Tuesday, April 26, 2016

Do Corporations Pay Enough Taxes?

It's the same old political whipping boy year in and year out. "Corporations don't pay their fair share of taxes blah blah blah." They use the language to incense and anger those who are dumb enough to believe them. Career politicians know if you're dumb enough to believe them you are probably to dumb to figure out the truth anyway*.  Plus the CEO's don't mind. They already made their legal campaign contribution and probably a closed door deal ensuring that business goes on as usual. Unfair? Maybe. But it's human nature and easy to judge when you're not in the same position with big responsibilities. Besides politicians know they need companies to keep folks hired so it's a two way street.

So do these "evil" corporations actually pay their fair share in taxes?  The answer is very simple to find out. However what is fair is all relative.

Wal-Mart is just about every persons favorite evil corporation despite employing millions of people and making plenty of things affordable for the less privileged worldwide. So let's take a look at their 2015 annual report for use in our example.

We'll start with income taxes.

For 2015 the company reported in its cash flow statement that it paid $8,169,000,000 in income taxes at the federal and state level. We look at the cash flow statement since we want to know exactly how much in cold hard cash the company paid out.  Of course they took every LEGAL action to reduce their tax bill. And honestly who doesn't? If you don't then I'm sorry you are making an ill advised mistake.

Of course that's not the only tax the company pays. Buried within the financials are the payroll taxes, sales/use taxes, and miscellaneous taxes. Here we find an accrual within note #5 to the financial statements. We see that the company has accrued payroll, sales, and misc taxes to the tune of $2,592,000,000.  Now the accruals are not the final tax bill, but we can assume they are reasonably close to what the company expects to pay based off historical results. It's unclear in the note if that includes property taxes.  So if it didn't we could make the following assumptions to come to an estimate.

The company stated it owned $26.261bil worth of land, and $97.496bil worth of buildings for a total of $123.757 billion. Additionally 46% of the companies locations are in the USA**. Let's assume they pay a 1% property tax rate nationwide.

(123,757bil x 46%) x 1% = $569,282,200

That equates to $110k in property taxes per store for the year which actually seems reasonable. That would bring the total accrual to $3,161,282,200.

Regardless this gives us a total of $10,761,000,000 without the additional property tax calculation.  That's a pretty large number in my opinion as almost $11 billion in tax payments is more than most companies generate in revenue for the year.  Let's put this number in perspective. Wal-Mart has to buy all it's inventory to sell you, pay utilities, staff, equipment, and interest on debt.  The company generates revenues of $482 billion. After all the company bills are paid for we reach operating profit totaling $24,799,000,000.  That's actually not a large number since it equals an operating profit margin just over 5%. There are plenty of other companies out there with better margins, but Wal-Mart competes in a low margin business.  It's from the $24 billion operating profit the company will pay it's income taxes.

What percentage of profits are paid as taxes?

The company has operating profits of $24.7bil and pays taxes of $10,761bil.  That means the company pays 43.3% of it's total profit in taxes.
10,761,000,000 / 24,799,000,000 = 43.3%

When income taxes paid in cash are calculated we see the company has an income tax percentage of 32.9%.
8,169,000,000 / 24,799,000,000 = 32.9%

These percentages are actually quite high. They even fall close to the range of taxes that individuals pay as I noted in my posts about Erin and Jake. After all is said and done the company looks to be paying quite a bit in taxes. Especially considering the company employs 1.4 million people that otherwise might not have a job.  That's a lot of extra jobs and tax revenue to find if the company were to disappear. Now if you think that amount of tax is fair or unfair is totally up to you.  In my opinion I think it is more than fair.

*Although I know the loyal readers of The MAD Consultant blog are smarter than most.
**While it's likely based off the financials the USA properties are more valuable for examples sake we will allocate the individual values as equal for international and domestic.

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