From the U.S. Government Accountability Office, www.gao.gov Transcript for: Corporate Income Tax Description: Audio interview by GAO staff with Jessica Lucas-Judy, Director, Strategic Issues Related GAO Work: GAO-16-363: Corporate Income Tax: Most Large Profitable U.S. Corporations Paid Tax but Effective Tax Rates Differed Significantly from the Statutory Rate Released: April 2016 [ Background Music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. It's April 2016. The corporate federal income tax rate tops out at 35 percent but what do corporations actually pay? A team led by Jessica Lucas-Judy, a director in GAO's Strategic Issues team, recently ran the numbers. GAO's Jacques Arsenault sat down with Jessica to talk about what they found. [ Jacques Arsenault: ] Corporate income taxes can be pretty confusing. I feel like on the news I'll hear some people say that the U.S. has very high corporate taxes and other people saying that corporations don't pay much in tax. You looked at corporate income tax and what corporations are really paying. But can we take it back a couple of steps? What is corporate income tax? [ Jessica Lucas-Judy: ] So, corporate income tax is very similar to individual income tax. A corporation earns money; it takes deductions for things like salaries and expenses. You multiply what's left, the taxable income, with the statutory tax rate which, for most U.S. corporations, the maximum is 35 percent. And then take off any credits such as for foreign taxes paid and what's left is the actual tax liability. [ Jacques Arsenault: ] So that actually sounds really simple. You looked at what the corporations were actually paying. Can you talk about how you found those rates? [ Jessica Lucas-Judy: ] Sure. We got data from the IRS for tax years 2006 to 2012 which is the most recent available. And it's important to note that we were looking at aggregated tax payments. We didn't have individual tax data. So we got the data that companies report on a schedule M-3 which is required of all corporations that have $10 million in assets or more, or what we call large corporations. And we use that to calculate their effective tax rate in a number of different ways. And what we found is that the actual federal effective tax rate for large profitable corporations was averaging about 14 percent over the courses of the years that we studied. So for example, in 2012 it was 16.1 percent. In addition, we calculated a number of different ways, such as by looking at what's called book tax, which is what companies report on their financial statements. And that was a little bit higher because it doesn't include some of the taxable credits. And we also included in some of our calculations not just profitable corporations but also those that operated at a loss, and as you can expect, there we ended up with slightly higher effective tax rates of about 20, 21, 22 percent. [ Jacques Arsenault: ] One of the other things that you found though was that many corporations are not paying any corporate income tax at all. How did that work? [ Jessica Lucas-Judy: ] That was the second part of our study where we were looking at corporations that had zero tax liability for each of the years 2006 to 2012. And here we were looking at all corporations not just large corporations. And we found about at least two-thirds of corporations in a given year that had 0 tax liability. But once you started to break that down more into just the large corporations, that percentage gets smaller. So, for example, in 2012, it was 42 percent that had 0 tax liability. And that number gets even smaller still when you're looking at just the profitable large corporations. So that was 19.5 percent in 2012. [ Jacques Arsenault: ] So in many cases, the corporations that weren't paying taxes it was because they weren't making profits or they maybe hadn't -- [ Jessica Lucas-Judy: ] Right. [ Jacques Arsenault: ] -- made profits in prior years. [ Jessica Lucas-Judy: ] Right. So that could be one of the reasons they were operating at a loss which about half of the companies were in the years that we were looking at. Or if they're carrying losses over from prior years, and in addition, as we mentioned you know, the different tax credits can also reduce the taxable income. [ Jacques Arsenault: ] So it sounds like if a corporation pays something lower than the statutory tax rate as their effective tax rate that, in many cases, it's because they have lower or no profits or they are taking advantage of credits and deductions in the same way that happens with the individual income tax. [ Jessica Lucas-Judy: ] Right. It's very similar to the individual income tax. [ Jacques Arsenault: ] Now one other thing that your report looked at was even for corporations that are not paying federal corporate income taxes, that they may be paying other taxes. What kinds of taxes might those be? [ Jessica Lucas-Judy: ] So in addition to federal taxes, they could have state taxes, local taxes, or if they're earning money overseas they could have foreign taxes. And when we included all those different tax rates into what we called the worldwide tax rate, that increases our averages by about 3.5 to 8.5 percentage points. [ Jacques Arsenault: ] Okay. So then, finally, for American corporations and for those of us that are just trying to figure this out, what would you say is the bottom line of this report? [ Jessica Lucas-Judy: ] The bottom line is that while two-thirds of all the corporations that we looked at had no tax liability, the larger profitable corporations were more likely to owe tax. And in addition, while we found a lot of variability in the average effective tax rates depending on how we calculated them, almost all of them were significantly below the statutory tax rate of 35 percent. And we think that that's important context for anyone who's considering any changes to corporate tax policy. [ Background Music ] [Narrator:] To learn more, visit GAO.gov and be sure to tune in to the next episode of GAO's Watchdog Report for more from the congressional watchdog, the U.S. Government Accountability Office.