effect of not including Exxon in the study. And, now I suppose you are going to assert that Exxon's financial statements are wrong, too.

Now, you've attempted to cherry pick one year for Exxon's tax filing to try to calculate the effective tax rate on US income only (not good for your credibility in this space). That wasn't the point of PWC survey. Neverthless, Exxon did have a low US effective rate in 2009. It is not unusual for the effective rate to fluctuate from year-to-year based on various accounting adjustments. That's why, in studies like this, as opposed to cherry picking to get a desired result, objective researchers look at multiple years to get an average. If we do that for Exxon (years 2007, 2008; 2009) we get combined before tax income on US operations of $26.44 billion on which they paid federal and state income taxes of $8.94 billion; That's an effective tax rate on US operations only of approximately 33.8 percent. Of course, that doesn't include the significant other US excise etc taxes they incurred during the same period.


Read it Again

Another thing. With respect to either your feigned or actual ignorance as to whether the PWC study calculated effective tax rates on worldwide income or only domestic income, you needed only to read (and comprehend) the following paragraph 2 of Mr. Davis' original article:

"There are all sorts of problems in calculating comparable tax rates across countries, but the tax economists at PWC, many of whom I have worked with, are very qualified to do so. They aggregated total income tax provision plus change in deferred taxes at all levels of government divided by worldwide net income before taxes, minority interest, and extraordinary items."

I think it might be time for you to go back to the Kitchen.


We should raise taxes on multinationals.

When said multinationals behave as this chart shows

http://thinkprogress.org/wp-content/uploads/2011/04/wherejobs.jpg

then we should be doubling their tax burden instead of falling for
the PWC con job and believing that these multinationals will create jobs
in this here country instead of continuing the disaster they've engineered
for our labor market only of we keep lowering their tax rate.

If these multinationals don't like this then they should "go Galt" and move
to, say, Somalia (the model Objectivist state) along with the non-productive
shareholders who make money out of these multinationals outsourcing like there's
no tomorrow.




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