INTERVIEW: Matthew Gardner

Matthew Gardner is a senior fellow and former executive director of the Institute on Taxation and Economic Policy, a progressive think tank. He is the primary author of ITEP's research on corporate taxes, including its most recent report, "Corporate Taxes Before and After the Trump Tax Law." We spoke on May 14.

I wanted to ask, it must be wild to hear the president of the United States using the stat that you put together, that was in your report--the 55 companies. ["55 Corporations Paid $0 in Federal Taxes on 2020 Profits"] I'm curious what that is like.

If you've been following this, you know that the President has cited the same exact number for something like three State of the Unions in a row. There was one year he didn't do one, so I do think that means he's cited ITEP date in every State of the Union address he has done, which is absolutely phenomenal. There's a reason why he's doing it. It's not a reflection on the inherent goodness of our report, it's more a reflection on the fact that, at a time when Americans can't agree on a whole lot, they can pretty clearly agree on the idea that big, profitable corporations should be paying more than they are, and that they appear to be getting away with something. So, I think that's why he's doing it. And obviously, corporate revenue-raising has been a central plank of every Biden budget since he got elected. So this is why he's drawing attention to it.

We're glad he's doing it. And there's two ways this argument can go. One is, it can prompt an evaluation of why these companies aren't paying a lot, and maybe fixing that. And the other is, Congress could end up increasing taxes in ways that don't really directly address the underlying problem. Which, arguably, is what's happened since then. I mean, the inflation Reduction Act, as you know, has one provision in it that appears on its face to be tailor-made to deal with the problems that were identified. I don't think it does. It sort of worked its way around it.

Why is that, do you think, that it hasn't?

If the starting observation in our reports, whether it's that one-off report the President has been citing or the more in-depth multi-year reports we put out, is that companies with very large financial statement income appear to have very small tax return income, then the obvious question is, why? There are some pretty straightforward responses to that. Number one with a bullet would be [accelerated] depreciation. So if that gap is bad, then we ought to get rid of it. The corporate minimum tax does not do so. It simply finds a different definition of income to rely on in calculating part of tax. So I think that's a clear second-best response to the problems we're identifying. The best response would be for Congress, and the Biden administration but primarily Congress because it's their job to change the law, to engage in a very serious re-evaluation of the dozens and dozens of tax breaks that are resulting in these zero-tax corporations, and to evaluate whether these tax incentives are working, achieving their stated purpose. And if they're not, to rethink them, either to repeal or reform them.

That clearly is not what Congress has done, in the three years that President Biden has been citing our report. They've talked about restructuring these things, but in the end, really what they did was to create what amounts to a separate tax system on top of the first tax system. The good thing you can say about this is that, by all accounts, the corporate minimum tax is going to raise a bunch of money. It's going to at a time when our federal budget desperately needs an infusion of tax revenue. And when the public clearly wants to see an infusion of corporate tax revenue, the minimum tax will, according to the best estimates, do both of those things.

So that's a good outcome, but it's not really dealing with the underlying problems in our tax structure. It's a welcome change in direction. I think Presidents and Congressional leaders have been running away from corporate tax reform for an awfully long time, and even more have been running away from the prospect of proposing tax increases, for decades. It's been a sea level change since the Reagan administration, where we're just afraid to talk about sustainable tax reforms. And the thing I'll credit President Biden for, in particular--not just Democrats in Congress, but President Biden--for sticking his neck out there is saying that revenue-raisers are necessary, and coming up with ideas for making them happen. Whether they're the best ones is another question. But he's certainly done that.

To get back to your initial observation, I think we can say, without pumping our chest too much, that our work has helped highlight the corporate tax as a pretty good place to look for these revenue raisers.

So this is an international tax newsletter, how much do you think that international tax issues specifically are part of this overall dynamic that you've identified?

Hard to tell. Because on its face, what we're doing in our work has always been narrowly geared towards looking at what's happening on this side of the pond. Our effective tax rate calculations are measuring U.S. federal income tax as a share of us pre-tax income.

Certainly, from a pre-2018 perspective, we know that many of the biggest companies have been systematically offshoring their U.S. profits, putting them in foreign tax havens. There's every indication that that's still happening. But we're making every effort to compartmentalize that. Whatever's happening abroad, whether it's income being legitimately reported abroad, or fraudulently being reported abroad, is a separate thing from what we're documenting in our reports.

