America’s REAL Corporate Tax Rate

On paper, America’s corporate tax rate is the highest in the world. But the reality is far different, with American corporations paying the lowest taxes of all industrial countries. This article evaluates the arguments, and provides persuasive evidence for the conclusions it reaches.

Originally published 2013

I was recently in an argument with some folks who claimed that America’s corporate tax rates are way too high. I argued that corporations pay less in taxes here than they do in most any other industrial country. They disputed that claim, of course, vehemently challenging its veracity. This article is my response.

The Statutory Rate

In the course of looking for that evidence, one of my first finds was a Republican making a speech in Congress, making the very same claims. The occasion was Japan’s announcement that it was lowering it’s statutory rate (the tax rate that corporations are subject to, on paper, before tax breaks and loopholes are taken into account).

It used to be that Japan and America were tied for the highest rate. (Or perhaps Japan’s was higher.) In any event, after lowering its rate, America was indeed left with the highest statutory rate in the world.

The problem, of course, is that statutory rate only exists on paper. The question is, What do corporations really pay?

The Reported Rate (The “Effective” Rate)

One of the articles I turned up said that something like 10 studies have been conducted to answer that question. Each of them said that while American corporations were perhaps not paying the highest taxes in the world, they were always somewhere in the top five when it comes to the effective rate — the amount that corporations actually pay, as a percentage of reported earnings.

For example, this Business Finance article claims that the effective tax rate in the U.S. is right up there witth the best of them, and ends by saying that the U.S. rate is “not an outlier”.

The top five. That’s not too bad, right? It sure sounds good. But hold on just a moment. The operative word in that phrase is reported earnings. As you may or may not know, reported earnings are not always the most perfect representation of reality.

Actually, that’s a bit of an understatement. At times, reported earnings can be an outright lie.

For example, consider the fact that a corporation can sell it’s trade secrets to an offshore company that operates tax-free in Switzerland or the Cayman Islands. It can then lease that information for say, a $1,000,000 a year. That’s a million dollars that comes straight off the gross income and gets salted away, tax free. So instead of reporting a profit of 2 million, they only have to report a profit of 1 million — immediately cutting in half the amount of taxes they pay. And that’s just one of many tax dodges reported in books like Perfectly Legal, by New York Times reporter David Cay Johnston.

Secondly, consider that (for incomprehensible reasons) the profits reported to the IRS don’t have to match the profits reported to stockholders. That arrangement produces the specter of a highly profitable company that reports a large profit to its shareholders (for example, because it includes the foreign company as a subsidiary), while reporting a much smaller profit to the IRS — one that is so small that the percentage of taxes paid on actual earnings can begin to become negligible!

So in our hypothetical example, a company could report $2 million in earnings to it’s shareholders, but only report $1 million to the IRS — and pay taxes on only that amount.

That is all just a theoretical possibility, of course. (Even though we know it’s happening. Wink.) But the question is, do we have any evidence that it is happening? More importantly, do we have evidence that tells us to what degree it is happening.

As it turns out, we do.

The Actual Rate

So how much do corporations actually pay? One way to make that determination would be to evaluate company stockholder reports to determine real earnings, and then find out how much they paid in taxes. After gathering that information for all of the companies doing business in the U.S. and doing the calculations, we could get a fair idea of how much American companies are actually paying.

Fortunately, there is an easier way. Economists track a country’s GDP — gross domestic product, or how much economic wealth was produced by a country. At the same time, the amount of taxes that are actually collected are also a matter of public record. Dividing the amount collected by the amount produced (GDP) gives the actual tax rate — the percentage of earnings that was, in the end, collected in taxes.

Even better, that mechanism makes it possible to compare one country to another. One country may not collect very much in taxes, while another collects a lot. But when each country’s GDP is taken into account, the resulting number shows the actual percentage of taxes that corporations are paying in each country.

It turns out that there is a site which tracks precisely that data. The Organization for Economic Co-operation and Development has recorded those numbers for virtually every country, for every year since 1965. (For 2011, numbers were not yet available for a handful of countries.)

When we begin to look at those numbers, America doesn’t come out looking so good.

In this article, I’m going to limit the analysis to the years from 1990 to 2011. And I’m going to limit the analysis to the 23 industrial nations.

Looking at the average taxes that industrial nations paid during that period, as a percentage of GDP, America ranks 21st out of the 23, with a 26% tax rate. Only Korea and Mexico paid less.

Sweden and Denmark were at the top of the list at 46% and change. (In an unrelated story, the people of Denmark were ranked as being the happiest people in the world.)

