Trump lower company tax charges to 21%, however many firms paid far much less

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Trump cut corporate tax rates to 21%, but many companies paid far less

Two years ago, President Donald Trump’s tax cuts lowered corporate rates from 35% to 21%, and the big gift to the economy was one of the reasons the tax bill was not popular.

Here’s another reason to complain: Many companies don’t even pay the lower rate.

In 2018, the first year under the new law, 379 profitable Fortune 500 companies paid an average effective tax rate of 11.3%, according to a study by the Institute on Taxation and Economic Policy, a progressive think tank in Washington.

This is the lowest rate since the institute began researching the subject in 1984. In its previous study, which captured the results from 2008 to 2015, large, profitable companies paid an average of 21.2% – higher than in 2018, however far lower than the maximum of 35%.

“Tax avoidance appears to be as much of an issue under the new tax system as it was before the Trump tax bill came into effect,” wrote Matthew Gardner, senior fellow and co-author of the report, last month. “This means that in 2018, these companies protected almost half of their US income from federal income tax taxes.”

For 91 companies, almost a quarter of those surveyed, the federal tax burden for 2018 was zero or they received a tax break, according to the group. The list includes heavyweights like Amazon, Chevron, and Netflix. As a group, the 91 companies combined generated pre-tax profits of $ 101 billion.

The report identified several Dallas-Fort Worth companies that did not pay federal income tax in year 18, including American Airlines, McKesson Corp. and Pioneer Natural Resources.

The US reduced corporate taxation by $ 92 billion in 2018, a 31% decrease in one year. Since 1934, only the Great Recession had fallen steeper in this respect.

“Such a sharp year-over-year decline in corporate tax revenue is unprecedented in a period of economic growth,” wrote the Peter Peterson Foundation.

Last fall, the Congressional Budget Office updated its corporate tax forecast, suggesting the tax cuts would cost much more than expected. Compared to projections under the law, corporate income tax revenue is projected to decline by $ 750 billion over 10 years, much more than originally thought.

In addition to lower tax rates, companies also have other options to offset tax burdens. This includes large investments in capital projects and research, as well as paying CEOs with stock options. Past red ink companies like American Airlines can also claim past losses as deductions in profitable years.

“All the indications are that these companies are using perfectly legal mechanisms,” Gardner said. “They’re taking advantage of the tax breaks they campaigned for and which Congress made available.”

The new tax law allowed companies to write off the cost of most capital investments immediately. Using accelerated depreciation and other incentives to lower taxes shouldn’t lead to wrongdoing or immorality, said Stephen Lusch, who teaches bookkeeping and tax at Texas Christian University.

“You cannot assume that someone is trying to cheat the helmsman,” said Lusch. “There are a number of strategies for lowering taxes, and some are risk-free.”

How a company cuts taxes can tell. Lusch said he was uncomfortable with multinational companies moving profits to other countries just to cut interest rates. Still, it is encouraged by those who take advantage of tax breaks to invest in assets.

“As an investor, I want to know why a company has low taxes,” said Lusch.

It’s too early to say much about the impact of tax changes, including pauses in repatriating foreign profits. However, the surge in share buybacks is undeniable.

In 2018, the S&P 500 companies spent $ 806 billion buying their own stocks – $ 287 billion more than the previous year. That’s 55% more buybacks after the corporate tax cuts.

Perhaps that money was better used, some would argue. However, the boost in buybacks was not a declared motive for the tax cuts, even if many had predicted it would happen.

The aim was to stimulate the economy in general, including by encouraging companies to invest in new projects. Initially, corporate investment spiked and rose over 6% in the two quarters following the tax cuts.

However, this growth was not sustained. In the second quarter of 2019, private non-residential fixed investments rose by only 1.4% after 2.6% in the previous quarter.

“The more aggressive predictions of a change in economic growth at sea level have not come true,” said Gardner.

A key explanation for the lower tax rate companies pay is that many write off past losses. More companies are going public earlier and getting more volatile results, said Russ Hamilton, who teaches bookkeeping and tax at Southern Methodist University.

He is working with Lusch from the TCU on a paper that found that the decline in corporate taxes for domestic companies was almost entirely related to the increase in losses and the use of those deductions.

“The question is whether the law should require them to pay more,” said Hamilton.

Many tax breaks can contribute to broader growth. He pointed to Amazon, one of the most valuable companies in the world. According to the tax rate study, Amazon had a discount of $ 129 million in 18, despite making nearly $ 11 billion in pre-tax profit.

Amazon invested over $ 43 billion in capital projects over a five-year period.

“Amazon bought planes and built warehouses and hired a lot of people,” said Hamilton. “What would have happened if they just gave the government more money?”

Texas Instruments' effective tax rate fell more than half after Congress cut corporate taxes in late 2017, and the Dallas company used the savings to fuel share buybacks and dividends.