Insurance companies and financial institutions have lobbied long and hard for all sorts of loopholes in the federal tax code, and the insurance industry alone has spent almost $1 billion over the past decade lobbying on tax issues. Some folks might say that these corporations are providing important services to help the free market function and that the government should infringe on them as little as possible. Well, here's why they're wrong: The very corporations that have persuaded Congress to grant them numerous loopholes reducing their effective tax rate to negligible levels are now lining up for a handout from the federal Troubled Asset Relief Program, or TARP.
Insurance companies have not received any bailout funds yet, but a recent Wall Street Journal article explains that many are now requesting aid, including several insurers that pay only a fraction of the statutory tax rate on corporate income. The statutory tax rate on corporate income is 35 percent, and many states impose a tax of around 4 or 5 percent as well. But insurance companies have mastered the use of loopholes to reduce their effective tax rate to much less. For example, Prudential Financial, which announced last week that it is seeking aid, received profits of about $25 billion over the past decade but its total effective tax rate was just around 5 percent over that period. Hartford Financial Services, which also seems to think it's eligible for TARP funds, received profits of $18 billion over the past decade and paid taxes at an effective rate of less than 8 percent over that period.
It would almost be a relief if it turned out that the insurance companies had done something illegal to reduce their tax liability in this way. However, the real scandal is that they are mostly using the loopholes that Congress enacted. For example, insurance companies get to immediately deduct the full costs of signing up new policy holders, but in their reports to shareholders they count these costs as being stretched across several years.
Financial institutions do not get to use quite as many loopholes as insurance companies, but they do know how to play the game. Goldman Sachs, which received $10 billion in bailout funds, expects to pay taxes of just 1 percent on its 2008 profits.
Conservatives have been grousing for a while that the corporate income tax rate is high compared to those of other countries, but these companies illustrate that the effective tax rate can be much lower than the statutory tax rate.
The corporate income tax funds many of the services that make corporate profits possible, like roads that make shipping possible, public safety that makes property valuable, even the research that lead to the internet and all of the commerce it facilitates. Now that these corporations are receiving TARP funds, it's more obvious than ever that corporations have a stake in our government and have good reason to help pay for it.