66% Of American Corporations Pay Zero Federal Income Tax.

And that really irritates me. Here are the rest of us, from the the family of four having trouble paying for college education to your neighbor just trying to make ends meet, who have to pick up the slack. Is it any wonder that when you combine the tax breaks for the richest Americans with the lack of income tax from corporations, that our country’s infrastructure is headed down the tubes?

Nearly two-thirds of U.S. companies and 68% of foreign corporations do not pay federal income taxes, according to a congressional report released Tuesday.

The Government Accountability Office (GAO) examined samples of corporate tax returns filed between 1998 and 2005. In that time period, an annual average of 1.3 million U.S. companies and 39,000 foreign companies doing business in the United States paid no income taxes – despite having a combined $2.5 trillion in revenue.

The article says the method for the various companies (who remain unnamed) to escape paying income taxes varies – some of them report $0 income before deducting their expenses and others find deductions equaling more than their reported income. Some of the companies are small businesses, but they say they still end up paying taxes because the income gets moved onto personal tax returns (kind of like individual LLC companies).

“The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes,” Dorgan said in a statement.

I could not agree more, and something needs to be done asap. It is not fair to individual tax payers who have to worry about being audited or getting trapped by the AMT. If I somehow found enough deductions to escape paying income taxes, I am sure that I would have a visit from the government. It’s just not right.

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Comments (34)

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  1. Personal Finance Buzz…

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  2. Jeff says:

    Rather then being upset with this “problem” why not just figure out how to play the system?

  3. Miranda says:

    As an LLC, I have a pass through. However, I pay individual income taxes to not a small amount. So I can see that side of it.

    But, on the other hand, there are plenty of corporations that are not small businesses that are getting huge tax breaks and subsidies. That’s right. On top of enjoying tax breaks, big corporations (Big Oil and Big Ag companies come to mind) get taxpayer money on top of their rather large profits.

    What with preferential tax treatment for those that need it most, and sending a great deal of our taxpayer dollars overseas for military stuff (and not just the Iraq War — the amount of funding we give to other countries’ militaries is ridiculous), it’s no surprise that our health care is #37 in the world and our infrastructure is in dire need of upgrades. Apparently our priorities as a country are somewhere else.

  4. NCN says:

    While it bums me out that individuals have to pay so much in taxes… I don’t think that raising the corporate taxes is the answer! Personally, I don’t think corporations should pay ANY taxes… and I think we should move to a national salex tax or a fair/flat tax. Remember, corporations don’t ‘have’ money… shareholders do. So, if you tax a corporation, you tax the people. Plus, even if you could figure out a way to tax corporations, they would just pass these taxes THROUGH to customers.

  5. david says:

    Playing the system is not the solution Jeff – if no one pays taxes, we all lose. That’s how the system keeps working.

  6. Miranda says:

    Ooops. I meant “preferential tax treatment for those that need it least at the expense of those that need it most.” My ranting got in the way of my articulation…

  7. david says:

    NCN – Not all corporations are public companies with shareholders!

    Miranda – I am afraid our priorities have been elsewhere for, oh, 8 years now.

  8. daveG says:

    1) S Corporations do not by definition pay any income tax. Similar to an LLC, the tax liability gets passed to their shareholders. Roughly 50% of all corporations are S Corps.

    2) The tax rate on US “C” corporations is quite high- 35-40%. Most of Europe taxes their corporations at less than 20%.

  9. david says:

    Sure, the tax rate may be set high, but that doesn’t mean they pay any. As the study says, 2/3 of ALL corporations do not pay taxes. So the rate become irrelevant when you don’t have to pay anything!

  10. Corporations don’t pay taxes. Their workers pay taxes. Their customers pay taxes. Any tax increase on a corporation would be passed along to consumers in the form of higher prices. Either way, you and I are stuck.

    Besides, the top 5 percent of income earners today (many of those corporations via sub-S or LLC) already pay 60 percent of all Federal taxes collected despite having earned only 19 percent of the income. Before the “tax cuts” under the current administration, the top 5 percent only paid 57 percent of all taxes.

    A better number might be to see how much was paid by “C” corporations and compare that to how much they invested back into their respective companies, paid in dividends, or paid in salaries that were then taxed.

  11. david says:

    Their customers pay the corp taxes in the price, but if the corporation does not have to pass that on to the govt, who loses?

