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Tax burden as a Share of Corporate Profits at Lowest in Decades for Dow 30

by Jordan Schneider

A new analysis from the Washington Post reveals that most of the 30 companies listed in the Dow industrial average have seen their U.S. tax burdens as a share of corporate profits drop by half since the 1960s and 1970s. For example, Proctor & Gamble, the world’s largest maker of consumer products, paid federal taxes equivalent to about 40 of profits in 1969; that share has dropped to about 15 percent today. Most of the other companies in the Dow 30 have seen similar drops, according to the report.

On the surface, this decline in U.S. corporate tax burdens can be partly explained by a drop in the overall U.S. corporate tax rate—which was 48 percent in 1971 and is 35 percent today—and by the fact that some of these companies have significantly expanded operations outside the United States. (Fourteen of those analyzed in the Washington Post report earned more profits abroad than in the U.S.)

But that’s not the whole story. Many of these companies have become extremely adept at exploiting loopholes in the federal tax code that allow them to avoid paying U.S. taxes by shifting income—even income earned within our borders—to financial institutions in offshore tax havens, such as Bermuda, Luxemburg or the Cayman Islands, which have little or no income taxes. Some of these schemes can even make income earned in the U.S. appear that is “earned” abroad, or transform income that would normally be subject to U.S. taxation into tax-exempt income. Using these strategies, Microsoft moved about half of all profits earned from U.S. retail sales between 2009 and 2011 offshore, helping the company avoid about $4.5 billion in U.S. taxes, according to the Washington Post article.

The cumulative losses attributable to tax haven abuse by corporations and individuals are about $150 billion each year, according to tax experts. Those lost revenues mean that the U.S. government and ordinary taxpayers are picking up the tab—in the form of increased national debt, higher individual income taxes, or forgone public services. (Check out U.S. PIRG Education Fund’s fact sheet on some public services and infrastructure projects the U.S. could pay for with the $150 billion lost to offshore tax havens.)

What’s worse, because of linkages between federal and state tax codes, those federal losses translate to about $40 billion in automatic revenue losses to state budgets, according to our own estimates.

Tax revenues support our nation’s infrastructure and critical public services—schools, roads and bridges, police and fire services and courts. Large U.S. multinational firms need these systems to hire an educated workforce, transport their goods to market, and protect their property. However, with discussions now underway about an overhaul to the federal tax code, lobbyists from these companies have swarmed Capitol Hill to argue for extending and expanding many of these extremely damaging tax loopholes.

Reform of the federal tax code is long overdue, but the last thing we need is to give more leeway to powerful companies to continue to exploit the basic fairness of our tax code.