Why do large corporations manage to save significantly on their taxes?
Profit Shifting: Large corporations often allocate revenue to subsidiaries in low-tax jurisdictions, a practice known as profit shifting, which reduces their taxable income in higher-tax countries.
Transfer Pricing: Companies manipulate the pricing of goods and services between their own subsidiaries to shift profits to lower-tax locations, a technique called transfer pricing.
Tax Incentives and Credits: Governments provide various tax incentives and credits, such as deductions for research and development, investments, or specific operational activities, which corporations utilize to reduce their tax burden.
Tax Planning and Professionals: Big companies employ teams of tax professionals to navigate complex tax regulations and engage in strategic tax planning to minimize their tax obligations.
Lobbying for Favorable Policies: Large corporations often lobby governments for more favorable tax policies, which can further reduce their tax liabilities.
Aggressive Tax Avoidance: While legal, some corporations engage in aggressive tax avoidance strategies that raise ethical questions about their tax practices.
Mergers and Acquisitions: Corporate mergers and acquisitions can provide opportunities for tax savings through structures designed to exploit tax benefits.
Declining Corporate Tax Revenue: Corporate income tax receipts in the U.S.
have fallen from 19% of GDP in 2015 to 1% of GDP in 2020, well below the OECD average of nearly 3%.
Low Effective Tax Rates: In 2018, U.S.
corporations paid an average effective tax rate of only 7.8%, significantly lower than the statutory corporate tax rate.
Fortune 100 Companies Paying Little or No Taxes: A study found that at least 55 of the Fortune 100 companies used various loopholes to pay zero federal income tax in 2020.
Tax Refunds for Profitable Corporations: Some profitable corporations, such as Dow Inc., reported tax refunds despite having billions in earnings.
Minimum Tax on Large Corporations: The Inflation Reduction Act of 2022 introduced a 15% minimum tax on corporations with average annual earnings of $1 billion or more, aiming to ensure they pay taxes on their profits.
Profit Shifting Practices: In 2010, U.S.-based companies began shifting around 50% of their profits to low-tax jurisdictions, a practice that has remained elevated ever since.
Surtax on Wealthy Individuals: The latest tax plan proposed by the Biden administration includes a surtax on the wealthiest Americans, in addition to the minimum tax on large corporations.
Billionaires Avoiding Taxes: Wealthy individuals, including billionaires, have been found to use various strategies, such as the Roth IRA, to avoid paying taxes on a significant scale.
Deductions from Capital Investments: Some companies, like FedEx, have paid very little in taxes due to large deductions from capital expenditures.
Cash Hoarding by Corporations: U.S.
non-financial corporations are sitting on over $4 trillion in cash, up from $2.7 trillion a decade ago, which can be used to avoid taxes.
Shift in Corporate Priorities: In the 1970s, large corporations allocated 30 cents toward dividend payments and stock buybacks for every dollar of capital expenditure, compared to 201-18 when the ratio shifted to enriching shareholders.
Race to the Bottom in Tax Jurisdictions: Tax jurisdictions themselves are under competitive pressure to reduce corporate tax rates, leading to a "race to the bottom" in terms of tax policies.
Ethical Concerns Surrounding Tax Avoidance: While legal, the extensive use of tax avoidance strategies by large corporations has raised ethical questions about their social responsibility and the impact on society.