MSN Money: Cut corporate taxes? First figure out what they are
media mentionIt’s pretty clear that US businesses are socked more than their global peers, but just how much they actually pay is quite murky.
By Jonathan Berr Fri 10:58 AM
Democrats and Republicans, who agree on very little anymore, are united in their belief that the top rate for U.S. business taxes needs to come down. Whether this will spur efforts to reform the tax code as Congress debates President Obama’s proposed $3.7 trillion federal budget remains to be seen.
U.S. corporations pay a marginal tax rate of 35%, the highest in the world, and that puts the country at a competitive disadvantage, according to the U.S. Chamber of Commerce and others. Obama advocates slashing it to 28%.
The big problem with the marginal tax rate figure is that it can be misleading. As Fortune’s Allan Sloan recently noted, the stated rate “has more holes than Swiss cheese,” thanks to a plethora of loopholes.
A 2011 report by the Citizens for Tax Justice and the Institute on Taxation and Economic Policy found that the average effective corporate tax rate — the tax that was actually paid — for the 280 companies it studied was 17.3%. According to the Chamber of Commerce, that effective rate is one of the highest in the world and averages 7.6 percentage points above that of global competitors.
This raises the question of how much companies actually pay in taxes. According to Sloan, a veteran business journalist, the answer isn’t as clear-cut as it ought to be. He urges readers to be skeptical of reports of companies that pay low taxes because these stories are based on the so-called current portion of taxes due.
Though some people use that figure as a proxy for federal taxes, it’s calculated for the purposes of earnings and has “no connection whatsoever with what a company actually forks over to the IRS for a given year,” writes Sloan. The “taxes paid” figure is no help either because it lumps local, state and federal taxes together.
At the request of Sloan and Bloomberg View, the Financial Accounting Foundation (FAF), an independent organization tasked with improving financial accounting and reporting standards, is undertaking a review of the rules companies have to follow for disclosing the taxes they pay. Such a standard seems to be a simple solution to the problem.
Until then, investors should view attempts at reforming the tax code with skepticism unless it’s clear what is being “reformed.”