McCain’s $45 Billion Tax Giveaways to 200 Largest Companies in America

The centerpiece of presumptive Republican presidential candidate Sen. John McCain’s economic agenda is massive tax breaks for the wealthiest individuals and corporations in the United States. The cost to the federal budget: an estimated $300 billion a year, according to the Center for American Progress Action Fund’s analysis of the McCain campaign’s public materials.

Almost two-thirds of these tax breaks, about $175 billion a year, will flow to U.S. corporations, including $45 billion for the 200 most profitable companies in America. When the United States faces so many urgent challenges, at home and abroad, delivering tens of billions of dollars to the most competitive U.S. companies is a particularly egregious misuse of public resources.

Specifically, under the tax plan offered by McCain (R-AZ):

• The largest 200 corporations (as identified by Fortune magazine) in America would get a combined $45 billion-a-year tax break.1 These companies earned more than $500 billion in profits in 2007.
• Eight companies—Wal-Mart Stores Inc., ExxonMobil Corp, ConocoPhillips Co., Bank of America Corp., AT&T, Berkshire Hathaway Inc., JPMorgan Chase & Co., and Microsoft Corp—would each receive over $1 billion a year.
• Like the earmarks McCain criticizes, the corporate tax breaks would “restrict America’s ability to address genuine national priorities.”.2 This $45 billion, for example, would more than pay for key anti-poverty steps, including cutting taxes on low-income workers and families and expanding federal assistance for childcare. Using this $45 billion more wisely we would lift more than 9 million people out of poverty.3

McCain’s Tax Plan

McCain has proposed $300 billion a year in four large tax breaks.4 First, he would slash the corporate tax rate to 25 percent from 35 percent. Second, he would allow corporations to immediately write off—or expense, in tax accounting terminology—the cost of corporate investments in equipment and technology. Third, he would repeal the Alternative Minimum Tax. Finally, he would double the exemption for dependents to $7,000.

The two corporate tax breaks are extremely expensive, costing the U.S. Treasury Department $100 billion and $75 billion a year, respectively. Corporate tax breaks are also extremely regressive. Corporate taxes are ultimately paid by investors, according to the longstanding view of the Treasury and the Congressional Budget Office. As a result, approximately 59 percent of these tax cuts would go to the top 1 percent of households. Only 11 percent of the benefit would go to the bottom 80 percent of households.

Finally, these corporate tax breaks are unlikely to help the economy. They drive up the federal budget deficit, resulting in higher interest rates and lower private-sector investment. Taxes paid by U.S. corporations are among the lowest in the world, measured as a share of the economy. And as Michigan University law professor Revuen Avi-Yonah points out, “experience indi cates that corporate rate cuts, like the temporary reduction in the tax rate on dividends from foreign subsidiaries from 35 percent to 5.25 percent, have resulted in increased profits for U.S. corpora tions but no increase in jobs or overall economic growth.”5

The U.S. corporate tax code is in need of wholesale reform, not just more tax breaks. The nominal U.S. corporate tax rate is among the highest in the world, but actual taxes are among the lowest because of the large number of corporate tax shelters. A balanced reform that reduces the tax rate by removing tax preferences could strengthen the economy without driving up the federal budget deficit or making the U.S. tax code more regressive. But cutting corporate tax rates without taking on special-interest tax breaks—as Sen. McCain wants to do if he becomes president—is an unwise giveaway to corporations.

Tax Cuts for the Fortune 200

The reduction in the corporate tax rate alone would cut taxes for America’s 200 largest companies by $45 billion a year. These companies’ 2007 profits exceeded $508 billion. The average Fortune 200 companies collected $2.5 billion in profits in 2007 (see Table 1 below).

The McCain tax plan also showers additional tax breaks on highly profitable industries (see Table 2 below). It includes $6.5 billion for Fortune 200 energy companies, $6.3 billion for Fortune 200 banks and financial institutions, and $5.6 billion for Fortune 200 merchandising and retailing companies.

These tax reductions are far larger than the earmarks McCain regularly criticizes. Earmarks total about $18 billion a year, according to Taxpayers for Common Sense.6 And there are only about $9 billion a year in wasteful earmarks that could be eliminated, according to the Heritage Foundation.7

In short, McCain’s tax breaks for the Fortune 200 alone amount to more than twice current annual earmarks and more than four times the amount of wasteful earmarks he could eliminate, as identified by a prominent conservative think tank.

Conclusion

Over the past eight years, U.S. corporate profits have grown along with the U.S. economy while workers’ wages have stagnated. But the centerpiece of Sen. McCain’s economic policies is a huge break of $300 billion to the nation’s wealthiest individuals and most profitable companies. These misdirected resources instead could be used to meet the needs of struggling families. For example, they could help lift more than 9 million families out of poverty.

Methodology

The estimates of corporate savings were calculated based upon information presented in the companies’ most recent 10-K filings with the Securities and Exchange Commission, which include audited financial statements.8 The figures reported on tax returns—which are not made public—may differ because corporations employ different methodologies for calculating income for accounting and tax purposes. The estimates are based on the financial statements’ reported current and deferred taxes paid in 2007 to the federal government for income earned from U.S. operations.

The figures present each corporation’s estimated savings from reducing the corporate tax to 25 percent from 35 percent. They do not include savings from Sen. McCain’s expensing proposal because there is no reliable way to estimate how those savings will be distributed across companies. They also exclude U.S. taxes on income earned from foreign operations. Finally, the figures do not include any offsetting tax increases resulting from McCain’s promise to eliminate corporate tax subsidies because the campaign has not presented specific proposals.

Several companies reported that 2007 taxes were negative (known as a “tax asset”). Companies with a “net operating loss” can use those losses to offset profits earned in the prior two years and receive a refund of taxes paid in those years. Net operating losses can be caused by business factors or by tax subsidies such as accelerated depreciation. Presumably the McCain proposal would not alter corporations’ ability to use net operating losses to offset prior years’ tax bills, and therefore these companies’ potential savings under the McCain plan are assumed to be zero.

The estimates are based on 2007 figures. The actual effect of the McCain proposals will depend on corporations’ future performance. Figures may not add due to rounding.

Endnotes

1. As identified by Fortune magazine. Fortune, “Fortune 1000,” May 5, 2008.

2.John McCain, “McCain Tax Cut Plan,” John McCain for President 2008.

3.The Center for American Progress Task Force on Poverty, “From Poverty to Prosperity: A National Strategy to Cut Poverty in Half” (Washington: Center for American Progress, 2007).

4.Based on information publicly available from the McCain campaign website and news accounts. The Tax Policy Center has recently released an analysis of McCain’s plan, apparently based on new information from the McCain campaign that clarifies and in at least one instance contradicts the campaign’s public policy documents. Our analysis continues to rely on the public materials, which we regard as authoritative.

5.Reuven Avi-Yonah, “John McCain’s Corporate Tax Agenda: A Critical Examination” (Washington: Center for American Progress Action Fund, 2008).

6.Taxpayers for Common Sense, “Taxpayers for Common Sense Releases New Earmark Database,” February 14, 2008.

7.Michael Dobbs, “McCain’s Fantasy War on Earmarks,” Washington Post, May 23, 2008.

8.Financial data compiled from “Form 10-K: Notes to Consolidated Financial Statement,” SEC filing of each company. Please see individual company websites for further details on filings.