The tax cuts signed into law by former President Trump at the end of 2017 were a boon for profitable corporations, according to a new report released by the Government Accountability Office. It finds the average effective federal income tax rate paid by large, profitable corporations fell to 9 percent in the first year that the Trump tax law was in effect, and the share of such companies paying nothing at all rose to 34 percent that year.
This is consistent with our findings that profitable corporations often pay little or nothing. While the corporate minimum tax passed this summer will help, Congress now needs to pass the international corporate minimum tax to further address this problem.
The GAO analysis presents many different types of figures, but all show the Tax Cuts and Jobs Act was an unprecedented gift to corporations. For example, it finds that the share of all corporations paying no federal income taxes was 67 percent in 2018 and had not changed much over the years. But that is not so surprising because that figure includes tiny companies and companies reporting losses, which are not expected to pay income taxes. (The federal corporate income tax is, after all, a tax on profits, not losses).
Much more alarming are the GAO’s conclusions about corporations that are both large (which GAO defines as having at least $10 million in assets) and profitable. The share of these companies paying nothing rose from 22 percent in 2014 to 34 percent in 2018, the first year that the Trump tax law was in effect.
The average effective federal income tax rate paid by these companies (the share of profits they paid in federal income taxes) fell from an already-low 16 percent in 2014 to a nearly rock-bottom-low 9 percent in 2018.
These estimates use corporations’ actual tax liability based on IRS data that is not available to researchers outside the government. Still, the GAO report shows that the “current” tax reported by publicly traded corporations in the filings they submit to the Securities and Exchange Commission (which is what ITEP uses to identify how much specific corporations pay) comes to roughly the same answers.
For example, while GAO found that average effective tax rates based on actual tax liability (using IRS data) fell from 16 percent in 2014 to 9 percent in 2018, an alternative version of those figures calculated using current taxes reported in the public filings are just a bit different, at 17 percent in 2014 and 8 percent in 2018.
Even profitable corporations might pay nothing in one year because they are allowed to carry forward losses from previous years. If the system works as intended, corporations that are profitable in the long run will pay taxes at a reasonable effective rate over time. But the GAO analysis demonstrates that even if the data is adjusted to ignore the deductions that companies can claim for losses, the conclusions do not change very much (in which case the average effective income tax rates increase slightly to 18 percent in 2014 and 10 percent in 2018). This is unsurprising because ITEP has followed corporations that were profitable each year for several years in a row and found that even these fortunate companies often manage to pay nothing over time.
What the GAO report really demonstrates is that no matter how you measure the federal corporate income tax, not much of it has been paid in recent years, and the 2017 tax law has brought it to a new low.
The corporate minimum tax enacted as part of the Inflation Reduction Act will help address this problem. But as ITEP has explained, another key step for Congress is to implement the international corporate minimum tax that the Biden administration negotiated with other governments, and which is designed to address the offshore tax dodging that will otherwise be very difficult to resolve.
ITEP is a non-profit, non-partisan tax policy organization. We conduct rigorous analyses of tax and economic proposals and provide data-driven recommendations to shape equitable and sustainable tax systems. ITEP’s expertise and data uniquely enhance federal, state, and local policy debates by revealing how taxes affect public revenues, people at various levels of income and wealth, and people of different races and ethnicities. www.itep.org