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Wednesday, April 21, 2004

Yin on Effective Tax Rates of Fortune 500

Wednesday, April 21, 2004

Non-TaxProfer Gordon Smith (Wisconsin) blogs How Much Tax Do Large Corporations Pay? Estimating the Effective Tax Rates of the Fortune 500, 89 Va. L. Rev. 1793 (2003), by George Yin (on leave at Virginia while serving as Chief of Staff, U.S. Joint Committee on Taxation). Here is the abstract:

Three recent phenomena - the corporate governance scandals, continuing concern about corporate tax shelters, and the Bush Administration's proposal to exempt dividends from income - have generated renewed interest in the amount of taxes paid by public corporations on the profits they report to their investors. This paper estimates the effective tax rates (ETRs) from 1995 to 2000 of the corporations included in the S&P 500 based on a comparison of their worldwide current income tax expense to their worldwide pre-tax book income. It finds that after controlling for the disparate tax and accounting treatment of stock options, the ETR of the sampled corporations declined slightly, from 30.11% in 1995 to 27.98% in 2000. Potentially more revealing is the fact that there is an important reduction in the 1999 ETR relative to the 1995-98 period (during which the ETR was virtually unchanged), and the 2000 ETR remains below the 1995-98 average. The paper is unable to relate these remaining changes in ETR to trends in foreign investment of the companies involved.

The paper also estimates that the six-year ETRs (after stock option conformity) of ten industry groups varied from a low for the energy sector (25.72%) and industrials (25.84%) to a high for the information technology sector (32.48%) and utilities (32.43%). Both the level of taxation (compared to the statutory tax rate of 35 percent) and relative uniformity of tax treatment of the industries is to be contrasted with the much greater variations experienced by industries during the early 1980's.

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Interesting. Does this analysis control for recession-related phenomena such as NOL and capital loss carryovers? I speculate not, because it benchmarks "current taxes", rather than the combination of current and deferred taxes. This might partly explain the reduced ETR's in 2000. The years the study spans don't seem to match up exactly with the economic downturn, though. One wouldn't intuitively expect massive NOL's being generated during the booming mid-90's (for use in 2000 tax returns).

Posted by: Michael M | Apr 22, 2004 11:09:37 AM