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Bipartisan support builds for slicing corporate tax rate

Backers of a proposed cut argue it would make U.S. businesses more competitive. Yet corporations have been paying an increasingly smaller share of federal taxes over the past half century.

April 20, 2011|By Jim Puzzanghera, Los Angeles Times
  • Mark Hurd, right, with Oracle chief Larry Ellison, was Hewlett-Packard's CEO for most of last year. The company said it paid $2.2 billion in income taxes -- an effective rate of 20.2%, well below the 35% U.S. corporate tax rate.
Mark Hurd, right, with Oracle chief Larry Ellison, was Hewlett-Packard's… (Paul Buck / EPA )

Reporting from Washington — U.S. corporations have enjoyed a two-year bull run on Wall Street. They are sitting on a record amount of cash and are back to paying bonuses that are the envy of executives around the world.

And the icing on the cake for many of them might be just around the corner: a tax cut that has bipartisan support in Congress.

As part of their budget plan passed last week, House Republicans want to cut the corporate tax rate to 25% from 35%. The Obama administration and many Democrats also are looking to slice the current rate, but not as much.

Supporters of the corporate tax cuts say they're needed to make U.S. companies more competitive with their foreign counterparts, and the administration and House Republicans say they want to offset rate cuts by eliminating unspecified loopholes and tax breaks.

Yet despite complaints that they fork over too much money to Washington, U.S. corporations have been paying an increasingly smaller share of federal taxes over the last half-century.

Nearly a third of all federal taxes came from corporations in 1952. Last year, they paid just 8.9%, according to government figures. Loopholes, credits and the ability to shelter earnings abroad have helped many of the country's biggest companies pay far less than the corporate tax rate set into U.S. law.

Take Hewlett-Packard Co., which reported $11 billion in pre-tax earnings in 2010. Its chief executive for most of the year, Mark Hurd, earned $24 million in salary and other compensation, and three other executives earned more than $9 million apiece.

The company said it paid $2.2 billion in income taxes — a rate of 20.2%, well below the 35% U.S. rate.

HP is hardly alone. Apple Inc.'s effective tax rate last year was 24%, Google Inc.'s was 21% and General Electric Co.'s was 7.4%, according to corporate filings.

"Something's wrong with the system," said Rep. Jim McDermott (D-Wash.), a leading Democrat on the tax-writing House Ways and Means Committee. "And everyone knows that."

Timothy E. Guertin, CEO of Varian Medical Systems Inc. in Palo Alto, said his company's effective tax rate in 2010 was 31% because Varian does most of its manufacturing of advanced medical equipment such as X-ray tubes and flat-panel imagers in the U.S.

"I haven't manipulated the system quite as much as some people have," Guertin said. "When I look at the tax rates of certain companies, it's very clear to me they have tax rates we don't have. In my view, you want a … fairer playing field than what we have today."

Business groups said that will happen if the government eliminates some of the dozens of tax breaks and uses the savings to reduce the overall rate. The corporate tax code is filled with breaks, including credits for energy production and conservation, accelerated depreciation for machinery purchases, and exemptions for interest on airport and dock construction bonds.

The Senate Budget Committee estimates that corporate tax breaks will total about $124 billion this year. Overall, companies will pay $191 billion in U.S. corporate income taxes in 2010.

"The ones who would benefit most are in some sense the ones who have been playing by the rules. They aren't as good at finding lobbyists," said Austan Goolsbee, chairman of the White House Council of Economic Advisors.

Neither House Republicans nor the White House has said which tax breaks they would ax so their plans remain "revenue neutral" and don't add to the budget deficit. They've been clear they don't want to eliminate all of them. In fact, the Obama administration has pushed for increasing the corporate research and development tax credit.

Eliminating any tax breaks will be difficult because corporate lobbyists are expected to fight hard to keep breaks that benefit their companies. But the push begun by the Obama administration for revenue-neutral corporate tax reform hasn't pleased some liberals. They want the loopholes removed, but want the savings to go toward reducing the budget deficit, not the corporate tax rate.

"We have this big fiscal problem, and if there's one thing the public might support it's getting rid of a lot of these business subsidies that are almost entirely a waste," said Robert McIntyre, director of Citizens for Tax Justice. "Otherwise the alternatives are cutting Medicare, or Social Security or the national parks."

The top tax rate for corporations has dropped from 52% in 1952 to 35% today. That has led corporate taxes as a share of U.S. economic output to decrease from 6.1% in 1952 to 1.3% last year.

But tax experts said another reason for the decline is the dramatic expansion over the last 30 years of business owners' paying taxes on their individual returns. That has shifted hundreds of billions of dollars from the corporate side of the tax ledger.

Still, there's broad agreement that a host of deductions and special breaks — many added after the last major corporate tax overhaul in 1986 — have allowed some companies to significantly reduce their tax rates.

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