International corporate tax rate comparisons and policy implications

 
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March 10, 2014

Given the unpopularity of all taxes large and small, it’s no surprise that tax reform is everyone’s favorite subject. In March 2013 the chair of the House Committee on Ways and Means, Rep. David Camp (R-Mich.), issued a voluminous plan to reform the U.S. system, including a cut in the U.S. corporate rate from 35% to 25%. President Obama has repeatedly called for the closing of corporate loopholes. While a major U.S. tax reform bill is likely to be delayed until after the 2014 mid-term elections, change is long overdue — the last reform was enacted in 1986, under President Ronald Reagan. A 2012 report from the Harvard Business School suggests that for business leaders, corporate tax reform is a major priority to improve U.S. competitiveness. (Other items on the list include “a sustainable budget, infrastructure investments, responsible new energy extraction, and assertive action on international trade.”)

Proponents of reduced corporate taxes frequently argue that the statutory rate in the United States — 35% — is significantly higher than that in most other countries. This is hardly what firms pay in the end, however: To reduce or eliminate taxes, corporate accountants can shift profits between branches in different U.S. and international subsidiaries, alter funding sources and terms, adjust pricing, and hundreds of other strategies. Consequently, alternative measures are often used to better capture the burden on investment imposed by corporation tax. One is the “effective rate,” which takes into account the tax base — countries with broad tax bases and low statutory rates look similar to countries with narrow tax bases and high statutory rates under this measure. Another way of looking at corporate tax burdens is the “marginal effective rate,” which captures the effect of tax rate differentials on future investment.

A 2013 analysis by the New York Times found significant variation in the effective rates paid by major U.S. firms. On the low end were the cruise giant Carnival (1%), Duke Energy (3%), Amazon (6%) and Apple (14%). High rates were paid by the Bank of New York (52%), ConocoPhillips (74%), Motorola Solutions (80%) and Goodyear Tire and Rubber (92%). Overall, the Times analysis found that the average effective rate in the United States was 29.1%, about 6% less than the statutory rate. Research from the advocacy group Citizens for Tax Justice suggests that many large multinationals pay little corporate tax, with 26 of the Fortune 500 paying no federal income tax at all from 2008 to 2012.

A 2014 report by the Congressional Research Service, “International Corporate Tax Rate Comparisons and Policy Implications,” compares U.S. rates to those of the 31 member nations of the Organisation for Economic Cooperation and Development and also assesses the impact of proposed reforms.

The study’s findings include:

  • While the current U.S. statutory corporate tax rate is 35%, because the rate varies by state — which also assess their own taxes — the overall average is 39.2%. This compares to an OECD weighted average of 29.6%. (The rates for individual countries are weighted by their GDP, as countries with smaller economies tend to have lower tax rates.)
  • The effective U.S. corporate tax rate is 27.1%, which is 12.1 percentage points less than the overall statutory rate in the United States. The effective rate for OECD countries is 27.7% including the United States (weighted average), and 23.3% excluding the United States (unweighted average). The unweighted average amplifies the effect of low-GDP, low-tax countries, however.
  • Overall, “the tax rate most relevant for the purpose of incentives to invest is similar for the United States and the rest of the OECD,” the author states.

The report goes on to estimate the impact of lowering the statutory corporate tax rate in the U.S. from 35% to 25%:

  • Over the 10-year period from FY2013 to FY2022 the proposed rate cut would cost the United States $1.3 to $1.7 trillion in lost tax revenues.
  • The effect on wages and output is likely to be low, with an estimated increase of 0.18%. This gain would not be for U.S. households, however, because much would accrue to people and companies outside the United States. The estimated gain to U.S. national income is less than 0.02% of national income — two-hundredths of 1%.
  • While revenues would increase as fewer profits are shifted out of the United States, this effect is likely to be small: “Even a cut to 25% would leave a large benefit to profit shifting” to nations like Ireland, which has a statutory rate of 12.5% or Bermuda with a statutory rate of 0%.
  • Gains from a corporate tax rate cut would be offset if other higher-taxing countries followed suit and cut their own rates. Evidence suggests other countries began to cut their corporate tax rates after the U.S. rate cut in 1986.
  • It is possible to identify enough changes to government policy to allow the corporate tax rate to be reduced to 25% without losing revenue over the long run. However, this requires “going beyond corporate tax expenditures … to business preferences associated with unincorporated businesses, foreign tax credit restrictions, or more fundamental reforms.”

The report suggests that U.S. corporate tax rates are in line with the average for comparative countries, and that lowering the corporate tax rate from 35% to 25% is likely to lead to high revenue losses and only small income and employment gains.

Related research: Another 2014 study from the Congressional Research Service, “Corporate Income Tax System: Overview and Options for Reform,” gives an overview of the U.S. system and evaluates proposed options, including Bowles-Simpson (2010), Rep. David Camp (2011-2014) and  Sen. Max Baucus (2014). The study begins by noting that in 1952 the U.S. corporate tax generated 32.1% of all federal tax revenue; by 2012, the figure had fallen to just 9.9%. Much of the change is due to the use of partnerships, S-corporations and other “pass-through entities.” Moreover,  the U.S. collects less relative to its GDP (2.3% in 2011) than the average of other OECD countries (3%). The study looks at policies that would broaden the tax base to finance reduced corporate tax rates, address corporate “double taxation” and revise how pass-through income is treated.

Keywords: taxation, tax reform, competitiveness

 

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Citation: Gravelle, Jane G. "International Corporate Tax Rate Comparisons and Policy Implications," Congressional Research Service, January 2014.