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Obama Plans To Cut Corporate Taxes, But How Much Do Companies Really Pay?

Today, President Obama will propose cutting the corporate tax rate from 35 percent to 28 percent—a move that has reportedly been in the works for a couple of years, but which is also timed to increase the president’s reelection prospects. Business groups and Republicans frequently complain that the U.S. corporate tax rate is too high, but others say that the many loopholes and deductions in the tax code tend to keep the effective rate well below the statutory rate. How much do American corporations actually pay?

A 2005 study on corporate tax avoidance suggests that, over the long run, many corporations pay taxes well below the 35 percent statutory rate. The study’s authors analyzed nearly 2,000 firms and found that 437 of them (about one-fifth of the sample) paid an effective tax rate of less than 20 percent over a ten-year period—all during a time when the statutory rate was 35 percent. (The authors defined effective rates as “the ratio of cash taxes paid to pretax financial accounting income.”) If these low-paying firms had been paying their taxes at the 35 percent rate over that period, they would have owed, in aggregate, over $450 billion dollars. “Instead,” the authors write, “these firms received tax refunds in aggregate totaling $205 billion, according to the cash tax paid number disclosed in their financial statements.” On average, the ten-year rate for all firms surveyed was just under 30 percent. That number may seem low, but the authors warn against seeing it as evidence of wrongdoing: “It is important to emphasize that our measure of tax avoidance does not imply that firms are engaging in anything improper. There are numerous provisions in the tax code that allow or encourage firms to reduce their taxes.”