John McCain's campaign tax talk has reiterated the typical corporatist position that has been propounded over the last four decades (since Reagan)--the view that the federal income tax of corporations is so high, with a 35% statutory rate, that it is making our corporations uncompetitive in the globalized marketplace, so we should lower corporate tax rates to "help" U.S. multinationals compete.
I've frequently said that this is simply wrong. One obvious reason is that the statutory rate of 35% is not indicative of the tax burden carried by corporations. The tax base is riddled with holes, the amount subject to the tax is much smaller than the corporations' economic income, and the loopholes that permit imaginative tax-avoidance schemes are superabundant. Second, the corporate income tx rates are graduated, so many small corporations do not pay the top corporate rate even on that small corporate taxable income base. Third, the corporate income tax is the primary federal tax that U.S. corporations have to pay. In other developed countries, there are a number of other taxes that apply to corporations, resulting in a much heavier burden than one would see if one looked only at the apparently corresponding corporate income tax. Fourth, although the tax code provides for a "worldwide" taxation scheme for multinational corporations, corporations can avoid its reach in numerous ways: there is a very favorable treaty system; a foreign tax crediting regime (made even more favorable in recent years) that permits cross-crediting of taxes in ways that essentially allow the US tax system to subsidize the tax systems of other nations; and deferral for active business income that permits companies to move manufacturing and other operations overseas to their benefit and our detriment, including the ability of financial institutions to defer taxation on their business income; as well as various provisions purportedly passed to stimulate the economy and job creation, such as the recent "one-time" tax forgiveness measure that permitted deferred income to be brought home at a very low rate (below 10%).
As a result of these and other characteristics of the corporate income tax, the U.S. is generally considered a tax haven for corporations, and not a jurisdiction to be escaped to other more corporate-tax-friendly ones, especially in the case of some industries, such as the financial services sector.
There are a couple of new studies out that are worth reading in this regard. One is the Oct. 27, 2008 release by the Center on Budget and Policy Priorities (CBPP), Putting U.S. Corporate Taxes in Perspective. A few excerpts follow.
The U.S corporate tax burden is smaller than average for developed countries. Corporations in the 19 member states of the Organization for Economic Co-operation and Development paid 16.1 percent of their profits in taxes between 2000 and 2005, on average, while corporations in the United States paid 13.4 percent.
[T]ax breaks lead to very low tax rates on certain types of investments — even negative rates in some cases. For example, a 2005 Congressional Budget Office study found that the effective marginal corporate rate — the rate paid on the last dollar of income earned and arguably the tax rate most relevant for investment decisions — on debt-financed investment in machinery was negative, estimated at -46 percent. This means that the total value of the deductions that companies may claim for such investment is much larger than the tax they pay. (Put another way, it means that other taxpayers effectively subsidize the investment.) While a very large share of taxable corporate income is earned by corporations large enough to face the top rate,8 in terms of numbers, most U.S. corporations face a statutory rate lower than the 35 percent top rate.
Another study, by Jane Gravelle and Thomas Hungerford, looks at the corporate tax rates and asks whether the effective tax rate is as high as generally asserted. See Gravelle & Hungerford, Corporate Tax Reform: Should We Really Believe the Research?, Tax Notes Today, Oct. 27, 2008.
For an earlier discussion (with some interesting graphs), see this July 2008"McCain Trickle Down Theory" blog post about the benefits of McCain's proposal for corporate tax cuts in contrast to measures intended to help individuals.
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