With all their difficulties over party contributions and antitrust deals far from settled, the last thing International Telephone and Telegraph officials needed was a fresh controversy over income taxes. Last week they faced exactly that. In the final stretch of the Wisconsin primary campaign, George McGovern charged that ITT had "paid no federal taxes at all" for the past three years. As it turned out, McGovern could not back his accusation with any reliable evidence, and thus earned the company's rebuke that his charges were "erroneous and misleading." On the other hand, ITT's real tax position, which its officers have refused to clarify fully, seemed indeed open to question.
Half-Rate. McGovern later admitted that he had included in his calculations only the taxes of the parent company, which accounts for a mere 10% of the entire conglomerate's sales. Thus his figures were bound to be askew. Taken as a whole, ITT and its subsidiaries reported federal income tax liability of between $67 million and $70 million for each of the past three years. By taking advantage of complex tax provisions that allow corporations to depreciate equipment much faster than it actually wears out, ITT was able to defer much of its tax bill until future years. Last year it deferred some $64 million in taxes, presumably a hefty share of them federal income taxes. Such deferrals give ITT use of the money to seek new profits, in effect providing the corporation with an interest-free loan. However, even if ITT had paid its entire 1971 federal tax bill in cash—a highly unlikely possibility—the conglomerate still evidently had a current tax rate of less than 25% on its $320 million gross profits in the U.S. and Canada.
In fact, for each of the past three years, ITT's total paid and deferred taxes in the U.S. and Canada came to 20% to 25% of its pretax profits, or about half of the official 48% tax rate on U.S. corporate incomes. Like individual taxpayers, corporations can effectively reduce the official rate by using certain benefits on their tax bill; these include capital gains, which are taxed at a preferential rate, and investment credits, which an expansionist firm like ITT would be certain to use to the fullest.
Nevertheless, an effective tax rate of 25% is considered low. Congressman Charles Vanik recently figured such rates for 17 of the largest U.S. industrial firms; the rates ranged from a high of 47% (RCA) to a low of 17% (Bethlehem Steel). Only two of the 17 (Bethlehem and International Harvester) appear to have got off easier than ITT. Whether ITT's rather cushy tax burden is legally justified or not, it is bound to stir further public concern about the inequities of U.S. taxes, a problem that is expanding into a major election issue. When Vanik recently discovered that U.S. Steel Corp. took advantage of so many tax breaks that, although it had earned $ 155 million last year, it planned "no provision for taxes on income," he instructed the Joint Economic Committee to report any other companies listed in FORTUNE'S 500 that were able to wiggle out of income taxes in 1971. Vanik then asked the House: "If an operation of this dimension pays no federal taxes, pray tell, who should?"