Economics, Taxes and Spending

Sorry, Kevin Drum, even the effective U.S. corporate tax rate is sky high

Over at Mother Jones, the always readable Kevin Drum takes issue with my criticism of President Obama’s new corporate tax plan, which lowers rates but raises corporate taxes by $250 billion:

In this entire thousand-word blast Pethokoukis apparently doesn’t have room to explain the distinction between statutory tax rates and effective rates. But it only takes a sentence or two, so here it is. The statutory rate is the top rate in the tax table. Right now it’s 35% for corporations. The effective rate is what corporations actually pay after their accountants are done combing the tax code for deductions and loopholes. The former is one of the highest in the world. That latter has been falling for years and is now one of the lowest. That’s right! The actual federal income tax paid by corporations is one of the lowest in the world. Even if you think statutory rates are more important, surely this is germane to the conversation?

Thanks, Kevin, for pointing that out! But guess what, the effective average tax rate American corporations pay is also really high, as this 2011 study notes:

We use publicly available financial statement information for 11,602 public corporations from 82 countries from 1988 to 2009 to estimate country-level effective tax rates (ETRs). We find that the location of a multinational and its subsidiaries substantially affects its worldwide ETR. Japanese firms always faced the highest ETRs. U.S. multinationals are among the highest taxed. Multinationals based in tax havens face the lowest taxes. … The findings in this study may hasten the development of U.S. tax reform by showing that U.S. multinational ETRs are among the highest in the world. Moreover, if territorial taxation further lowers the taxes on Japanese and British multinationals, then the U.S. may be forced to provide some tax relief for its multinationals to maintain some level of international tax competitiveness.

And here is a handy table from the study listing statutory and effective corporate tax rates from around the world. Note that the median U.S. effective tax rate is 25 percent for domestic firms and 30 percent for multinational firms vs. 21 percent (DOM) and 22 percent (MNC) for European corporations and 20 percent (DOM) and 19 percent (MNC) for Asian ones.

And a study from last February by AEI’s Kevin Hassett and Aparna Mathur found the following:

The United States is currently underperforming in global tax comparisons. The United States’ top statutory tax rates will soon be the highest in the OECD, and the US effective average and effective marginal tax rates are far above the OECD average. Any effort at corporate tax reform is therefore incomplete without a push toward addressing not only the high statutory rates, but also the relatively high effective average and marginal rates. These rates are the best indicators for capital investors of their true tax liability—much more so than the statutory rates.

By our calculation, the US statutory rate is nearly 10 percentage points higher than the effective average rate and nearly 17 percentage points higher than the effective marginal tax rate. Relative to other OECD countries, the United States is one of the worst performers on this score. The effective average tax rate for all OECD countries excluding the United States is 20.6 percent, while the effective marginal tax rate is 17.3 percent. The corresponding values for the United States are 29 percent and 23.6 percent.


18 thoughts on “Sorry, Kevin Drum, even the effective U.S. corporate tax rate is sky high

  1. Sharmarke- From where is that fellow getting his data?

    I think I’m more apt to believe data from the national bureau of economic research– a 90 year-old institution that produces Nobel Prize-winning economists– than a crackpot liberal think-tank group. But that’s just me I guess.

    Your link falls into the “can’t believe everything you read online” category.

    • Read the article and find that the data comes from a variety of sources, including the Citizens for Tax Justice, the OMB, and IRS.
      Do they fall into the “can’t believe everything you read online” category?

      • It’s interesting to note that the sponsor of the blog is a crackpot CONSERVATIVE think tank funded by right-wing propagandists and is far more partisan, home to neo-conservatives like Billy Kristol who thought in 2006 of engaging in a military strike against Iran; a purely nonsensical ploy.
        AEI’s founder was the largest asbestos manufacturer in the US during the 1930s, and was involved in a massive, 40-year cover up of the severe health risks it causes.
        I can’t imagine any liberal think tank with such a dubious background…

        • But the devil’s in the details, right?; none of those charts explain _which_ “IRS data” they are looking at, which assumptions they made, whether their data set was statistically meaningful… to me, those graphs might as well just have been made up.

          Now take a look at the report _this_ blog post quotes:

          “We use publicly available financial statement information for 11,602 public corporations from 82 countries from 1988 to 2009 to estimate country-level effective tax rates (ETRs)… U.S. multinationals are among the highest taxed.”

          Which aspect of the report is flawed enough to make you not believe it?

