How much did you pay in taxes last year? If you paid any taxes at all, there's a good chance that your effective tax rate was higher than the tax rates of three huge drugmakers: Amgen (AMGN 2.12%), Eli Lilly (LLY 1.05%), and Gilead Sciences (GILD 1.57%). And one big pharmaceutical company, Allergan (AGN), didn't pay a penny in U.S. taxes. Here's why.
Comparing the numbers
Let's take the easiest case first. Allergan didn't pay taxes in 2015 for the simple reason that the company didn't have any profits. If you lost nearly $2.9 billion in a year, you probably wouldn't want to pay any taxes, either.
Amgen, however, made plenty of profits last year -- over $6.9 billion. The biotech's effective tax rate in 2015 was 13%. Lilly's profits last year totaled $2.4 billion. Its effective tax rate stood at 13.7%. Amgen's and Lilly's profits look almost like chump change compared to Gilead Sciences'. The big biotech generated profits of over $18.1 billion in 2015. Gilead's effective tax rate for the year was 16.4%.
What is the average American's effective tax rate? Over a third of individuals in the U.S. don't pay any federal income taxes. Those who did pay taxes, though, had an average effective tax rate of 14.9%. And that doesn't include other taxes such as state taxes and property taxes. So if you paid close to the effective tax rate of the average American in 2015, Amgen, Lilly, and Gilead enjoyed a lower rate than you did.
How they did it
Before you fume too much about the injustice of it all, let's look at why these drugmakers' effective tax rates were relatively low. All three companies had low rates for the same reason: They made a lot of money outside the U.S. that wasn't brought into the U.S.
Amgen generated one-fifth of its total revenue in 2015 outside the U.S. While it paid the standard U.S. corporate tax rate of 35% on the rest of its revenue, the biotech deliberately invested its international sales elsewhere rather than bring them into the U.S. Amgen also received some help due to an excise tax credit in Puerto Rico.
Nearly half of Lilly's total revenue stemmed from countries other than the U.S. Gilead reported that 34% of its total revenue in 2015 was generated from international sales. Like Amgen, both companies lowered their overall tax rates by not bringing that money back to their home country.
The issue for these drugmakers and other companies is that U.S. corporate tax rates are very high compared to those of most other nations. Only the United Arab Emirates and Puerto Rico have higher top marginal corporate tax rates than the U.S. does. The average top marginal corporate tax rate for the world is 22.5%. In the U.S., it's 38.9% (combining the 35% federal rate plus the average corporate tax rate among the states).
These drugmakers might have company soon
With the U.S. elections over, there's a good chance that all companies will enjoy effective tax rates close to what Amgen, Lilly, and Gilead Sciences had in 2015. President-elect Donald Trump promises to lower the federal corporate tax rate to 15%. He also has proposed that all companies be able to bring all of the money they've kept offshore back to the U.S. with a one-time tax rate of 10%.
Are these good ideas? Not if the primary goal is to make sure everyone, individuals and corporations, pay the same tax rate. However, it would result in Amgen, Lilly, and probably Gilead (assuming the biotech repatriated some of its overseas cash) paying more in U.S. taxes than they have in the past.
If the objective is to spur job growth in the U.S., these proposals might work. The changes would certainly provide incentives for companies to stay in the U.S. and invest money here as well. That could mean more jobs for Americans -- and potentially more people, like you, who pay taxes.