Corporate tax: only a piece of tax revenue pie
Business taxes may be high in the US, but overall, Americans are not overtaxed.
In his speech yesterday to the U.S. Chamber of Commerce, President Obama doubtless pleased many in his audience by repeating the business community’s favorite mantra about U.S. taxes: “Another barrier government can remove,“ he said, “is a burdensome corporate tax code with one of the highest rates in the world.”Skip to next paragraph
Howard Gleckman is a resident fellow at The Urban-Brookings Tax Policy Center, the author of Caring for Our Parents, and former senior correspondent in the Washington bureau of Business Week. (http://taxvox.taxpolicycenter.org)
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Now, what the president said is not wrong—the 35 percent top statutory U.S. corporate income tax rate (39 percent when you include average state rates) is among the highest in the world. And it is far above the 26 percent average among major developed countries. That’s no doubt a bad thing. But real story of business taxation in the U.S. is far more complicated than that one rate.
The average effective U.S. corporate tax rate—the amount of tax corporations actually pay—is far lower than 35 percent, roughly 20 percent to 25 percent by some estimates. Thanks to the diligent and widespread use by many companies of hundreds of billions of dollars in tax breaks, and because the earnings of many firms are reported on individual, rather than corporate returns, the U.S. raises very little tax revenue from corporations. And the variation of tax liability among corporations is huge. GE pays a 3.6 percent rate. Disney pays 36.5 percent.
The Tax Code is loaded with reasons why. For instance, multinationals shift income to low-tax countries. Firms are allowed to depreciate some investments for tax purposes much faster than the equipment needs to be replaced. Congress went even further in December when it agreed to let businesses immediately write off the entire cost of investments they make in 2011. Firms that finance this equipment with borrowed money may end up paying a negative tax rate on the deal.
But these breaks are only one reason why the statutory rate tells less than the whole corporate tax story. It turns out that more than half of taxable business income in the U.S. is earned by pass-through companies such as partnerships and S corporations. Their owners pay individual taxes on this income, but owe no corporate tax at all.
Because this happens far less frequently elsewhere, it is very difficult to compare U.S. business taxes (either rates or payments) with those in other countries. Peter Merrill, a principal at the accounting firm of PriceWaterhouseCoopers, argues that the shift to pass-through companies may be the single most important reason why U.S. corporate tax revenues are so low.
Indeed, even though the U.S. corporate rate is the second highest in the world, corporate tax revenues amounted to only about 1.3 percent of Gross Domestic Product last year–less than half the average among major industrialized countries.