Tax avoidance is an old trick, but under the Bush administration, weak enforcement and a spate of new tax credits and loopholes have led to an extended tax holiday for big business. Though the basic corporate tax rate is 35 percent, according to the left-leaning Citizens for Tax Justice, the average tax rate paid among the 275 largest U.S. corporations is closer to 17 percent — lower than that of most individual citizens. Tax avoidance tactics abound, including funneling U.S. profits to tax-free subsidiaries overseas and using previous years’ losses (from up to 20 years ago) to write down a firm’s annual taxable profits. Lower levels of Internal Revenue Service (IRS) audits targeting large corporations have compounded the problem. While corporate tax payments accounted for 23 percent of all federal tax revenue in 1960, by 2007 that figure had dropped to just 14 percent. In fact, as the Government Accountability Office reported in a controversial 2008 study, nearly 60 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.
Thanks to an increase in corporate profitability, the amount of revenue from corporate taxes increased during fiscal years 2003 through 2006. Yet, according to 2006 IRS estimates, corporations and the self-employed continue to evade some $88 billion in taxes a year. The IRS has previously said that while the number of large corporate audits has declined, it has focused its “resources better on where the noncompliance is,” and plans to make targeting noncompliance with tax laws a “high priority.” In response to a request for comment, an IRS spokesman noted that tax enforcement revenue for corporations climbed to $14.2 billion in 2007, a rise of 33 percent from the previous year.
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Since the onset of the financial crisis, pressure to crack down on tax scofflaws has increased. In the fall of 2008, published reports have revealed that some financial giants turning to U.S. taxpayers for costly bailouts — for example, American International Group, which recently received up to $123 billion in Treasury assistance — had avoided paying taxes for years. In the case of AIG, the company used and promoted an abusive tax shelter that individuals have used to evade at least $3.7 billion in federal taxes (though the IRS has since managed to recoup those funds).