          • You make a fair point, but there’s no evidence that it IS made up.

            You are free to verify that it is made up by reviewing the IRS, OMB etc and looking it all up. There are other sources which verify it as well.

            Better yet, call the authors of the CAP and challenge them to provide the specific source. They most likely won’t disappoint you.

            Finally, the fact remains that corporate taxes/profits have plummeted:

            The problem isn’t that corporate taxes are too high, it’s that the tax code now is too complex and unfair.

          • Sharmarke- You didn’t answer my question: which part of the NBER report don’t you believe? It’s in direct conflict with these other sources to which you’re linking.

            I know that cognitive dissonance is painful, but you should just admit it– you’re wrong about this particular issue.

          • Sharmarke- Sorry, there’s two more things I should add:

            1) I’m not trying to be snarky, it’s just been a long day; I’m wrong about lots of things all of the time, and I know it’s difficult to admit it. I infer that you’re a liberal based on your positing. Liberals often say that conservatives fly in the face of the facts; I would argue you’re suffering from the same falacy with this issue.

            2) On an analytical note, I’m not sure you’re understanding the problem. The issue isn’t whether our corporate taxes have gone up, down, or sideways, or what they are relative to income or profit. The only thing that matters is: are our effective rates competitve with the rest of the world? The NBER report finds that the answer is, generally, “no”.

            If I’m running a business, I might be willing to stay in the United States if the difference is only a couple of percentage points. But when the difference grows to several percentage points, I start to see some substantial savings, savings I can use to invest in capital and grow my business, or send back to my shareholders as dividends.

            Maybe you run a business? If so, I’m sure you see what I mean.

            I agree that the tax code– both personal and corporate– is too complex and “unfair”. In general, I am against market subsidies. They are inherently “unfair” because they pick winners and losers, and have the potential to create bubbles (subsidized student loans are a great example).

            But you also can’t have it both ways; simplifying our tax code might mean eliminating loopholes and deductions for green energy, for example.

  2. “You didn’t answer my question: which part of the NBER report don’t you believe? It’s in direct conflict with these other sources to which you’re linking.”

    Not really, since the NBER report refers to effective corporate income tax rates, while my sources refer to corporate taxes as a share of pre-tax profits.

    While effective tax rates are very high in America, the fact remains that they were even HIGHER historically.
    James’ report refers to effective marginal tax rates. Here’s the definition:

    “The marginal effective tax rate on capital income is the expected pretax rate of return minus the expected after-tax rate of return on a new marginal investment, divided by the pretax rate of return.” (The Encyclopedia of Taxation and Tax Policy, Urban Institute Press, 1999)

    The rate doesn’t just include the actual corporate tax rate; it accounts for a whole slew of things, like dividend and property taxes, tax credits and breaks, and interest deductions. It accounts for cost depreciation that falls in line with inflation, inventory accounting, the alternative minimum tax, and personal taxes like the income and capital gains tax.

    In other words, it’s really complicated. More importantly, it’s based on EXPECTATIONS, and not on what is actually paid…namely, what is really paid on income from investments.

    The REAL effective tax rate is what companies actually pay out of profits, and it’s been tremendously low lately.

    Don’t bother entertaining yourself with these pernicious and misleading reports. They are meant to indoctrinate fellows into believing that we need more tax cuts and less regulations. They want to keep more for themselves at the expense for everyone else.

      • >> While effective tax rates are very high in America, the fact remains that they were even HIGHER historically.

        Again, that’s irrelevant.

        >> The REAL effective tax rate is what companies actually pay out of profits, and it’s been tremendously low lately.

        Yes, because there are “real” and “fake” effective tax rates, u-huh.

        I’m done with this debate; clearly you’re proving that for most people politics is like religion– a function of personality and background rather than logic. You can twist and turn the numbers any way you like, and introduce as much complexity as you need to fulfill your world view.

        Let’s go talk to some actual business owners– of which I know several by the way– and ask them.

        • >> In other words, it’s really complicated.

          Here’s an idea we both might agree on; why not just toss out the entire, current corporate tax code– goofy deductions, breaks and all– and introduce a new one with a simple, flat statutory rate? Then we can adjust the rate to keep us competitive with the rest of the world. It’s simple and easy.

          Right now, it’s obvious to me we’re in an “Ayn Rand” situation, with bureaocrats trying to favor certain behaviors, then layering on more complexity to fix the loopholes they introduced, followed by _more_ complexity to fix the new loopholes, etc.

