Corporations and their think-tank supporters have been busy arguing for a zero rate of corporate income taxation. Their argument goes something like this: Corporations today have to compete in a world market. Corporations organized in countries with lower taxes will have an advantage over corporations organized in countries with high taxes. The US has high corporate income taxes. Therefore, the US should eliminate its corporate income taxes to help the US corporations be competitive.
There are a number of significant flaws in the corporatist argument for zero corporate income taxation.
1) Although the US statutory rate for taxation of corporations is modestly high (35% on corporations with about $18 million in annual income), corporations do not typically pay anything like the statutory rate on their comprehensive income. Instead, they pay effective tax at a much lower rate. Due to various legal loopholes (for which corporations assiduously lobby) and various illegal tax shelter schemes and aggressive tax reporting that plays the audit lottery (fewer than 2% of returns get audited, and even if audited, risky positions are likely to pass under the radar screen), corporations operating in the US tend to pay an effective rate of taxes that is about one/third the statutory rate or less (depending on industry, type of corporation, and various other factors).
Richard Sims, at the NEA, sent along a piece he'd written about the Tax Foundation's misleading propaganada arguing that the corporate income tax is causing America's corporations to fail to be competitive in the world markets. Richard notes another flaw in the Tax Foundation's propaganda about high US corporate income tax rates--it focuses on comparisons of direct taxes on profits, but ignores the fact that different countries slice the tax world up in different ways. As a result, while corporations in one country might be subject, let's say, to a 50% income tax and no other taxes, corporations in another country might pay only a 25% income tax, but have to also pay a 30% social contributions tax and a 10% environmental cleanup tax. Added together, it is clear that the aggregate tax in the second country would be substantially higher, but the Tax Foundation's methodology for looking at US taxes would claim (irrationally) that the first country's corporations cannot be competitive with the second country's because of the higher income tax rate. Richard notes the World Bank study on taxes on this issue. I've excerpted his discussion of that, below.
PricewaterhouseCoopers, along with several other international consultancies, recently partnered with the World Bank in an extensive study on international business taxation (Doing Business 2008: The Global Picture). The World Bank, unlike the Tax Foundation and other mono-tax theists, takes into consideration the fact that businesses do, in fact, face a host of taxes in addition to the corporate profits tax. Particularly, it takes into consideration that businesses in many nations incur employment and social contribution taxes in amounts that are much higher as a share of profits than are the direct profit taxes themselves.
For example, looking at taxes on labor and social contributions, the U.S. is 3rd lowest as a percent of profits, ahead of only Denmark and New Zealand. In the U.S., taxes on labor and social contributions are mainly the employer’s share of social security taxes and state unemployment contributions and amount to 9.6% of profits. The average for such taxes in the industrialized world is 22.8%, more than double the U.S. level. In seven of those nations, labor and social service taxes are more than 30% of profits, and in two of those, France and Belgium, are over 50% of profits.
When the World Bank study adds up the total tax bill for businesses, they find that the rates vary from as low as 28.9% and 27.2% in Ireland and Iceland, respectively, to as high as 66.3% and 76.2% in France and Italy. The World Bank data shows the U.S. total business tax rate to be 46.2%, which happens to be exactly the average rate for the industrial nations. Eleven of the 24 nations have higher total tax rates than the U.S. while twelve have lower rates. You don’t get much more average than that
2) Admittedly, taxes may distort decisions, but the corporatist lobbying position that the economic distortions introduced by taxes are deeply harmful to corporations is highly overstated. Every developed nation has an array of taxes that corporations are required to pay, and thus it is highly unlikely that taxes form a primary focus for corporations in deciding how and where to compete. Various industry figures have verified that this is true, including John Snow as Secretary of the Treasury commenting on his life as a railroad CEO. 3) Although the US taxes worldwide income of corporations, it permits significant deferral of taxation until profits are repatriated. In fact, the foreign tax credit rules have been loosened recently so that corporations can cross-credit taxes paid to other countries to reduce their US tax due on US income, resulting in lower US tax rates that essentially subsidize those other countries' taxes. 4) US multinational corporations often are competing against other US multinational corporations, even overseas. Lowering US taxes in those cases has nothing to do with helping US corporations compete--it has to do with helping the managers and shareholders of those corporations make even more money, without paying their fair share to support governmental programs. 5) Even if the argument were correct (that US taxes restrain US corporations' ability to compete internationally), it is not clear what the people of the US gains per se from the ability of US-based multinationals to compete better in overseas countries. US corporations tend to take for granted that their gains redound to the benefit of the US. But if they are not paying taxes, the government loses. If they are conducting most of their business abroad, their ability to compete that way does nothing for this country and the people lose. In other words, the only way competitive gains by US corporations abroad benefit this country is if those gains are translated into jobs at home and manufacturing at home. The record seems clear that multinationals are generally taking more of their business assets overseas, outsourcing more jobs, including even the financial sector jobs that had seemed "safe" in the US, and laying off US workers. Helping them to "compete" doesn't provide any assurance of increased US based investment, operations, employees, or manufacturing. In fact, if their recent investment patterns hold up, we can expect investment gains from reduced corporate income taxes to redound to the benefit of India, China, and other countries with expanding markets.
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