The corporate tax rate. Wait! Don’t click away. If liberal, you think it’s too low; if conservative, too high. The truth is somewhere in the middle. Get an executive summary in the first paragraph. This is important and interesting . . . really!
Yes, the statutory U.S. corporate tax rate is 35%, the highest in the developed world. BUT that isn’t what corporations actually pay. Comparisons of tax rates need to be based on: 1) actual paid taxes after tax subsidies, deductions, and various other legal loopholes (aka the effective actual tax rate, ATR, or ETR); 2) weighted, comparable economies, e.g., using the G7 or Organization for Economic Cooperation and Development (OECD. When this is done, the actual U.S. corporate tax rate is comparable to similar countries. For example, in 2014, Pfizer paid only 7.5% on its worldwide pre-tax income of $12 billion. Glaxo, Smith, Kline, a large British pharma had an effective tax rate of 23.9% in 2014. In 2011, for all U.S. corporations with assets over $10 million, the ATR was 20%. Interestingly in 2012, 42.3% of those corporations paid no federal tax at all. In 2012, the ATR was 16.1% for those corporations showing a profit.
Discussion about the 35% high corporate tax rate is IRRELEVANT! Except that it makes sense to cut this U.S. corporate tax rate ONLY if subsidies, deductions, and other tax-avoidance measures are cut also. This would be a sensible solution. It should be noted that such subsidies and loopholes impact different industries so that some U.S. industries pay a higher rate than others. It varies as much as 10% to 28%.
According to the U.S. Treasury Department: “The effective actual tax rate is defined as taxes actually remitted divided by book or financial statement income (rather than taxable income). 1 The average effective “actual” federal corporate tax rate (ATR) provides a comprehensive measure of the average tax rate actually paid by corporations. 2 For several reasons, the ATR differs from the 35 percent top federal statutory tax rate. Accelerated depreciation and other tax preferences, such as the domestic production activities deduction and tax credits, can lower the ATR below the top U.S. federal statutory corporate tax rate. 3 In addition, tax planning, noncompliance, and costly enforcement all can influence taxable income and taxes paid, and hence also have the potential to impact the ATR.” www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Average-Effective-Tax-Rates-2016.pdf
Image thanks to edman_eu
GAO Report to the Ranking Member, Committee on the Budget, U.S. Senate, Corporate Income Tax: Most Large Profitable U.S. Corporations Paid Tax but Effective Tax Rates Differed Significantly from the Statutory Rate, March 2016. For highlights of the GAO report: www.gao.gov/assets/680/675845.pdf; For the full report: www.gao.gov/assets/680/676078.pdf
Forbes Magazine, “The Truth about Corporate Tax Rates” by Martin Sullivan, March 2015; www.forbes.com/sites/taxanalysts/2015/03/25/the-truth-about-corporate-tax-rates/#70f0effc742c
NPR, Fact Check: http://www.npr.org/2017/08/07/541797699/fact-check-does-the-u-s-have-the-highest-corporate-tax-rate-in-the-world This source brings up another interesting comparison: the tax rate compared to GDP. In 2014 the U.S. was at 2.2%, while the average for the Organization for Economic Cooperation and Development (OECD), the most highly developed countries, was 2.8%.
“All truths are easy to understand once they are discovered; the point is to discover them.”