“Multinational Taxes, Profits, and Jobs” A Short Story in Six Parts

Part 1. Reported Effective Tax Rates are Falling

Source of the data Start with 100 most profitable corporations 80 corporations with almost ½ of total US profits Annual Report income tax footnotes Average effective rate 1997-1999 Average effective rate 2004-2006

Effective Corporate Tax Rates in Annual Reports for 80 Corporations 1997-99 Average 2004-06 Average Change

1997-1999 2004-2006 Change 1 Freddie Mac 28.9% 10.2% -18.72% 2 Occidental Petroleum 55.0 37.7 -17.33 3 Phelps Dodge 35.5 18.4 -17.10 4 Cisco Systems 40.9 26.0 -14.87 5 General Electric 29.6 17.4 -12.23 6 Morgan Stanley 38.2 26.4 -11.80 7 United Parcel Service 46.4 34.7 -11.70 8 AT&T -11.30 9 Altria Group 40.3 29.5 -10.77 10 Dow Chemical 34.9 24.7 -10.19 11 Anadarko Petroleum 47.0 37.1 -9.98 12 MetLife 37.3 27.6 -9.69 13 Verizon Communications 38.8 29.2 -9.60 14 Boeing 25.2 15.7 -9.49 15 Coca-Cola 33.4 24.0 -9.33 16 Lockheed Martin 27.9 -9.15 17 Texas Instruments 32.3 23.5 -8.78 18 Disney 42.4 34.2 -8.23 19 Alcoa 31.6 24.1 -7.53 20 Oracle 36.5 29.0

1997-1999 2004-2006 Change 21 Qualcomm 25.6 18.1 -7.45 22 Merrill Lynch 33.8 27.1 -6.67 23 Citigroup 35.5 28.8 -6.63 24 Microsoft 35.6 29.1 -6.53 25 J.P. Morgan Chase 36.2 29.7 -6.49 26 TXU 36.0 30.1 -5.95 27 U.S. Bancorp 37.5 31.7 -5.85 28 Pfizer 26.6 21.0 -5.57 29 Allstate 29.8 24.2 -5.53 30 Wells Fargo 39.4 34.0 -5.43 31 Wyeth 28.5 23.1 -5.39 32 Hewlett-Packard 27.7 22.3 -5.37 33 Chevron 47.6 42.4 -5.23 34 Intel 34.4 29.2 -5.20 35 Honeywell Intl. 26.9 -4.73 36 Dell 30.0 25.4 -4.63 37 Procter & Gamble 34.7 38 SunTrust Banks 34.6 -4.58 39 Bank of New York Co. 36.3 32.0 -4.30 40 Bear Stearns 38.1 -4.07

1997-1999 2004-2006 Change 41 Apache 40.9% 37.1% -3.83% 42 ConocoPhillips 47.3 43.6 -3.67 43 Caterpillar 31.9 28.2 44 Wal-Mart Stores 37.1 33.6 -3.43 45 3M 35.7 32.3 -3.40 46 United Technologies 30.0 26.7 -3.27 47 Bank of America Corp. 36.4 33.3 -3.14 48 Capital One Financial 37.7 34.9 -2.84 49 PNC Financial Services Group 34.3 31.5 -2.83 50 Baker Hughes 36.0 -2.72 51 Loews 32.0 29.3 -2.67 52 McDonald's 32.4 29.8 -2.57 53 Washington Mutual 38.9 36.5 -2.41 54 Hartford Financial Services 23.1 21.0 -2.11 55 Motorola 32.5 30.5 -2.07 56 Home Depot 39.0 37.3 -1.66 57 UnitedHealth Group -1.30 58 National City Corp. 33.7 32.6 -1.17 59 Amgen 27.2 -1.07 60 Target 38.8 37.8 -1.03

