Are corporations dodging taxes?

The AP had a story yesterday headlined, “Most companies in US avoid federal income taxes” (full study). Governor Rendell frequently makes this claim as well, when defending Pennsylvania’s corporate income tax. With the exception of Chris Edward’s comments however, the story gets the facts wrong and wrongly demonizes corporations.

1) Most “corporations” are really small businesses, including S-Corporations or LLCs that don’t pay the corporate tax (they pass their profit on to partners, who pay it under the individual income tax). The AP mistakenly says that 25% of non-payers are “large corporations” – in fact the GAO study indicates only 0.29% are.

2) Only 25% of “large US corporations” reported no tax liability in 2005. Over the 8 years studied, 55% reported no taxes in any year (45% paid corporate taxes in all 8 years). Only 2.7% of large US companies had no tax liability in all eight years.

3) 85% of large business non-payers paid no taxes because they lost money in 2005 (11% deducted losses from past years, and only 3% reached $0 tax liability due to tax credits). As the Tax Foundation points out:

For example, in a “clever tax dodge,” American Airlines avoided income tax for 2005 by losing $862 million. General Motors lost $10.5 billion in 2005; I bet those greedy fat cats didn’t pay any corporate income tax, either.