Estimating the Return on Investment of Corporate Lobbying

In an earlier post we discussed the lumpy difference between the nominal (40%) and effective (average 16%) corporate tax rates in the US. That effective tax rate is driven by many things, including subsidies, deductions, offshore accounts, and other drivers.

A reader suggested we look into how much money that 24% gap is worth and how that might incentivize corporations in their lobbying efforts in Washington.

After-tax profits for US public corporations reached $1.7 trillion in 2014, which means that profits before taxes (at 16%) were $2.0 trillion.

corporate-profits

If corporations in the US were taxes at the nominal rate of 40%, they would walk away with $1.2 trillion instead, meaning that the deductions and other loopholes are worth about $500 billion to US corporations as a whole.

What does it cost to get these tax breaks? If we use total corporate lobbying spend (to DC) as an estimate, the cost is about $3.24 billion. If lobbying efforts only maintained current tax benefits (and never improved them), the one-year return on investment would be 15,400%--that is, they make back $154 dollars in a year for every dollar spent.

That’s probably the single best investment a corporation can make.

Are we confident lobbying drives a lot of these tax breaks? There are a few leading indicators that suggest so. GE, for example, spends the most on corporate lobbying and sometimes pays nothing at all in corporate income taxes. An admittedly cherry-picked set of 30 large corporations might suggest that frequently, big lobbying spending is correlated with no taxes--or even negative tax rates.

Lobbying is of course spent on other efforts: to create new or eliminate old regulations, to get new contracts with the federal government, etc. So not all of that $3.24 billion goes towards reducing tax rates entirely. But let’s call it a hand-wavy estimate.

If you were the CEO of a major corporation, would you make this “investment?”

As citizens, how do we draw the line between some deductions we might think are good (like incentives to build domestic factories, or green-building incentives, or tax breaks for solar manufacturers) and those we think are bad?

 

1 Comment

Erik Fogg

We do politics, but we don't do the thinking for you.