Intl. Business Machines 32.3% 31.3% -1.00% 1997-1999 2004-2006 Change 61 Intl. Business Machines 32.3% 31.3% -1.00% 62 Merck 31.9 31.0 -0.97 63 Johnson & Johnson 27.9 27.1 -0.80 64 Berkshire Hathaway 33.4 32.7 -0.78 65 Countrywide Financial 39.0 38.7 -0.27 66 Travelers Cos. 24.6 24.7 0.03 67 Burlington No. Santa Fe 37.4 0.07 68 Valero Energy 32.8 32.9 0.15 69 American Intl. Group 28.9 29.3 0.40 70 American Express 27.5 28.0 0.52 71 Anheuser-Busch 38.1 39.3 1.17 72 Lowe's 36.4 38.3 1.90 73 Wachovia Corp. 29.6 32.1 2.43 74 Lehman Brothers Holdings 29.7 32.5 2.80 75 Wellpoint 35.7 3.03 76 Eli Lilly 24.4 29.0 4.53 77 Marathon Oil 32.3 39.1 6.85 78 Chubb 16.8 26.3 9.50 79 Exxon Mobil 42.9 10.02 80 Apple 8.6 28.7 20.10

Negative changes Positive changes

Part 2. WHY rates are falling?

Source of the data Annual Report Income tax footnote Reconciliation of Statutory and Effective Tax Rate

What caused the four percentage point decline? 2.9 percentage points due to lower taxes on foreign earnings 0.5 percentage points due to lower state and local income taxes 0.5 percentage points due to increase in favorable audit adjustments

WHAT is behind decline in foreign effective tax rate? Part 3. WHAT is behind decline in foreign effective tax rate?

Source of the data U.S. Department of Commerce, Bureau of Economic Analysis Annual survey Aggregate data Latest year available is 2005

Three possibilities Lower foreign tax rates Shift of real activity out of high-tax countries [ jobs ] Profit shifting in excess of movements in real activity [ revenue ]

Note: Rates include sub-national taxes.

All Three Possibilities in Play Average foreign ETR did decline from 31.8 in 1999 to 28.6 in 2004 Multinational foreign business activity increases by 43 percent Multinationals increase foreign profits by 72 percent Each of these three factors contribute about equally to declining foreign effective tax rates

HOW MUCH profit shifting out of the United States? Part 4. HOW MUCH profit shifting out of the United States?

Part 5. What are the facts on domestic vs. foreign job creation by U.S. multinationals?

“For every one job U.S. multinationals created abroad in their foreign affiliates they included nearly two U.S. jobs in their parent operations.”

What role do taxes pay in foreign job creation? Part 6. What role do taxes pay in foreign job creation?

Employment (thousands) Change in Foreign Employment by U.S. Multinationals Corporations Between 1999 and 2005 Employment (thousands) 2005 ETR 2005 Avg. Compen-sation Level in 2005 (000’s) Growth between 1999 and 2005 All countries 8,955.8 1190.0 28.7% $38,958 1. China 489.6 237.2 18.7% $8,750 2. India 179.1 116.9 28.2% $11,167 3. United Kingdom 1,160.6 101.0 46.9% $60,403 4. Canada 1,079.1 74.9 26.2% $39,453 5. Mexico 838.4 57.6 27.2% $13,459 6. France 584.1 53.7 33.2% $49,351 7. Brazil 393.3 44.5 34.3% $19,367 8. Indonesia 102.7 41.1 41.8% $10,750 9. Italy 225.5 37.3 39.9% $51,601 10. Korea 83.0 36.9 22.5% $38,819 11. Poland 94.4 35.9 14.8% $16,123 12. Japan 242.0 34.7 40.2% $83,566 13. Sweden 104.8 32.4 58.0% $63,254 14. Australia 283.9 31.4 16.7% $50,049 15. Russia 55.7 26.7 29.2% $14,219 16. Spain 192.2 25.7 30.8% $46,436 17. Netherlands 184.3 18.8 31.9% $61,042 18. Switzerland 72.7 18.0 13.0% $83,301 19. Thailand 119.6 17.3 25.8% $8,955 20. Czech Republic 59.6 16.1 23.1% $16,762

For More Details “Reported Corporate Effective Tax Rates Down Since Late 1990s,” Tax Notes, Feb. 25, 2008, p. 882. “Why Reported Effective Corporate Tax Rates Are Falling,” Tax Notes, Mar. 3, 2008, p. 977. “U.S. Multinationals Shifting Profits Out of the United States,” Tax Notes, Mar. 10, 2008, p. 1078. “U.S. Multinationals Paying Less Foreign Tax,” Tax Notes, Mar. 17, 2008, p. 1177. “Offshore Jobs and Taxes: Will Democrats Attack?” Tax Notes, Apr. 7, 2008, p. 24. “U.S. Multinationals Moving Jobs to Low-Tax, Low- Wage Countries,” Tax Notes, Apr. 14, 2008, p. 119.