TOPICS > Economy

Report: Many Companies Able to Avoid Paying U.S. Income Taxes

BY Admin  August 12, 2008 at 6:00 PM EDT

Money; file photo

The study by the Government Accountability Office revealed that 72 percent of foreign-owned corporations and 55 percent of domestic ones went at least a year without owing taxes.

Small companies were much more likely to pay no taxes than bigger ones, according to Congressional Quarterly. Even so, more than 3,500 large domestic corporations — with more than $250 million in assets or $50 million in gross receipts — did not pay taxes in 2005.

About 80 percent of the companies studied paid no taxes because they didn’t generate any profit after expenses, the report stated. Money-losing companies can legitimately pay no taxes, and others can use provisions of the tax code to lower or eliminate their liability.

“It’s shameful that so many corporations make big profits and pay nothing to support our country,” said Sen. Byron Dorgan, D-N.D., who commissioned the study with Sen. Carl Levin, D-Mich.

Tax expert Chris Edwards of the libertarian Cato Institute said increasing numbers of limited liability corporations and so-called “S” corporations pay taxes under individual tax codes.

“Half of all business income in the United States now ends up going through the individual tax code,” he told the Associated Press.

The study did not investigate why corporations weren’t paying federal income taxes or corporate taxes and it did not identify any corporations by name. It said companies may escape paying such taxes due to operating losses or because of tax credits.

More than 38,000 foreign corporations had no tax liability in 2005 and 1.2 million U.S. companies paid no income tax, the GAO said. Combined, the companies had $2.5 trillion in sales.

With this year’s federal budget deficit running close to the $413 billion record set in 2004 and next year’s projected deficit to set a record at $486 billion, lawmakers are looking to plug holes in the tax code and generate more revenue.

Dorgan called the report “a shocking indictment of the current tax system,” in a statement. Levin said it made clear that “too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”

Eric Toder, a senior fellow at the Urban Institute, said the vast majority of corporations are small businesses and start-ups that have adopted a corporate structure that allows them to lower their tax bills, according to The Washington Post.

“I’m not trying to imply that there aren’t tax-compliance issues among small corporations,” he said. “But when you are talking about businesses that size, I would suspect the norm would be to not pay taxes, and there’s nothing nefarious about that.”

The GAO said it analyzed data from the Internal Revenue Service, examining samples of corporate returns. For 2005, for example, it reviewed 110,003 tax returns from among more than 1.2 million corporations doing business in the U.S.

Dorgan and Levin have complained about companies abusing transfer prices — amounts charged on transactions between companies in a group, such as a parent and subsidiary. In some cases, multinational companies can manipulate transfer prices to shift income from higher to lower tax jurisdictions, cutting their tax liabilities. The GAO did not suggest which companies might be doing this.

“It’s time for the big corporations to pay their fair share,” Dorgan said.