It's widely known that billionaire Warren Buffett and millionaire President Obama pay taxes at a lower rate than their secretaries, who make much less.
This "inequality" led them to devise a plan to hike the minimum tax rate on the top 0.3% of taxpayers -- now referred to as "The Buffett Rule."
But what's even more shocking is that American citizens collectively pay higher income tax rates than General Electric, Boeing, DuPont, and countless other companies.
Tiny Tax rates for Trillionaires
A recent study examined 280 of the largest companies in America and the taxes they paid in 2008, 2009, and 2010. All were Fortune 500 companies. And all were profitable. In fact, their pre-tax profit over that period totaled $1.4 trillion.
Yet a whopping 25% of them paid federal taxes at a rate of less than 10% (compared to the standard 35% corporate tax rate). And 30 of these companies paid absolutely no income tax on their profits between 2008 and 2010.
The 78 companies that enjoyed at least one year of paying no income tax had profits equaling $156 billion.
Yet instead of the $55 billion in tax revenue you'd assume the government would have received (at the 35% corporate rate), these companies (all of which -- again -- were profitable) received refund checks from the government totaling $21.8 billion.
We're talking corporate giants ranging from Duke Energy and Eli Lilly to ExxonMobil and Goldman Sachs.
Eliminate these tax breaks, and the U.S. Treasury would be $473 billion richer today.
Even worse, 134 of the 280 companies examined were content paying foreign taxes at a rate one-third higher than they paid in America.
It Affects All of Us
The study goes on to point out that the prevalence of these "corporate tax dodgers" means paying more for (or getting less of) government-funded projects. It means unfairness in corporate competition. It means struggling state governments.
And it means angry citizens who are upset and disillusioned by (not to mention downright angry with) their elected officials and the government these officials are entrusted to run.
So how was this possible? An obvious answer is the size of the tax code. SmartMoney recently noted that the U.S. tax code now contains more than four times the number of words that Shakespeare left behind across all of his works.
Yet it's full of loopholes -- loopholes that legally permit even a tech giant such as Apple to sidestep billions of dollars in taxes.
A recent article in The New York Times explained how Apple avoids state taxes in California by setting up additional corporate offices in Nevada (which has no state income tax).
It also pointed out an elaborate technique like the "Double Irish With a Dutch Sandwich" trick, whereby Apple sends profits through Irish subsidiaries to subsidiaries in the Netherlands to other subsidiaries in the Caribbean. This all lets Apple trim its U.S. federal tax bill.
A former Treasury economist calculated that, without these strategies, Apple's tax bill would have been $5.7 billion instead of the $3.3 billion it actually paid.
But Apple's not alone. Countless other companies employ similar methods. And it's completely legal.
What Can Be Done?
It's a vicious cycle, and will continue to be. As state governments and the federal government face growing deficits, it will become increasingly necessary to raise taxes.
Yet raising taxes will only force these companies to look even harder for ways to legally dodge these higher taxes, exacerbating the problem.
Corporations will continue to lobby for ever-lower taxes -- and politicians will continue to cower to their demands, so these companies will fund their next reelection campaign.
However you look at it, our tax system is in desperate need of fixing, and we need our elected officials to work together to fix it. But at more than just the individual level.
This article was written by Motley Fool analyst Adam J. Wiederman. Click here to read Adam's free report on how to boost your Social Security checks by as much as 76%.
The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, ExxonMobil, and Goldman Sachs, as well as creating a bull call spread position in Apple.