A recent report jointly prepared by Americans for Tax Fairness (ATF) and the Institute for Policy Studies (IPS), working from data gathered for a study by the Institute on Taxation and Economic Policy (ITEP), details how, between 2018 and 2022, at least 35 major profitable corporations paid their executives in compensation more than they paid in federal income tax.

In its revelation of corporate fiscal and tax practices, the ATF-IPS report underscores a trend among some of America’s most profitable enterprises—de minimis contributions to the public fisc by way of corporate income tax.

The issue is exacerbated by tax cuts made under the Tax Cuts and Jobs Act of 2017 (TCJA) that were ostensibly intended to spur investment and economic growth—but have, in the main, chiefly served to reduce the taxes paid by major corporations. The net effect is that, according to an ITEP analysis of annual 10-K reports, the average effective tax rate of most profitable corporations is just a hair above 14%.

Highlighting specific examples, the ATF-IPS report details how high-profile companies like Tesla
TSLA
, T-Mobile and Netflix
NFLX
engaged in tax minimization strategies. The most stark example is Tesla, which paid top executives more than $2.5 billion during the period, paid no taxes on domestic profits, and received a $1 million refund.

In 2023, Tesla reported $15 billion in profits – nearly $8 billion in Q4 alone. The corporate rate of 21% applied to $15 billion is a $3.15 billion hypothetical tax liability. Corporations never pay corporate tax strictly on net income, and Tesla would unquestionably qualify for deductions, but there is a fair amount of daylight between $3 billion and $0.

Wider View

Taking the details of the ATF-IPS report more broadly, the findings cast a spotlight on the pressing issue of economic inequality and the role that policy plays in mitigating or exacerbating the divide.

Viewing taxation through the lens of societal compensation for services rendered offers a compelling perspective on corporate responsibility as pertains to executive pay and tax liability. Executive compensation is ostensibly a remittance for achieving business success and, similarly, taxes can be viewed as a corporation’s dues to society for the services rendered and infrastructure maintained that allow profits to be generated—ranging from the legal system that protects the contractual right to collect payment and intellectual property, to the education of employees and roads that facilitate commerce.

In light of the paychecks awarded to executives, a question arises: if a single executive merits an exorbitant paycheck on the strength of their contributions to the business’ success, how much more is owed to society, whose contributions are more vast and varied still?

Looking Abroad to Look Ahead

By way of comparators, the Organisation for Economic Co-operation and Development (OECD) maintains a database of effective tax rates for states that are signors to the Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

Hypothetically extrapolating the 14% effective corporate tax rate to the economy more generally—in other words, assuming the rest of the economy was able to model their tax practices after the highest earners—would place the United States at the bottom of the G-20. Australia, by comparison, comes in at a 28.5% effective rate – fully double that of the United States.

If fully implemented, the Biden administration’s 2024 budget would raise the corporate tax rate to 28%, but this is slim comfort when the statutory rate appears to have little bearing on the actual rate paid by the highest earning corporations.

The juxtaposition of U.S. corporate tax practices against the backdrop of global tax policy should serve as a clarion call for more robust reform. The U.S. position, as highlighted by the effective corporate tax rate disparity and seeming reversal of corporate tax equity more generally in the years since the TCJA, raises critical questions about competitiveness in the global market.

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