  12. Andys says:

    Just goes to show, those with the best liars (I mean lawyers) and accoutants pay the least taxes. Our capitalist system is designed for innovation. Unfortunately the side effect of that is that it also promotes innovation in avoiding taxes…

    However, a lot of these organization provide employment which is far more importnant than the taxes foregone. If the govt pushes too hard (eg haliburton) they will just go overseas to countries with zero taxes.

  13. Eden says:

    Time for me to become an American Corporation!

    But seriously, how do we solve this? Flat tax perhaps?

  14. Just remember that no tax increase ever expanded an economy. Taxes restrict economies.

    What is the ultimate goal? If it’s just to “punish” a corporation, good luck. It won’t happen. If it’s to increase revenues to the Treasury, we have a method for doing that–tax DEcreases. Every time taxes are decreased, revenues to the Treasury increase. “Why” is up for debate, but the numbers bear it out. There is a point where revenues start decreasing but I’ll leave figuring out that tangent to the tax curve up to the Calculus majors in the audience.

    What do we want to accomplish? We certainly don’t want equity of outcome, that would be a socialistic disaster and a big wet towel on competition. If we want equity of opportunity, then we have something to work with.

    I’m very interested in the Fair Tax and have read a great deal on it, pro and con. So far, the pros have the edge, but it will never happen without another American Revolution. Maybe when the top 1% are forced to pay 99% of all taxes and they just move to Belize, we’ll realize the error of a progressive tax.

    What do we want to accomplish? Will this action do that? What will happen if we do this? What will happen if we don’t? What will not happen if we do this? What will not happen if we don’t?

    I think if we all ask these questions and try to come up with answers that will work, we can accomplish anything. But we have to follow what will happen to each dollar as it flows through the system. Everyone needs and should contribute financially to making our country great. We just need to insure that our actions don’t pop up with some unintended consequences (like costs being passed on to those struggling consumers–you and me!).

  15. @Miranda
    Go to the Exxon’s website and pull up their latest annual report to see how much they paid in taxes. You’ll be surprised.

  16. “Their customers pay the corp taxes in the price, but if the corporation does not have to pass that on to the govt, who loses?”

    No one loses. It isn’t a zero sum game.

    Look at it like this, as a percentage of gross income, I paid over 25% in income taxes last year, despite having a mortgage and a boatload of medical expenses.

    The average corporation pays less than 3% of it’s gross income in taxes.

    Businesses are allowed to deduct all expenses before paying taxes. How would you like for your car’s depreciation to be a deduction! Individuals cannot deduct half the things that businesses can deduct. Individuals are essentially taxed on cash flow, whereas businesses are taxed on net income.

    The government comes out far better financially taxing US rather than taxing THEM. It’s just more politically expedient to say otherwise.

    (I’m not trying to hijack this thread–I promise!)

  17. Patrick says:

    yeah, corporations and taxes… It’s a big issue. So are all the loopholes, credits, incentives, kickbacks, etc. It really does come down to the little man footing the bill. Unfortunately, the rich guys are usually the guys in power and can keep it that way through lobbying or creating law. The only way to deal with it is to change it (very difficult for one person), or learn to adapt by starting your own business or renting real estate and taking advantage of these same tax advantages. (if you can’t beat ‘em, join ‘em).

    Of course, that’s the cynic in me talking. The reality is that it is much more complex than that, and certainly beyond the scope of my expertise. It does make for a fun debate though. ;)

  18. @ Ron: “Every time taxes are decreased, revenues to the Treasury increase.”

    Care to cite a reference for this?

    Ben Stein, conservative economist (and actor) seems to disagree:

    “That is, cutting taxes, especially on upper-income Americans, does not generate so much economic activity that it replaces all the lost I.R.S. take and then some. At least those have been the results so far.”


  19. David says:

    I am with Alligators, taxes have gone down for 8 years now…and where has the benefit been for either the rich or the poor? Or even the economy as a whole?

  20. @Alligators

    It’s all right there.

  21. Nope not true. Just see this website for more information:



  22. Jon says:

    Who cares if most corporations don’t pay? The S&P 500 alone accounts for over 70% of the total market cap of US companies! What the bottom 1 million corporations do is pretty much irrelevant. Also, the report is looking at data from just one year (2005). Occasionally corporations pay too much income tax in one year, and then pay nothing the next year. Or they carry forward a loss from a previous year and despite having profits they still don’t pay.

    I have to question the partisanship of a report (or at least the coverage of that report) that makes no mention of salient facts like that, or as others have mentioned, that some types of corporations don’t pay income tax by design.

