Why Don’t Corporations Pay Taxes?

By Lizzie Letsou

So, you pay taxes, right? And so do all your friends and family? Well, have you ever wondered why corporations don’t pay taxes? Or just curious about how big corporations handle their finances?

Either way, you’ve come to the right place! I’m gonna be honest — until recently I was pretty clueless about this topic. But, after doing a lot of research, I’ve realized that learning about corporation tax doesn’t have to be intimidating or difficult. In fact, I think it’s actually super useful (and cool!) to be knowledgeable about this issue.

So, keep reading to find out more!

Brief overview of corporate taxes

Before I dive into the nitty gritty details, I want to give you a brief overview of corporation taxes. First of all: what exactly is corporate tax?

I’m glad you asked! Many countries, such as the United States, impose taxes on the income/capital of corporations. This tax is not the same for each and every corporation though: it depends on the company’s net income

Sounds pretty straightforward, right? While the concept of corporate taxation is, indeed, a simple and easy-to-grasp concept, corporate tax reduction–or even evasion–is a point of confusion for many. 

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How exactly do corporations reduce taxation? 

After all, countries like the US mandate that corporations must pay taxes (depending on their net income)–so isn’t taxation sort of inevitable? 

Technically, yes. However, many companies take advantage of other countries’ more lenient corporate tax laws. These countries, such as Bermuda for example, are often known as “corporate tax havens,” as they allow companies to reduce their overall tax bills. In fact, the Tax Justice Network, an advocacy group fighting against tax avoidance, created an index that ranks these “tax havens” according to the extent to which they enable corporate tax abuse.

Is Corporate Tax Evasion Even an Issue?

According to a recent report by the official US Joint Committee on Taxation, about 10 percent of all corporations’ foreign-sourced profits are booked in Bermuda, meaning that they are only subjected to a 0.4 percent government tax rate (much lower than the American tax rate). 

However, this statistic does not tell the full story–and many companies do, indeed, pay hefty tax rates (depending on where their foreign workers are located). In fact, a lot of companies hold investments in countries like China, Canada, Germany, and India, all of which have higher tax rates than the US. In fact, 10 percent of companies’ foreign workers are located in India, which has a 40 percent corporate tax rate.

Nonetheless, aside from a few notable exceptions (like India), companies often open offshore accounts in countries that require an extremely low corporate tax rate. 

So, what’s being done about all this? 

There’s actually a tax that was created by Republican lawmakers–called the “global intangible low-taxed income” aka “GILTI.” GILTI aims to target money stowed in low-tax jurisdictions in order to increase the corporate tax rate: businesses typically pay a 16 percent tax on what is known as “GILTI income.”

Is GILTI effective?

Obviously the concept of GILTI seems solid–it’s just trying to mitigate the effects of corporate tax avoidance in offshore havens. But, is this tax effective?

Well, according to a Politico article by tax reporter Brian Faler, the average U.S. corporate tax rate has actually fallen by more than half since the 2017 GOP tax overhaul. Taking into account deferred taxes (taxes that will be paid in the future), the corporate tax rate fell to 13.1 percent in 2018 from 19.7 percent in 2017.

This may seem confusing, especially seeing as provisions like GILTI seem to be designed to increase, rather than decrease, corporate tax rates. But, if we take a closer look at how GILTI actually works, this whole thing will become a lot clearer. 

What needs to be done next?

Firstly, it is important to bear in mind that the tax on GILTI is generally much lower than the regular US corporate tax rate. For your reference, the GILTI tax rate is around 5.5 percent, a figure that pales in comparison to the 21 percent US domestic tax rate. 

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In fact, many Democrats, namely Senate Finance Chair Ron Wyden, have argued that GILTI is too lenient, and that it is giving too big of a discount to corporations. Additionally, Democrats are currently lobbying for corporate tax rate reform, a move that makes sense considering their proposed big-ticket spending initiatives. 

What does this have to do with me?

Now, you might be wondering: what does this have to do with me? I don’t own a big corporation! Well, even though that may not be true (not yet anyway!) it’s still important to know more about the ways in which corporations operate–and it’s always nice to know more about taxes in general.

After all, tax season is right around the corner! Fret not though–Nav.it’s got you covered. Nav.it is committed to your financial education and literacy (in addition to helping you maintain financial wellness). With countless in-app resources and tools, Nav.it’s here to ensure that you never fall behind on your financial schooling (and/or taxes)!

For example, you can find plenty of quick–yet informative–stories on Nav.it’s community feed. Be sure to check out if you’re curious about taxes, psychological wellness, or practically anything related to money!

You can also check out Nav.it’s instagram for exclusive content all about financial wellness!

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