President Joe Biden wants to pay for his proposed $2.3 trillion infrastructure bill by raising the corporate tax rate to 28% from 21%. But if experience is any guide, companies are unlikely to pay anywhere near the higher rate because they are experts at dancing around the tax code. That's why Congress's first priority should be to close the loopholes that allow companies to treat tax rates as an opening bid rather than a firm demand.
Corporate taxes were once a significant source of revenue for the federal government. But they accounted for just 6% of federal receipts last year, a fraction of individual income and social insurance taxes. "Our tax revenue are already at their lowest levels in generations," Treasury Secretary Janet Yellen told reporters earlier this month. "By choosing to compete on taxes, we've neglected to compete on the skill of our workers and the strength of our infrastructure. It's a self-defeating competition."
I wanted to see how much companies pay in taxes, so I dug up all the details I could find, which was income and tax data for nearly 800 public companies going back to 2011. Importantly, there were two different tax regimes during the period: from 2011 to 2017, the corporate tax rate was 35%; beginning in 2018, it fell to 21%. What I found was that the two periods were starkly different.
In the first period, roughly two-thirds of the companies paid taxes at a lower rate than the corporate one. As a group, they handed the Treasury between 26% and 28% of their income during each of those seven years, well below the advertised rate of 35%. In 2011, that gap cost the government about $37 billion. As corporate earnings grew in subsequent years, so did the gap, climbing to $59 billion by 2017.
When the corporate tax rate dipped to 21% in the second period, however, the rate at which the companies paid taxes did not decline proportionately. Instead, the gap between their actual tax rate and the corporate tax rate narrowed to less than 3 percentage points in each of the years between 2018 and 2020, down from around 8 percentage points in the preceding period. The percentage of companies that paid taxes at a lower rate than the corporate tax rate also declined to around 50%.
As a result, while tax revenue declined by about $44 billion in 2018 from a year earlier, it turned out to be a smaller dip than the one implied by the sharp drop in the tax rate. In percentage terms, it was a decline of 18% from 2017, even though the tax rate shrank more than twice that. Consequently, the government could have made up much of the difference in subsequent years simply by enforcing the new 21% tax rate. And assuming that were possible, it wouldn't take much of a bump in the corporate tax rate to make up the rest.
That makes intuitive sense. Companies can only get away with paying so little, so the lower the tax rate, the more of it they're likely to pay. Similarly, the higher the tax rate, the greater the room and incentive to skirt it. Raising the tax rate without closing the loopholes, therefore, may not generate meaningfully more revenue than keeping the tax rate where it is, or raising it modestly, and making sure companies pay it. And all things equal, the latter approach is preferable because it would result in a simpler and more transparent tax system as well as the better optics of a lower headline tax rate.
Rather than deal with the loopholes head on, Biden has proposed a minimum tax of 15% to limit the wiggle room of the most profitable companies, those with profits of $2 billion or more. The problem is it's not likely to help much. Of the companies I looked at, 83 met that threshold last year, and only about a fifth of them paid less than 15% in taxes in any year since 2018. If Biden's minimum tax had been in effect during the period, it would have generated an additional $18 billion in revenue over the last three years, compared with the $52 billion that was lost to all the companies that paid less than 21% during the same time.
Ultimately, taxpayers — individuals and companies alike — are entitled to pay as little tax as possible. The difference is that big corporations have unlimited resources to cruise around the tax code looking for ways to lower their tax bill. Raising the corporate tax rate is the easy part. Given all the holes in the tax code, Congress and the White House should give more thought to whether they can collect.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.