Most Companies Paid No Taxes

Our friends at the government's General Accounting Office (GAO) have just dropped a bombshell. A recent GAO report reveals that between 1996 and 2000, when the economy was booming and the stock market was soaring ever higher, the majority of American companies (61%), paid not a penny in federal taxes. Hmm.

In 2003, tax revenues from corporations made up just 7.4% of total federal receipts -- the second-lowest rate since 1934. The current corporate tax rate for major corporations is 35% -- but there are clearly enough loopholes and tax credits available that many firms are able to pay considerably less than 35%. The GAO study reported that the average tax bill of U.S. companies represented about 1.2% of gross receipts.

The study also revealed that small companies were more likely to avoid taxes than their larger brethren. Nearly 40% of firms with more than $250 million in assets or $50 million in revenues paid no taxes during the period studied. Making matters worse, some 70% of foreign-owned firms that operate in the U.S. also managed to avoid coughing up taxes during the late 1990s.

This news will help Senator Kerry and President Bush point fingers at each other for failing to fight corporate tax avoiders. But the truth is probably that both individuals and both political parties and both the Clinton and Bush administrations have too often looked the other way. After all, corporations have increasingly been generous political donors. (This led me to ask, in 2002, "Why are corporations permitted to contribute even one dollar to politicians?")

Go ahead and blame our politicians for not finding ways to ensure that those firms benefitting from doing business in America also support our nation by paying their fair share. We might also blame the tax code itself -- since much of this tax avoidance is done legally. And if you think about it, if credits and loopholes are available, is it really so wrong for a company to take advantage of them? From an ethical perspective, it's troublesome. But when you consider that companies owe it to their shareholders to maximize earnings, perhaps it suddenly becomes not so unreasonable.

To its credit, Congress is looking to close some loopholes, such as leasing-related ones reportedly enjoyed by the likes of Wachovia (NYSE: WB), Bank of America (NYSE: BAC), and KeyCorp (NYSE: KEY). Here's hoping that one of these days our tax code will be more rational.

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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.