Coming close behind at 40% and above, were Finland, France, Austria, Netherlands, and Norway. In the 30% bracket, we find Italy, Germany, Poland, Israel, the UK, Canada, New Zealand, Spain, and Ireland. Greece and Australia paid significantly more than the U.S., but still less than 30%, while Japan and Switzerland narrowly edged out the United States for “bottom of the barrel” honors.

But more than the average numbers lets take a look at the trend:

  • In 1990, America ranked 19th. (Numbers were not available for Poland and Israel. But for every year for which they were reported, the numbers have been higher.)
  • In 2010, America ranked next to last. Only Mexico paid a lower percentage.
  • In 2011, America ranked next to last. (Numbers were not available for 6 countries. Five had a higher average rate, while only Mexico had a lower average.)

Here is the relevant data shown side by side, for ease of comparison:

1990   2010   2011   AvG: 1990-2011
 
1990
Avg
Poland
..
34.4
Israel
..
33.4
Sweden
52.3
46.3
Denmark
46.5
46.2
Finland
43.7
42.7
Netherlands
42.9
40.2
France
42
41.5
Norway
41
40.1
Austria
39.7
40.6
Italy
37.6
39.5
New Z’land
36.9
32.8
Canada
35.9
33.0
U.K.
35.5
33.2
Germany
34.8
34.7
Ireland
32.8
30.9
Spain
32.5
32.1
Japan
28.6
26.9
Australia
28
28.4
U.S.
27.4
26.0
Greece
26.4
29.7
Switzerland
24.9
26.2
Korea
19.5
21.3
Mexico
15.8
16.8
2010
Avg
 
47.6
46.2
Denmark
45.5
46.3
Sweden
42.9
41.5
France
42.9
40.1
Norway
42.9
39.5
Italy
42.5
42.7
Finland
42
40.6
Austria
38.7
40.2
Netherlands
36.1
34.7
Germany
34.9
33.2
UK
32.4
33.4
Israel
32.3
32.1
Spain
31.7
34.4
Poland
31.5
32.8
New Z’land
31
33.0
Canada
30.9
29.7
Greece
28.1
26.2
Switzerland
27.6
30.9
Ireland
27.6
26.9
Japan
25.6
28.4
Australia
25.1
21.3
Korea
24.8
26.0
U.S.
18.8
16.8
Mexico
2011
Avg
 
..
34.4
Poland
..
40.2
Netherlands
..
28.4
Australia
..
30.9
Ireland
..
26.9
Japan
48.1
46.2
Denmark
44.5
46.3
Sweden
44.2
41.5
France
43.4
42.7
Finland
43.2
40.1
Norway
42.9
39.5
Italy
42.1
40.6
Austria
37.1
34.7
Germany
35.5
33.2
UK
32.6
33.4
Israel
31.7
32.8
New Z’land
31.6
32.1
Spain
31.2
29.7
Greece
31
33.0
Canada
28.5
26.2
Switzerland
25.9
21.3
Korea
25.1
26.0
U.S.
..
16.8
Mexico
Avg
 
46.3
Sweden
46.2
Denmark
42.7
Finland
41.5
France
40.6
Austria
40.2
Netherlands
40.1
Norway
39.5
Italy
34.7
Germany
34.4
Poland
33.4
Israel
33.2
UK
33.0
Canada
32.8
New Z’land
32.1
Spain
30.9
Ireland
29.7
Greece
28.4
Australia
26.9
Japan
26.2
Switzerland
26.0
U.S.
21.3
Korea
16.8
Mexico

The Bottom Line

There are many ways to slice and dice the data, but the conclusions are pretty hard to avoid. When it comes to corporate tax rates, the United States barely made the top 20 early in the 1990’s. Since then, America has been in the bottom three of the 23 industrial nations in the world — and presently ranks next to last, above only Mexico.

Far from paying the highest percentage of corporate taxes in the world, the United States ranks close to the bottom among industrial nations. Not surprisingly, the United States also ranks close to the bottom in education and every measure of health — including infant mortality and deaths from the kinds of diseases that occur in industrialized nations. In short, virtually every industrial nation in the world does better than the U.S. on some of the most important measurements of health and happiness — and they collect more in taxes. That’s not a coincidence.

The worse news is the shape of the trend. The constant repetition of the lie that the U.S. “has the highest corporate tax rate in the world” has produced a climate in which the already dismally-low actual rate is being reduced even further.If the trend continues, we may someday find American corporations paying less in taxes than many third world nations!

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