Obviously, post-2017, that's no longer as surgically clean as it used to be. Because when companies, in particular in the pharma sector, continue to offshore their income, there are features of the U.S. tax system that are now designed to claw a little bit of that back. [The tax on global intangible low-taxed income], for example, is a U.S. tax provision that explicitly applies to foreign income. In our most recent reports, wherever GILTI is disclosed, we're not including that for exactly that reason. It's a U.S. tax, but it's a U.S. tax on foreign income. So it's not included either in the numerator or the denominator of what we're doing here.

We're still trying to get to a place where whatever companies are doing with offshoring is not affecting our effective tax rate calculations. But, we know the laughable things that tech companies, and especially pharma companies, continue to do with the location of their income. It's clearly a problem. It's just not a problem that is diagnosed much in our work.

So, you know the completely laughable thing where companies like Pfizer appear simply unable to turn a profit in the U.S., right? You wonder why they even bother selling stuff to Americans, given the apparent unprofitability of everything they do. That continues to be a thing going forward, post-2017. It's just not something that our effective tax rate calculations can really speak to at all. Because we're a prisoner to what these companies are reporting in their 10-Ks. And what they're reporting in their 10-Ks, especially in the case of Big Pharma, it tends to be losses in the U.S. All the reports that we've done, certainly the comprehensive ones we've done the last few couple of years, as a starting point we're only looking at companies that report a profit in the U.S. in every single year under analysis.

So our most recent one, where we're trying to do a before and after on the [Tax Cuts and Jobs Act], a condition for being included in that report was that companies had to report positive US income in every single year between 2013 and 2021. That, on its face, tended to exclude a lot of the companies that are really getting away with it, because they're zeroing out their U.S. income by sending it all abroad. So it's a huge problem. And there are other places you can look to know that offshoring continues to be a problem, that it's a problem that's going on unabated in the wake of TCJA. It just isn't something our effective tax rate calculations can really speak to.

I guess I didn't realize you were carving it out that way.

Where possible. As I'm sure you know, for a lot of companies disclosure is limited. If a company disclosed, specifically, a GILTI effect, and said it was a current tax effect, we excluded it from our effective tax rate calculations. There are plenty of companies that surely paid GILTI tax, but just didn't disclose this effect, or put the GILTI effect and the [base erosion and anti-abuse tax] effects and the [foreign-derived intangible income] effects all on one bucket, but didn't disclose the individual effects of those things. And in most of those cases, we couldn't make an adjustment. But wherever GILTI was explicitly disclosed, we removed it from our calculations.

Sometimes companies will say that the difference in effective tax rate is due to income being reporting in foreign jurisdictions, right?

But when that happens, it's typically a net effect, which could include both positive and negative impacts. And, of course, it could be due to a lot of things. Special regimes that are in place in other countries could have that effect. As could GILTI. As could BEAT. So in most cases, it's really hard to know what's driving that disclosure. The effect of foreign income is one of the more common disclosures you see in the 10-K's, for sure. But all too often it's just impossible to know which particular provisions of which countries' tax regimes are having that effect.

What are some of the big factors that have led to this big drop in effective tax rates after the TCJA, other than the obvious fact that they lowered the corporate rate?

Depreciation clearly is a factor, R&D clearly is a factor. And 'I don't know' is a gigantic factor. And I say that just because, one of the things that really jumps out is for every company--utilities are a big example of this--where you can just look at the deferred tax liabilities and see that there's a depreciation-size hole in their ETR. That's absolutely what's driving it. Then there's another company where you simply cannot infer from the disclosures they make what's driving this gap between their financial statement income and their apparent taxable income. Their disclosures all too often simply aren't good enough to know.

But 100%, the expansion of accelerated depreciation, to turn into expensing in the last couple of years, has been a big, big driver in this. And pre-TCJA it is a big factor in driving these rates. When all they had was bonus depreciation. Accelerated depreciation more generally, that was still a big factor in driving these rates. And that's part of what makes the multi-year thing more interesting. I think you can absolutely take potshots at anyone who's using a single year of effective tax rate data to say something magisterial about the overall health of the tax system. But when you can look at the same company in a time series, going back to 2013, and find the same sort of results, that's saying something a little bit more.

Because we know there are cyclical elements to effective tax rates and the way corporate taxes work. We know that depreciation in particular is primarily a matter of timing, in theory. Taxes not paid in 2013 should get paid eventually. So what you expect to see is some kind of cyclical effect over time. And, pretty clearly, a bunch of the companies here appear to be using depreciation in a way that snowballs, where they're generating new tax breaks faster than these old ones. I think that's a pretty interesting result of our paper as well. Depreciation, R&D are the two that jumped out the most, but 'I don't know' would probably a strong third place candidate there.

