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October 21. 2013

MythBuster: New Analysis Finds Effective Corporate Tax Rates Significantly Higher than Reported by GAO

By ACT Staff

Earlier this year, the U.S. Government Accountability Office released a report that found surprisingly low effective tax rates for U.S. companies in 2010. This week, a new analysis was published by Andrew Lyon from PricewaterhouseCoopers on Tax Notes that uses the same data as GAO, but extends the time period studied to give a more comprehensive look at the corporate rates – studying from 2004 to 2010.

The new study finds that over the entire 2004-2010 period the average worldwide effective tax rate of all U.S. companies exceeded 35 percent based on actual tax payments.

By focusing only on 2010, the GAO’s analysis understated average corporate effective tax rates of U.S. companies. During 2010, corporate tax rates were distorted by the impact of losses and write-downs reported on financial statements during the recession in advance of their recognition for tax purposes.

Additionally, GAO’s focus on companies with positive financial statement income further contributed to unrepresentative calculations of the average effective tax rate.  GAO’s methodology resulted in the exclusion of companies with financial statement losses in the year of their loss but their inclusion in a succeeding year in which the related tax benefit from the loss was received.

Finally, GAO also omitted most foreign tax from its computations of worldwide effective tax rates by not including the taxes paid on foreign earnings distributed to U.S. parent companies by their foreign subsidiaries.  This omission alone understated the worldwide effective tax rate by 4 to 5 percentage points in 2010.

Click here to view the full study.