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April 26, 2019

How Are Corporations Paying No Taxes?

Some billion-dollar giants are paying $0, while small businesses pay out the nose.

The Tax Cuts and Jobs Act of 2017 was supposed to restore a sense of fairness and simplicity to the tax system for both individuals and companies. Sure, many working Americans had less taxes taken out of their paychecks in 2018, and there are other aspects of the act that improved the tax code overall, but the act failed to address tax loopholes that enabled the largest companies to avoid taxes. In fact, some of these loopholes were expanded.

For example, in 2018 there were 60 American corporations that paid $0 in federal taxes, despite earnings in the billions. According to a report from the Institute on Taxation and Economic Policy, these federal free riders included IBM, Amazon, Netflix, Molson Coors, Whirlpool, JetBlue Airways, and General Motors.

It gets worse.

As Megan Henney writes at Fox Business, “Instead of paying $16.4 billion in taxes at the 21 percent corporate rate, the companies received a corporate tax rebate of $4.3 billion.” Henney adds, “Netflix, for instance, raked in $856 million in profit but paid no federal taxes because of tax credits, according to ITEP. IBM, meanwhile, earned $500 million but received a rebate worth $342 million, although it’s unclear specifically how the company did so. The company said it used "domestic incentives” to reduce its income tax by about $110 million in 2018.“

How do they get away with it?

The loopholes that these large companies use to reduce or eliminate their tax burdens include accelerated depreciation — which allows them to write off their capital investments — and a range of tax credits for what they call "research and development.” Still others took advantage of alternative-energy tax subsidies or stock options.

Until Congress and the Securities and Exchange Commission get serious about closing some of these loopholes, corporations will continue to take advantage. After all, what they’re doing isn’t illegal. But in the end, the public’s confidence in our elected officials will continue to erode as the perception of government favoritism toward big business is reinforced. Not surprisingly, polls show that most Americans want these loopholes closed.

But let’s be clear: First, corporations don’t pay taxes — consumers do. So this isn’t about raising corporate taxes, punishing successful companies, or eroding their positive effects on our economy. Instead, the issue is fairness, as so many small businesses and working individuals struggle to keep their accounts in the black each month and contribute a much higher percentage to the government at tax time. That’s because small-business owners often file taxes as individuals — and thus pay the much higher individual rate.

Meanwhile, video-game companies like Activision, entertainment companies such as Netflix, and gargantuans like Amazon reap the benefits of a flawed system that enables them to not only avoid taxes, but to actually receive tax windfalls.

Brock Blake writes at Forbes, “While there’s potential for this tax law to have a positive impact for small business owners in the long run, most entrepreneurs feel that the government looks out for corporations’ interests over small businesses. According to a recent survey, 79 percent of startup entrepreneurs say they had no support from government to launch their companies, and 60 percent believe that government doesn’t care about businesses like theirs. Ouch.”

Our approach to this problem will test our commitment to free-market principles. We shouldn’t embrace policies that limit the expansion of job opportunities, the innovativeness and competitiveness of American companies, or the overall growth of the U.S. economy.

The Republican reduction of the corporate tax rate from 35% to 21% was a good and much-needed move, but large companies shouldn’t be exempt — again, especially when so many small businesses who compete with them are Sub S corporations paying the taxes at the highest personal rate. Moving forward, conservatives should enable a business climate that supports the creation and expansion of small businesses. We’re all for limited taxation and pro-growth economic policies, but if mom-and-pop grocery stores fork over hefty taxes to the federal government every year, then large corporations should bear some of the burden too.

Finally, despite what many conservative economists predicted, the largest tax-avoiding companies don’t always reinvest their savings into the American economy. Some shelter their tax windfalls overseas, for example. Clearly, we need a tax system that incentivizes reinvestment while steering clear of the Left’s failed formula of higher taxes and increased government regulation.

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