That does kind of lead into what I was going to bring up next, some of the criticisms of your model. You already spoke to the timing element. But there are people who have said that looking at financial data, and then comparing it to tax payments, this is really an apples-to-oranges thing. Because financial data has a different system of measurement, that has a different purpose. I'm curious for your response to that.

There's no question that book income and taxable income are very different things and they exist for different purposes. The whole point of financial statements is, theoretically, to give shareholders and to give potential shareholders an accurate view of the current, and hopefully future, health of the company. Financial statement income is, in general, the thing companies are trying to maximize, to paint a rosy picture of their financial health. By contrast, taxable income is something that companies are typically trying to keep as low as possible. And certainly, if you asked the leaders of these companies which income measures more accurately represent their overall health, they'd point to book income. The fact that financial statement income and taxable income are sharply different is not a slam on what these companies are doing. By and large, they're using the tax laws to create these differences. But nonetheless, the fact of the matter is that financial statement income is, in general, the best measure of the overall health of these companies.

There are, of course, rare cases where that's not true. For example, oil and gas companies claim huge impairments, as happened a bunch in 2020. That sharply reduces their book income for the year, in a way that I think is kind of misleading. That's the case where financial income isn't really telling the legit story. What's interesting about that, is that almost universally, when that happens, the companies themselves will go out of their way to present an alternate measure of good book income that they think is better. One of the more interesting developments in financial accounting in the last couple of years, for my money, is just how frequent these non-[generally accepted accounting principles] measures are. Companies are saying, OK, financial statement income usually is the thing, but it's not telling the whole story here. And here's why. They'll present a list of things that are in financial statement income, usually subtractions, that they think they want to see around. But I think that kind of reinforces the point, which is that if you ask these companies what best represents a true picture of their fiscal health of their income, they'd say book income, not taxable income.

The second thing I'd say about this is, none of these companies are telling us what their taxable income is. If they did, their effective tax rate would always be 21%. The whole point of the exercise is to draw attention to the fact that some remarkably healthy companies are telling the tax system that they're not healthy. And we don't know why. And Congress ought to know why, and evaluate whether whether they're happy with that result. I think we go out of our way to drive this point home, there's certainly no indication that companies that are creating this big gap between book income and taxable income are doing something wrong. They're just following the rules. They are, in fact, rules that many of these companies were instrumental in creating and it's the influence of private money in elections that created this outcome. There's no indication that this is anything other than perfectly legal. But it is an indicator of a huge, huge gap between financial statement statement income and taxable income and one that Congress ought to take a closer look at.

That's one of the issues, that Congress enacts these policies that create these effects. In some cases, maybe they're policies that are defensible, and people would agree with. In other cases, maybe it's an unintended consequence. And then both of those things go into the single measurement.

Everyone involved, whether it's us, as NGO observers, or Congress that enacts these laws, should have a better sense than we currently do of what's driving these outcomes. The fact that I can say, 'I don't know what's driving low effective tax rates,' that's not great. We ought to have a clearer sense of what's going on here.

But to get back to your underlying question, is it inherently misleading to use financial statement income and line it up with tax? I don't think it is. Not just because financial statement income is the only picture we get, but because financial statement income is simply better than taxable income as a barometer of the company's fiscal health. They themselves wouldn't disagree with that point. Taxable income is an accounting fiction, and a fiction that Congress has been complicit in creating, but it's a fiction nonetheless. And even if they provide it, I wouldn't use it for an effective tax rate calculation, because it simply doesn't represent how well these companies did every year.

I do think people would be surprised, how much is unknown about the tax system. And about taxes in general. A lot of times, we just have to do our best based on information that's out there, but it's going to be very incomplete information.

Yeah. And it's ludicrous. I think it's absolutely ludicrous. At a time when we're looking back, from a 2024 prospective, at a sea-level change in our tax system that was enacted at the end of 2017. And for some of the really big companies that clearly benefited most from this, we can't quantify those benefits. What we can say is that effective tax rates went down sharply after 2017. There's no question, that's a finding that jumps out from our new report. But we simply cannot say how much of that is the normal cyclical workings of the tax system--companies using depreciation tax breaks--and how much of it is the result of statutory changes.

