Tax Data Highlight Corporate Loopholes

By JESSE DRUCKER
Wall Street Journal

The Internal Revenue Service found that U.S. companies paid federal income taxes on their reported U.S. profits at far less than the 35% statutory rate, offering a potential revenue source for an incoming presidential administration that faces a yawning budget deficit.

Newly released data from the IRS show companies paid federal and foreign income taxes on their U.S. book income -- the amount reported to shareholders -- at a rate of 25.3% during 2005, the most recent year for which data were made available by the IRS.

Effective U.S. corporate tax rates could take on increasing importance in the months ahead for President-elect Barack Obama. Some tax experts call for tightening corporate loopholes and ending some industry tax breaks, while others say such moves could be counterproductive and end up killing jobs in an economic downturn.

Mr. Obama has publicly highlighted this issue. In the first presidential debate, he said: "There are so many loopholes that have been written into the tax code...that we actually see our businesses pay effectively one of the lowest tax rates in the world."

The information about tax rates was included in a broader IRS study that examines the gap between income reported to shareholders and the consistently lower income reported to tax authorities. Differences between accounting rules and tax laws mean companies keep two sets of books. Tax rules often allow them to take deductions on their tax returns that don't eat into their book profits reported to shareholders.

(More here.)