Nobody likes to pay taxes. But what gets people
upset is finding out that
That message came through loud and clear earlier this week,
when the Citizens for Tax Justice and the Institute on Taxation
& Economic Policy released a new study that looked at how
much major corporations pay in corporate tax. Although most news
sources have focused on the populist anti-corporate angle in
reporting on the study, investors should see the results as a
mark of a company's success and competence in navigating the
complex set of U.S. tax laws to its maximum advantage -- and
consider the report's list of "corporate tax dodgers" as a
watchlist for further research.
Why corporate taxes inspire such anger
The corporate income tax is a particularly divisive issue. Some
people believe that corporations shouldn't have to pay income tax
at all; after all, other business forms, including partnerships
and limited liability companies, avoid entity-level tax and
merely pass through their taxable income to their investors.
Critics argue that corporate tax combined with the tax on
dividends and capital gains amounts to
, unfairly penalizing equity investors in comparison to debt
financing, for which businesses get tax deductions on
At the other end of the spectrum, though, are those who see
the 35% statutory corporate tax rate as something that every
corporation ought to pay. Yet because of the impact of credits,
deductions, and other tax preferences -- the same things that
keep many individual taxpayers from ever paying anywhere close to
their marginal tax rate --
many companies dramatically reduce their tax
. In fact, when you look at short periods of time, as the
CTJ/ITEP study did, you'll even find periods during which credits
outweigh tax liability, creating
effective tax rates.
Here's a quick look at some of the 30 companies that achieved
that dubious distinction between 2008 and 2010, according to the
- Utilities made a strong showing on the list, with
American Electric Power
all showing up with negative tax figures.
led the list with an effective tax rate of -57.6%, while
had a negative tax bill of more than $1 billion.
- At No. 2 on the list was
) , whose
tax attributes already got plenty of attention
earlier this year
- Blue-chip stocks from many industries showed up among the
30, including glass-tech leader
) , aircraft-maker
) , and chemical giant
- Despite government bailouts, only one major bank made the
(WFC) , with a reported effective tax rate of -1.4%. It was
identified as the company with the largest total tax subsidies,
however, at nearly $18 billion -- likely due in large part to
its acquisition of Wachovia and its attendant tax-losses.
Policymakers can argue the pros and cons of making certain
changes to the tax laws. But for investors who are more
interested in the system we have
, the study is invaluable in pointing to winners and losers.
Why pay more?
The key information the study provides is its
industry-by-industry breakdown of tax rates. For instance, among
financial stocks, you might expect to see most companies making
fairly attractive showings. But
(JPM) pays effective taxes of more than 30%. At least in theory,
that's a huge headwind that favors Wells Fargo -- and is a major
point in favor of choosing it over JPMorgan Chase.
Of course, the major caveat in acting on this study is whether
you believe that tax reform will ultimately happen. If big
changes occur, then winners under the old system could become
losers under a new one, and vice versa. But if you think any
reforms will make only minimal changes to the status quo, then
you can fairly expect adroit tax-managing corporations to keep up
the good work.
Where activism and investing conflict
Tax strategies to minimize tax may offend your sense of fairness,
but they're part and parcel of managing a business well. Until
serious reform gets closer to fruition, companies that have
rewarded shareholders in the past with their tax-smart moves will
likely keep doing so.
If you want to cut your
taxes, head over to the Fool's Tax Center. There, you'll find
lots of advice to help you give less of your money to the
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights
reserved. The Motley Fool has a