I don't think anyone would deny that the lion's share of the reduction in effective tax rates we've seen since 2017 is because the statutory rate got knocked down by 40% after 2017. But we cannot quantify, in any particular case, just how important that was. It's frustrating, but it points to a need for far better disclosure than we currently have. We're just not there yet.

I don't think you've looked at the years since the Inflation Reduction Act took effect. You do have all of these green energy credits. Do you know how you're going to account for those?

We haven't really looked at 2023 at all. And, again, because we've had this single-minded focus on companies that are reporting positive book income, there's plenty of them that we might miss. I haven't really looked at these as much, but I would bet that a bunch of companies that are benefiting most from the IRA's clean energy provisions are companies that are not even turning a profit. In which case, we won't be analyzing those very closely.

But an interesting point to get from it is just that, if you're starting observation is that we should be trying to find ways for profitable companies to pay more corporate tax, the clean energy provisions in the IRA aren't going to achieve that. They might not make things dramatically worse, but they sure aren't going to make things better. There are provisions in the IRA that are going to mitigate the problems that we identified in our reports. The clean energy credits aren't among them. They're for an entirely different purpose. And that speaks to a problem in the legislative process. This is true both on the individual side and the corporate side, all too often Congress has moved away from achieving desirable social policy outcomes through direct spending. Even when direct spending might be a better way of accomplishing it.

We like cutting taxes as a nation, more than we like the government spending money directly as a nation. And so we've embodied a lot of these social policy objectives in the form of tax cuts, whether it's individual tax cuts or corporate tax cuts. I'm not going to say these things are bad, because social policy done through the tax code is better than no social policy at all, in most cases. And we need, desperately, to restructure the way we're producing and consuming energy in this nation. If corporate tax cuts are the way we accomplish it, then I'm not going to say that's a terrible thing. But in all likelihood, to the extent we're able to measure the effect of the energy tax incentives on effective tax rates, they're going to be pushing them lower, and continuing to create this gap between financial statement income and taxable income going forward. So I wouldn't expect this picture to get any prettier over time.

You're aware of the approaching "tax cliff" in 2025, the fact that so many of these provisions are going to expire. There's expected to be a big standoff and, potentially, some sort of grand bargain that will affect huge parts of the tax code. I'm curious if there are particular policies, or just directions that you're hoping to see enacted as part of this expected tax package.

The most obvious thing about the impending fiscal cliff is that it's something that is going to have far more of an impact on the individual side than on the corporate side. Because the corporate provisions, in general, tended to be permanent, and the individual provisions tended to be temporary. Individuals have a lot more at stake in the impending fiscal cliff than corporations do. But that doesn't mean that we can't go back as a nation, and re-examine every element of the TCJA as part of this process. I guess that's what I'd say my main hope is.

Pretty clearly, the way the TCJA got done, the way Congress was able to sell the Tax Cuts and Jobs Act to Americans was pretty misleading. They made it appear more affordable by packing tax benefits early in the window and asking people not to think about what happens later on. It's a template that was created by the Bush administration in 2001 and 2003, when they packed in a bunch of tax breaks early on and just assumed repeal later on in a way that made the 10-year cost appear lower than if there really was, and the long-term cost of appear lower than it really was. It's pretty clear that lawmakers have no intention of letting this happen.

But I think the fact that these things are going away gives us a chance to re-litigate the entire process, including the corporate provisions, including the corporate rate cuts.

In the run-up to 2017, everybody knew that there were two things that were pretty unusual about our corporate tax laws. One was that our statutory rate was higher than what most other countries had. And the other was that our effective tax rates were dramatically different from our statutory tax rates. And a very sensible hope that a lot of people on both sides of the aisle had in 2017 was that we'd get to a place where the sticker price on our corporate tax rate reflected what companies are actually paying. Thirty-five percent isn't going to be the law of the land anymore, but whatever the law of the land is, companies ought to pay it.

And one thing that jumps out of our new report is that that isn't the case, that we missed that opportunity. I think the impending fiscal cliff is an opportunity to take another swing at that, to get to a point where whatever our statutory tax rate on the corporate side is, is what companies are actually paying. And if that requires taking a closer look at the depreciation provisions, if it requires thinking more about what a sustainable statutory corporate tax rate is, my hope is simply that all of these things are part of the mix when Congress comes back to deal with this next year.

I'm not going to be the one to say what the appropriate personal or corporate income tax rate is. But my hope is that Congress will think organically about all of these provisions--not just the ones that are about to expire--when they come up with a sustainable budget going forward.

Contact the author at amparkerdc@gmail.com.