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Lobbying and declining corporate tax burdens

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According to a report today in the Washington Post, most companies in the Dow 30 have dropped their tax rates by at least half in the last four decades.

The article notes a few factors: the corporate tax rate of today (35%) actually is lower than the corporate tax rate of 1971 (48%); Large U.S. companies today are increasingly multinational companies and so can keep corporate profits overseas; Companies have become increasingly aggressive in their tax strategies.

But here’s another factor: Lobbying.

When it comes to lobbying, the #1 issue for special interests in Washington is taxes. As I estimated back in November, 2,049 unique organizations had spent $619 million on lobbying during the 112th Congress (2011-2012).

What does all that lobbying buy?

A year and a half ago, I looked at which Fortune 100 companies had lobbied on the most tax bills between 2008 and 2010. I found that the ten Fortune 100 companies that lobbied on 50 or more bills since 2008 paid an average effective tax rate of 17.1 percent in 2010. The ten companies that lobbied on between 25 and 49 bills paid an average effective tax rate of 18.0 percent. The remaining publicly-traded companies paid an average effective tax rate of 26.0 percent. The companies that lobbied on the most tax bills also have seen their tax rates decline the most since 2007.

Last April, I looked at the largest 200 companies and I asked companies who had spent the most money on lobbying overall. Of the eight companies that spent the most on federal lobbying between 2007 and 2009, seven decreased their overall tax rate between 2007 and 2010. And six of the Big Eight enjoyed a decrease of at least seven percentage points.

Table 1. Changes in reported tax rates

Company 2007-2010 decline 2007 rate 2010 rate 2007- 2009 lobbying (in millions) Estimated tax reduction (in millions)
Exxon Mobil -1.1% 41.8% 40.7% $81.92 -$565.32
Verizon Communications -7.9% 27.4% 19.4% $77.58 -$1,005.51
General Electric -7.6% 15.0% 7.4% $73.17 -$1,082.70
At&T -40.4% 34.0% -6.4% $70.96 -$7,359.95
Altria +0.2% 31.5% 31.7% $63.31 none
Amgen -7.1% 20.1% 13.0% $58.33 -$377.16
Northrop Grumman -11.4% 32.9% 21.5% $57.56 -$296.08
Boeing -7.1% 33.7% 26.5% $56.99 -$321.5
Median among 200 companies -0.6% 31.8% 31.6% $5.48 -$13.08
 

Combined, the Big Eight spent $540 million on lobbying between 2007 and 2009. In total, they filed 332 lobbying reports that mentioned taxes, naming 491 different tax bills over the three-year period we investigated.

Compared to what their taxes would have been if their 2007 tax rates were applied to their 2010 income, we estimate that the seven companies that lowered their taxes saved a combined $11 billion on $120 billion in reported 2010 profits. If we assume that the entire reduction was due to their lobbying, the return on investment would be 2,069%.

To be sure, all this correlation does not necessarily prove causation. But it strongly suggests it. The most comprehensive academic analysis of this question, published in the American Journal of Political science,  finds that “Firms that spend more on lobbying in a given year pay lower effective tax rates in the next year. Increasing registered lobbying expenditures by 1% appears to lower effective tax rates by somewhere in the range of 0.5 to 1.6 percentage points for the average firm that lobbies."

More broadly, the massive growth of business political activity I described in my Ph.D. dissertation (“The Business of America is Lobbying: The Expansion of Corporate Political Activity and the Future of American Pluralism”), corresponds pretty well to the steady decline in corporate tax rates that the Post describes.

All of this makes sense when you look at the messiness of the U.S. tax code. According to a 2005 report from the President’s Advisory Panel on Federal Tax Reform: “Since the 1986 tax reform bill passed, there have been nearly 15,000 changes to the tax code – equal to more than two changes a day. Each one of these changes had a sponsor, and each had a rationale to defend it. Each one was passed by Congress and signed into law.”

For the latest evidence, one needs to look no further than the fiscal cliff deal that passed on January 1 – the bill was full of special tax treatments for favored industries.

In 2011, the IRS’s own ombudsman estimated the length of the U.S. tax code to be 3.8 million words – or about 6 ½ War and Peaces, for those reading at home. As I told Marketplace Radio in a story that aired last night: “Every tax break got into the tax code based on some justification. But in totality, they add up to a whole stinking mess of craziness.”