          Forgetting for the moment that I think you’re deliberately attempting to obfuscate the issue to suit your agenda, I do think the discussion is unnecessarily complicated, and it doesn’t need to be that way.

          • >> They want to keep more for themselves at the expense for everyone else.

            One more comment; I’m working on a blog post, and I just re-read your response so I could do some more research– I caught this line in my re-read.

            I _think_ you might be falling into the “fixed pie” falacy. That is, some people view total wealth as a “pie”, and the only way you can get a bigger “slice” is by cutting out of someone else’s portion.

            Maybe you’re not thinking that way, and that’s good. But just thought I’d point it out.

            As far as analogies go, I don’t really like the “rising tide” one either, so I made up my own. Try picturing wealth this way:

            Imagine thousands of stars in the sky. Each star is a person. Now imagine a circle around each star. The circles represent each person’s wealth. Some circles are really big, some are medium-sized, and some are small.

            _Every single circle_ could in theory increase if everyone made smart decisions and investments. Put another way, one circle increasing doesn’t mean any of the others have to decrease.


          Please review these before making obsequious remarks. I’m not that interested in what corporate spokespeople have to say to protect the bottom line of their employers. I care for what independent minds have to show.

          Corporate taxes out of profits are at an all-time low. This is verifiable with minimal internet research.

    • Sharmarke- One more question: are you just taking about _Federal_ income tax? You said “the rate”… so I’m not sure which one you’re talking about.

      The NBER report dervived its conclusions based on financial statements _after_ all of the dust settled– income and profits accounted for, and taxes paid. That’s as close to the metal, so-to-speak, as I think you can get.

      But one important distinction is that their numbers included _all_ taxes paid, not just Federal income. So we may not be discussing apples to apples?

      What triggered the thought was this article:

      GE paid zero Federal income tax, but still paid a billion dollars in payroll taxes, local taxes, etc.

  3. Sharmarke- I was thinking about this some more this morning while I was out running some errands; the NBER report is labelling each country based on their origin– so, United States, or French, etc.– then calculating their effective tax rates. They found that American companies had the second highest effective tax rates.

    That fact can not be disputed, despite your crazy fantasies and made-up statistics. You should be somewhat ashamed actually; anyone who applies the old “when the metrics don’t tell me what I want to hear, make up new ones” cliche loses quite a lot of respect in my eyes. Learn to be more open minded and stop pasting random financial terms from Wikipedia in an attempt to sound knowledgable.

    After all, I can play that game too! It’s easy! How about a source from PricewaterhouseCoopers saying we have among the highest effective tax rates?

    But I’d prefer to actually use my brain and think independently. And I did think of a logic gap in the NBER report– most companies don’t release their tax returns, so we don’t know in _which_ countries these companies paid their taxes.

    For example, to go back to my earlier General Electric example, they had a 29% effective tax rate in 2011. We’ve no clue how much of that was paid in the United States though, and GE refuses to tell us, nor are they obligated to. We do know that they paid very little Federal income tax due to the Democrats’ Green Energy deductions. It’s theoretically possible that they paid a very small amount of taxes in the United States in general– we just don’t know.

    What we would need is a reputable– as in, non-partisan– source that has statistically meaningful United States tax return data that looks at not just Federal taxes, but also payroll, state, and other local taxes. In that way we would be breaking out only what companies pay in taxes in the _US_, not in other countries. The problem is, companies apparently don’t usually release their tax returns.

    Contrary to what you say, this is _not_ complicated– we just have incomplete data.

    Short of that data, the logical course of action is to go survey as a big of a sample size of CEOs that we can and just _ask_ them why they outsource so many jobs. If it’s not taxes, then what is it? Regulatory burden? Cheap labor? I’m sure they’d be more than happy to tell us.

  4. Plus, Sniper, you don’t even account for corporate tax rates historically. Now, they are at 35% marginally, but before they were much harder. It stands to show that based on this, the effective rates of that era were higher as well, though of course below the marginal rates of that time.

    We were one of the strongest exporters in the world. Poverty declined dramatically. Incomes grew mightily, including for those at the top. And productivity of course surged.

    Now, they’re down to 35%, marginally. We have a ridiculous trade deficit. Poverty is the highest in 15+ years. Incomes are going nowhere. Productivity is weak, and benefiting only those at the top.

    Instead of insults, back up your claims with facts, fool.

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