  23. david says:

    Pretty funny Alligators…

    Jon – Who cares? Seriously? So do you care if none of the rest of us pay taxes either?

  24. [...] spirited discussion follow David’s post on the large percentage of American corporations that pay no federal income taxes.  The biggest point that I would like to make here is that if you’re going to argue with [...]

  25. [...] 66% Of American Corporations Pay Zero Federal Income Tax. @ My Two Dollars [...]

  26. Alvis Jenkins says:

    66% of all corporations pay no income tax!

    Well the only corporations that are required to pay are federal corporations. Tampa Electric Company, Florida Power, Progress Energy, are nonfederal corporations and are not required to pay one cent of federal income tax. Know the Code and you know why only federal entities are the only one’s required to pay over the tax. Not even the American people are required to pay the tax, however they do but it is by “election” to voluntarily comply.

    Alvis Jenkins, Plant City, Florida

  27. Nathan says:

    That 66% means nothing if we’re going to complain about tax avoidance. Most of those companies are not avoiding taxes at all- they are simply not taxable entities (Non-profit, S-corp, LLC, etc).

    Is that unfair? Does that mean they are making an income without paying taxes on it? Absolutely not. Every single individual who receives any kind of compensation, whether in wages or dividends, from the corporation (public or private), will be paying taxes on that income. It simply goes on their personal tax return.

    Does that mean the little guy foots the bill? Again, no. It’s quite the opposite. Here are the numbers:

    * According to data from the IRS, the bottom 50 percent of income earners pay approximately 4 percent of income taxes.
    * The top 25 percent of income earners pay nearly 83 percent of the income tax burden, and the top 10 percent pay 65 percent.
    * The top 1 percent of income earners pay almost 35 percent of all income taxes.
    * The top 400 richest Americans paid 1.58 of total income taxes in 2000.

    (Those are from http://taxesandgrowth.ncpa.org/news/do-the-rich-and-businesses-pay-their-fair-share)

  28. [...] 66% Of American Corporations Pay Zero Federal Income Tax. | My Two … Aug 13, 2008 … And that really irritates me. Here are the rest of us, from the the family of four having trouble paying for college education to your …www.mytwodollars.com [...]

  29. Schmoo says:

    @Jeff: “Rather then being upset with this “problem” why not just figure out how to play the system?”

    You’re a banker, aren’t you?

  30. philmon says:

    Corporations do pay taxes, and the rate is higher than the normal income tax.

    What’s being hidden here by unexplained statistics is that there are lots and lots of startup corporations that aren’t making a profit. In any given year, there could be that many, or certainly enough to pump the number up to what seems to be an outrageous high — corporations who break even or lose money … that year. If you don’t make money, you don’t pay taxes on the money.

    The people who create and run corporations take huge risks. They often lose. But this is how real jobs get created. To discourage buisinesses from starting up and creating more jobs by taking the financial incentive away from the owner is counterproductive. Fewer jobs, smaller tax base, less money for the government.

  31. [...] some evidence supporting the claim. Broad and inacurate generalizations often get dismissed. 66% Of American Corporations Pay Zero Federal Income Tax. __________________ "Just the omission of Jane Austen's books alone would make a fairly [...]

  32. [...] Posted by red55 66% Of American Corporations Pay Zero Federal Income Tax. You cite an article that says that 66% pay zero in taxes and have 2.5 trillion in revenue. For [...]

  33. Great. Add to this the 47% of US households that escape federal taxes. How do I join these groups? sounds like a good deal to me. :)

  34. RRider says:

    This is a bogus story. Most of the “corporations” are tiny LLC personal corps, where the income of the individual is paid out subject to income tax, leaving no earnings in the corporation. Is that a tax dodge? Not hardly. It’s primarily to reduce personal liability exposure.

    Want to test whether this “zero income tax” is true for the real corporations? Go to Google, type in the name of your most hated S&P 500 corporation with the words “income statement.” Look at the net earnings (revenues minus expenses) of that corporation before income taxes — the look at how much state and federal income tax is paid.

    Best of luck in finding a corporation that pays no income tax. There are a few — some actually didn’t make any profit.

    More commonly, you’ll find about 40% of profits are confiscated by corporate income taxes. About 90% of the time, I suspect.

    Of course, you won’t bother doing this little test. You’d rather blindly believe this “zero income tax” drivel. Truth is something that won’t interest you.

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