Why are Corporations paying lesser tax in the US?

Published by Ishaan Jain on

Taxes are the most important source of revenue for governments across the world. Most countries follow a progressive taxation system: wherein tax rates increase as a taxable amount or income increases. By this logic, most wealthy individuals have to pay more taxes than those who have fewer incomes. Businesses also have to pay out taxes from their profits.

However, the government at the same time needs to ensure tax rates don’t disincentivize firms to earn profits. Corporate tax rates in the United States have been slashed from 34% to 21% through the Tax Cuts and Jobs Acts. This has been aimed along with many other initiatives in the past like investment tax credit, tax cuts, and fiscal stimulus to unleash entrepreneurial spirits in the economy.

Various countries both from developing and developed worlds are trying to make tax rates competitive to encourage businesses. However, big bracket firms are often accused of finding ways to evade taxes and pay fewer taxes. Perfect markets hardly exist and firms aim to maximize profits in these circumstances. So they often lookout for ways to minimize costs and taxes are an integral component of costs. So is it true that firms often look to minimize taxes.

According to a report by ITEP on corporate taxes in the United States, 379 companies had paid 11% of taxes on average much less against the designated 21%. Similarly, 258 Fortune 500 Companies (companies with the highest net worth) in the United States paid a federal income tax rate at 21% against the designated 35%. It is true that very high rates of tax can disincentive investments in a country and we cannot ignore the fact investments make up nearly 40% of the national incomes in many economies. This brings us to the question, how do firms pay fewer taxes?

Companies look to outsource revenues in those countries where corporate taxes are lower than their home countries. Tax havens are those economic zones where tax rates are quite low and they provide companies a comparative advantage to set up their operations in these havens. They often look to take advantage of tax subsidies available throughout. Companies often look to finance via the stock markets wherein they can avoid taxes to a certain extent. In various countries, specific industries receive tax credits and tax breaks and many of these big firms often lead lobbying efforts to receive various benefits from the government. Tax Deferral schemes are also available and firms are smart enough to take advantage of opportunities.

Tax calculations often play an important role in leading to firms often paying up less than they’re expected to. For example, a mismatch of the calendar in the profit cycle and financial year might go to the firm’s advantage or another way around. Suppose a firm earned a loss of $10 before the end of the financial year and it might have earned profits of $20 later, though the net profit would have been $ 10 in that particular, the company might not be liable to pay taxes as it was operating on losses that year. Thus, the timing of transactions plays a very important role in the determination of revenues.

This has brought us to attention that taxation systems are often biased in the favor of wealthy individuals and big corporations whereas middle-income groups often have to scramble through the taxation process. One new significant provision of the ‘Tax Cut and Jobs Acts’ of the Trump Administration expanded companies’ ability to write off certain investments in equipment and factories as well as intellectual property.

Amazon reduced its tax bill partly through accelerated depreciation deductions primarily on equipment, according to its federal filing. Pharmaceutical and technology companies have long been criticized for leaving profits overseas in countries with little or no corporate taxes, or tax havens like the Cayman Islands, Luxembourg, and the Netherlands. The United States theoretically had one of the highest corporate tax rates in the world, though many firms had an effective rate much lower.

Even previous administrations aimed at making the tax rate competitive. the federal government collected about $230 billion in corporate taxes in 2019, about 6.5 percent of federal revenues in 2019. That’s down from 9% of the federal revenue in 2017, before the passage of the Tax Cuts and Jobs Act (TCJA). The share of federal tax revenues from the corporate income tax has been dropping for decades – it was about one-third in the early 1950s. According to a 2019 Gallup poll, about 7 out of 10 Americans believe corporations are not paying their fair share in federal taxes.

This often has a huge implication for society, it often makes the society vulnerable to class divides where a major proportion of the workforce believes that the taxation system is biased in favor of big corporates. This might stem more inequality and in full-blown up crises like the present one, governments might put themselves at crossroads.

Written By- Ishaan Jain


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