For Many Companies, Low Taxes Key To Profits The tax system is broken, President Obama said during his State of the Union address. Some companies pay no taxes at all, he said, while others pay among the highest tax rates in the world. Obama is only the latest government CEO to call for a fairer system.

For Many Companies, Low Taxes Are Key To Profits

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We can expect to hear a lot about corporate taxes over the next few years. In his State of the Union address, President Obama said the current tax system is broken.

President BARACK OBAMA: Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.

SIMON: Just how broken is the corporate tax system? We asked NPR's Brett Neely to find out.

BRETT NEELY: For an example of what the president was talking about, consider the tax rate paid by two of America's biggest companies: Wal-Mart and General Electric. Wal-Mart paid 34 cents for every dollar of profit it made in the past three years; General Electric paid just 3.6 cents on the dollar. Welcome to the mysterious world of the corporate income tax, says tax expert Len Burman at Syracuse University.

Professor LEN BURMAN (Tax, Syracuse University): There are big companies that consider their tax departments to be profit centers.

NEELY: That's right. Instead of concentrating on making light bulbs, power plants or whatnot, companies use the tax system to boost their profits. How do they do it? Burman says it helps to be large and have lots of overseas subsidiaries.

Mr. BURMAN: They make money by moving income overseas or in different kinds of activities or adjusting their accounting in such a way that they can pay less taxes than their competitors do.

NEELY: Companies say their behavior is driven by the fact that corporate taxes here in the U.S. are among the highest in the world. True, but there are other ways to look at it, says Roberton Williams of the Tax Policy Center in Washington.

Mr. ROBERTON WILLIAMS (Senior Fellow, Tax Policy Center): If you look at the statutory tax rate, the 35 percent tax rate, we're among the highest among industrialized countries. If you look at the effective tax rate, the actual tax rate that companies pay after all the adjustments they make, were much closer to the center of the pack.

NEELY: That's around 25 percent or so. And when companies work aggressively to minimize their U.S. taxes, they leave billions of dollars in profits parked overseas. Economist Len Burman says think about a company that moves its pharmaceutical plant from New Jersey to Ireland for tax purposes. In addition to the loss of American jobs, there are other costs to consider.

Mr. BURMAN: The company might say, well, it's worth incurring the transportation costs, hauling all the medicines back overseas from Ireland to the U.S. because of all the money they save on taxes, but that's just a pure waste.

NEELY: Pharmaceutical and biotech companies pay some of the lowest tax rates around - in the low single digits according to research from New York University. Most retailers - like Wal-Mart - pay the full 35 percent corporate tax rate.

Rachelle Bernstein is the tax counsel for the National Retail Federation.

Ms. RACHELLE BERNSTEIN (Vice President, Tax Counsel, National Retail Federation): Right now, we have the tax code that provides incentives for you to do this type of behavior or that type of behavior. The better way to do it, lower the rates, broaden the base and let businesses make the right decisions without the tax code getting in the way.

NEELY: And the difference is because Congress has showered the pharma and biotech industries with tax write-offs for research and development. Meanwhile, energy companies get tax breaks for exploration. But retailers and many companies that don't do much business overseas tend to get very few write-offs.

President Obama didn't lay out a detailed plan for reforming the corporate tax in his State of the Union speech. He said only that he wants to weed out the loopholes so that overall rates can be lower for everyone while raising the same amount of money. There is a precedent for the kind of tax reform he's proposing. Back in 1986, President Reagan reached a deal with Congress that cleaned out many loopholes.

Syracuse's Len Berman says that deal actually raised corporate taxes quite a bit while lowering individual tax rates.

Mr. BURMAN: There was a turning point when a bunch of corporate CEOs came to Washington and said, well, we really like this proposal even though you're going to hammer our companies because we personally are going to pay a whole lot less of income tax.

NEELY: But in the current fiscal environment, there may not be enough money to buy off CEOs with yet another round of tax cuts.

Brett Neely, NPR News, Washington.

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