American companies have been subject to Trump tax law for three full years, 2018-2020, and the numbers are in. While proponents tout the law as real tax reform, the data shows that our system of taxing corporate profits is not working. As lawmakers scrutinize how trillions of dollars in investments can be paid for in an upcoming reconciliation package, part of the answer is for Congress to close the special breaks and loopholes that allow companies to evade taxes so easily.
According to publicly available information, 39 companies belonging to either the S&P 500 or the Fortune 500 told investors on their profit statements that they were profitable every year from 2018 to 2020. However, they also said they did not pay federal income taxes during that period.
Some paid federal income tax in one or two of those years, but their income tax liability over the entire three year period was $ 0 – or negative, meaning they received a refund from the IRS.
For example, DISH Network paid $ 44 million in 2018 and $ 173 million in 2019. However, in 2020 it reported a minus $ 231 million tax liability, meaning the IRS paid the company a refund of $ 231 million for taxes it had paid in previous years. Because this refund was higher than the amounts paid by DISH in the other two years, the company’s total tax liability for 2018-2020 was less than zero. Federal tax laws allowed this, although DISH posted profits of $ 6.6 billion in each of those years.
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Of the 39 corporations, T-Mobile posted the largest profits and still avoided paying taxes. The company posted $ 11.5 billion in profits from 2018 to 2020 on a tax liability of minus $ 80 million, which means it has refunded $ 80 million from the IRS for that three-year period.
These numbers come from filings that public companies file annually with the Securities and Exchange Commission (SEC). In April, we used the information from these public filings to identify 55 companies that were profitable in 2020 but didn’t pay federal income taxes for that year. President Biden rightly cited this result as a reason to reform our corporate tax laws to increase revenue.
After we published this study, some argued that many companies that didn’t pay anything in 2020 would eventually pay taxes if they were truly profitable over time. But our new study shows that 39 companies paid nothing over a three-year period, even though they posted profits for each of those three years.
And that’s not all. Many companies that paid some taxes from 2018 to 2020 contributed very little to the Treasury Department relative to their enormous profits. Our analysis of corporate filings shows that 73 companies were profitable in each of those years but paid an effective rate that was less than half the statutory corporate tax rate of 21 percent set under the Trump Tax Act.
Amazon, for example, reported profits of $ 43.4 billion from 2018 to 2020 and paid an effective federal tax rate of just 4.3 percent, meaning it paid only 4.3 percent of those staggering profits in federal corporate taxes during that time.
In addition to Amazon, many other well-known names like Bank of America, Deere, Domino’s Pizza, Etsy, General Motors, Honeywell, Molson Coors, Motorola, Netflix, Nike, Verizon, Walt Disney, Whirlpool, and Xerox paid effective federal income tax rates in the single digits.
Most Americans would say that something is wrong when the corporate tax rate is 21 percent, but profitable companies like Amazon and Bank of America only pay about 4 percent of their profits in federal income taxes. But that is exactly what has happened since the law came into effect because it used all sorts of corporate tax avoidance strategies in order to minimize payments to the IRS.
Fortunately, there are many solutions before Congress. Some of President Biden’s proposals would close the cracks and loopholes that reward companies for using complicated accounting gimmicks to claim their profits are made in tax havens like Bermuda, the Cayman Islands and Ireland. These proposals would be effective on their own and would be even stronger if the developing international agreement setting corporate tax rates of no less than 15 percent came into force.
Another proposal from the Biden government would increase revenue by reversing years of cuts in the IRS budget for tax enforcement. Many of the tax avoidance strategies used by corporations are clearly legal applications of the regulations enacted by Congress, but some fall into a legal gray area and could be blocked by an IRS with the resources to seriously evade corporate tax.
The Biden government is also proposing a fallback provision to impose a minimum tax on companies that will ensure they pay at least 15 percent of the profits they report to shareholders around the world. This is probably very much in line with how most Americans think our tax system should work. If fairness means anything, it must mean that companies reporting huge profits to their investors should pay their share to support the society that makes those profits possible. The Biden Plan would certainly be an important step towards that goal.