A recent study released by the Institute on Taxation and Economic Policy (ITEP) claims that while the statutory corporate tax rate is 35%, American corporations used tax loopholes to lower their effective tax rate to 21.2% between 2008 and 2015. On its face this study’s finding may be shocking, but it does not tell the full story.
The data points and time frame used do not paint a fair picture of the corporate tax landscape. It should be noted that the study included 258 corporations that were continually profitable between 2008 and 2015, a time period encapsulating before and after the “Great Recession.” Therefore, the scope of their findings must be limited to just these selected corporations and not to all corporations and their taxes.
Additionally, ITEP fails to adequately take into account that corporations can pay less than 35% of their net income in a given year and still pay 35% of their taxable income. As the Director of Fiscal Policy at American Action Forum Gordon Gray noted, “Essentially, what ITEP is trying to calculate is an effective tax rate – what a firm really paid in tax net of all tax provisions, but then ignoring those provisions by reporting the tax paid as a share of overall net income, rather than taxable income.” Questions about ITEP methodology can and should be raised, but what is more important to address are ITEP’s misguided conclusions.
ITEP claims that their findings “refute the prevailing view inside the Beltway that America’s corporate income tax is more burdensome than the corporate income taxes levied by other countries, and that this purported (but false) excess burden somehow makes the U.S. ‘uncompetitive.’”
Nevertheless, when considering both the statutory corporate tax rate and the marginal corporate tax rate from an international perspective, the United States remains in the top tier of both lists. According to the National Bureau of Economic Research (NBER), between 2006 and 2011 the United States had the second highest book effective tax rate in the world. Book tax expenses take into account present and future tax liabilities, and are calculated under generally accepted accounting principles and reported on a company’s financial statements. A separate study by the World Bank fortifies NBER’s report by showing the United States has the third highest effective tax rate of Organization for Economic Co-operation and Development countries at 28.1% in 2014 – only lower than Japan and New Zealand. Studies done by both the European Commission and the University of Calgary found similar data as the World Bank and NBER when it comes to marginal effective tax rates throughout the world.
Even if corporations are not paying the statutory rate, they are still paying the highest effective tax rate in the world, which does place the United States at a competitive disadvantage, especially in the modern, interconnected world. Moreover, according to one of the Tax Foundation’s economists Dr. William McBride, the two most harmful tax types to economic growth are corporate and individual income taxes. By reforming the tax code in a way that reduces the statutory and effective tax rate on businesses and individuals, the United States has a better chance of spurring economic growth.
ITEP concludes by saying “this report shows that the focus of any overhaul should be on closing loopholes rather than on cutting tax rates.” Why should these proposals be mutually exclusive? Tax reform can reduce the corporate tax rate to increase economic growth, decrease the incentives to lobby the government for tax breaks, and follow suit with the international community and adopt lower corporate tax rates. Reform can also close loopholes and tax exemptions which will reduce existing cronyism, and force large businesses to compete in the market against all competition without being improperly supported by government.