The other day, a reporter asked a politician how to collect more money with lower taxes. Of course, there is a very simple answer to this childish riddle. With 95% of the worlds population outside of the United States, there must be economic development in the USA to bring companies, jobs, and capital into your jurisdiction. Whether you are President Obama, Paul Ryan, Joe Biden, or Mitt Romney, there are eternal truths about tax policy that can make or break a government budget, businesses, and families. Just like states compete for new business, so should the United States. With the USA corporate tax rates being the highest in the world, this reduces the number of businesses and people doing business within the US jurisdiction.

As the old sage says, “60% of nothing is still nothing”. So, if you raise taxes, less people participate. Even with higher rates, you get less. But with competitive rates, you always get more. Examples are Walmart, Target, Amazon or other. Water always flows to where there is the least friction, and the same holds true for businesses.

In todays global marketplace, there are businesses from around the world running to special jurisdictions to establish headquarters or offices within these economic hubs of freedom. Thus, money and tax dollars flow freely where the fees are fair, reasonable and are for mutual benefit of the business and society.

Everyone on both sides of the political spectrum says that corporate tax reform is a priority. But no one in Washington seems ready to make the tough choices necessary to develop a system that forces multinational corporations to pay their fair share without hurting US competitiveness in the world markets. Overtax multinational corporations and they’ll move their operations overseas; under-tax and you’ll reduce revenue that is sorely needed by the US government.

As part of the ongoing debate and investigation of the US corporate tax system, the U.S. House Committee on Ways and Means is hearing testimony from tax experts on the US tax system and alternatives.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of corporate tax reform issues in Advisor’s Journal, see Obama’s Blue Ribbon Debt Commission Proposes Complete Overhaul of the Tax Code (CC 10-95).

For in-depth analysis of US Corporate Tax, see Advisor’s Main Library: A – The Corporate Income Tax.

Why is this Topic Important to Wealth Managers? Presents discussion on Federal corporate income tax reform as noted in the President’s State of the Union address.  Provides an overview of the current corporate tax situation from a macroeconomic level. 

President Obama recently targeted corporate tax rates in his State of the Union address.  “It makes no sense, and it has to change”. “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. It can be done.”

Here’s why some politicians in Washington are calling for reform:

Although America has one of the highest maximum corporate tax rates throughout industrialized nations, many large corporations pay only a fraction of the maximum rate.  In a study by a New York University Professor, the data shows that a great number of public companies are paying around half, or even less, than the maximum corporate rate. 

Below is a chart adapted from the study showing just how low the effective tax rates are for some major corporations (information compiled from over 7000 publicly traded companies): [1]

Industry                                    No of Companies         Effective Federal Rate

Electric Utilities                         24                                 33.8%

Retail Automotive                       15                                 32.7

Trucking                                    33                                 30.9

Railroad                                    15                                 27.4

Tobacco                                    12                                 26

Securities brokerage                  30                                 20.5

Banking                                    481                               17.5

Petroleum producing                  198                               11.3

Medical supplies                        264                               11.2

Computer software/services        333                               10.1

Internet                                     239                               5.9

Drug                                         337                               5.6

Biotechnology                            121                               4.5

Further evidence of low corporate taxes actually paid is shown rates paid by companies compiling the Standard & Poor’s 500 stock index.  Of the 500 companies, “115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years”, according to an analysis by The New York Times. [2]   “Thirty-nine of those companies paid a rate less than 10 percent.”   

The Times also recently spotlighted Carnival Cruises as paying a mere 1.1% total tax over the last five years on $11.3 billion in profits. [3]   The Publication cites other low tax paying corporations including, Boeing which paid a total tax rate of just 4.5 percent over the last 5 years;  Southwest Airlines paid 6.3 percent; Yahoo 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent. [4]

Some tax professionals attribute the significant tax breaks to companies who have operations offshore in low tax jurisdictions or make heavy tax deductible expenditures.  Other companies however, “simply seems to have become expert at avoiding taxes.”   

The Times notes, “G.E. is so good at avoiding taxes that some people consider its tax department to be the best in the world, even better than any law firm’s”. [5]

Tomorrow’s blogticle will continue our discussion on additional changes and hot topics in 2011. 

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

[1] Professor Aswath Damodaran. NYU.  http://www.nytimes.com/imagepages/2011/01/28/us/politics/28tax-graphic.html?ref=politics. 

[2]David Leonhardt.  The Paradox of Corporate Taxes.  New York Times.  2/1/2011.  http://www.nytimes.com/2011/02/02/business/economy/02leonhardt.html?src=me.  Last Accessed 2/1/2011. 

[3] Id. 

[4] Id.

[5] Id.