Friday, March 29, 2013

The Washington Post Does Not Understand Effective Tax Rates

Darla Cameron and Jia Lynn Yang want to report on how US multinationals are shifting profits to foreign tax havens but their key statistic is the ratio of US tax expenses to worldwide profits:
A Washington Post analysis of data compiled by Capital IQ found that in the late 1960s and early 1970s, companies in the current Dow 30 routinely cited U.S. federal tax expenses that were up to half of their worldwide profits. Now, most are reporting less than half that amount. The reason? The slow but steady transformation of the American multinational after years of globalization. Companies now enjoy an unprecedented ability to move their capital around the world, and the corporate tax code has not kept up with the changes. Across industries, virtually every major U.S. firm has seen the rate of its tax contributions plummet, at least according to publicly available financial statements.
Let’s consider two very different situations. Company A has mostly US activities but has shifted its intangible assets to a Cayman affiliate. If half of its profits are attributable to intangible assets, then not only has its US tax expenses dropped below 20%, its effective tax rate is also below 20%. Company B does not create much in the way of intangible profits but has half of its activity in high tax Europe. Its effective tax rate – calculated as worldwide tax obligations relative to worldwide income – is still high even though its US taxes are likely less than 20% of worldwide profits. Company A is involved with the kind of transfer pricing manipulation that the press should be complaining about. Company B is not. But this statistic cannot distinguish between the two very different situations.


Nateo said...

Forgive my ignorance, but isn't a lot of the reason corporations don't pay taxes on foreign profits due to reciprocal tax agreements and international treaties? The WaPo article didn't mention that at all.

Unknown said...

Your figures are in error. The taxes for both Clinton and Bush were calculated using the maximum rate for that selected income. For instance the Clinton 1999 tax rate on 30K was 28%, which is what they used to get the 8400 figure. However taxes are not calculated that way. The first 25K of income would have been 2013 tax brackets at the lower 15% bracket first, thus yielding a much lower figure than what you show.I am not arguing that Bush doesn't have lower taxes. He certainly does. Of course he obtained his lower tax brackets by using deficit spending and increasing the national debt. Add back in the interest payments we'll be making and I bet Bush actually cost taxpayers far more than Clinton ever did.