George K. Yin

How Much Tax Do Large Public Corporations Pay? Estimating the Effective Tax Rates of the S&P 500

Three recent phenomena - the corporate governance scandals, continuing concern about corporate tax shelters, and the Bush Administrations proposal to exempt dividends from income - have generated renewed interest in the amount of taxes paid by public corporations on the profits they report to their investors. This paper estimates the effective tax rates (ETRs) from 1995 to 2000 of the corporations included in the S&P 500 based on a comparison of their worldwide current income tax expense to their worldwide pre-tax book income. It finds that after controlling for the disparate tax and accounting treatment of stock options, the ETR of the sampled corporations declined slightly, from 30.11% in 1995 to 27.98% in 2000. Potentially more revealing is the fact that there is an important reduction in the 1999 ETR relative to the 1995-98 period (during which the ETR was virtually unchanged), and the 2000 ETR remains below the 1995-98 average. The paper is unable to relate these remaining changes in ETR to trends in foreign investment of the companies involved.The paper also estimates that the six-year ETRs (after stock option conformity) of ten industry groups varied from a low for the energy sector (25.72%) and industrials (25.84%) to a high for the information technology sector (32.48%) and utilities (32.43%). Both the level of taxation (compared to the statutory tax rate of 35 percent) and relative uniformity of tax treatment of the industries is to be contrasted with the much greater variations experienced by industries during the early 1980s.

Is the Tax System Beyond Reform

Immediately after the 1994 election giving the Republicans control of the U.S. House of Representatives for the first time in 40 years, Congressman Bill Archer (R., Tex.), who was in line to become the new chairman of the House tax-writing committee, announced his intention to abandon the income tax system altogether. According to Archer, the current system is too broken to be fixed and therefore needed to be replaced with something completely different, such as a national retail sales tax.This paper first explains why a national sales tax is not a viable alternative as a complete replacement for the income tax. Although Archer retired from the Congress after the 2000 election without having made any progress on his objective, subsequent events have made clear the continuing interest in this plan. The paper describes and analyzes H.R. 25, a bill to replace all income, payroll, and estate and gifts taxes with a national sales tax. This proposal was recently popularized in a book entitled, The FairTax Book: Saying Goodbye to the Income Tax and the IRS, authored by Neal Boortz and Congressman John Linder, the lead sponsor of H.R. 25.Second, the paper explains why Archers pessimism about reforming the income tax may be well placed, although perhaps not for the reasons he had in mind. The paper explains why the current legislative process is not conducive to enacting the type of amendments necessary for real tax reform.

Principles and Practices to Enhance Compliance and Enforcement of the Personal Income Tax

In July, 2011, the Budgetary Affairs Commission of the Standing Committee of China’s National People’s Congress convened an international symposium on reform of China’s Personal Income Tax (PIT) system. Currently about 30 years old, the Chinese PIT system very roughly resembles the U.S. PIT system at a similar age (prior to changes effected during World War II). This symposium paper describes general principles and specific practices to improve compliance and enforcement of the PIT, based on the U.S. experience with that tax. Support for the symposium was also provided by Deutsche Gesellschaft fur Internationale Zusammenarbeit GmbH (GIZ), an enterprise of the German government that supports international cooperation for sustainable development.

A Maritime Lawyer, the Percentage Depletion Allowance, and the Joint Committee on Taxation

This year marks the 90th anniversary of both the percentage depletion allowance and the Joint Committee on Taxation. This essay relates the curious tale of Norman Beecher, a New York maritime lawyer with little background in energy, natural resources, or tax, who convinced Congress in 1918 to adopt a tax proposal that helped lead to both of these important features of the tax system eight years later. While Beecher’s idea ended up providing a major tax break for the oil and gas industry, this essay presents evidence that the source of the proposal was Beecher himself, and not the industry, as a result of his misunderstanding of the proposal’s tax effect. Since the conditions especially favorable to enactment of the proposal were very short-lived, this essay offers the intriguing possibility that but for Beecher (or his misunderstanding), the tax system might never have included percentage depletion or, conceivably, the Joint Committee.