Countdown to #1: 2011 Marks 20th Year That U.S. Corporate Tax Rate Is Higher than OECD Average

March 09, 2011

Tax Foundation Fiscal Fact No. 261

There is increasing recognition in Washington that the U.S. corporate tax rate is out of step with the lower tax rates of most industrialized and emerging nations. Indeed, 2011 marks the 20th year in which the U.S. statutory tax rate has been above the simple average of non-U.S. countries in the Organization for Economic Cooperation and Development (OECD).

It is now well known that with a combined federal and state corporate tax rate of 39.2 percent, the U.S. has the second-highest overall rate among OECD nations. Only Japan, with a combined rate of 39.5 percent, levies a higher rate.

As Figure 1 indicates, the simple average of non-U.S. OECD nations has fallen from 38 percent in 1992 (the first year in which it fell below the U.S. rate) to 25.5 percent today. Similarly, the weighted average—which accounts for country size—has fallen from 42.5 percent in 1992 to 30.1 percent today. The weighted average rate of non-U.S. countries fell below the U.S. rate in 1998. Thus, 2011 marks the twelfth straight year in which the U.S. has been above the weighted average rate. 

Figure 1

These figures and rankings do not reflect the changes that have occurred this year or will take place later in the year. On January 1, 2011, Canada's national corporate tax rate was reduced from 18 percent to 16.5 percent, which gives the country an overall rate of 28 percent. On April 1, both Japan and the United Kingdom are scheduled to lower their rates as well. Japan is planning to reduce its national rate by 4.5 percentage points, which will bring its overall rate to below 35 percent. The U.K. rate will fall from 28 percent to 27 percent as a first step of a multi-year plan to lower the British rate to 24 percent by 2014.

After the scheduled rate cuts in Japan and Great Britain take effect, the simple average of non-U.S. OECD nations will drop to about 25 percent and the weighted average will hit 29 percent. This will leave the U.S. rate a full 10 percentage points higher than the weighted average of our major economic competitors.

Falling Behind by Standing Still

Japan and the U.S. have not always held the number one and number two corporate tax rate rankings. As Table 1 shows, just 10 years ago Germany and Canada held the top spots while Japan and the U.S. held the third and sixth spots, respectively. During that ten-year period, the corporate tax rates in Japan and the U.S. stood still while Germany cut its rate by roughly 22 percentage points, more than any other country. This dramatic change lowered Germany's rate from first to fifth among OECD nations.

Canada's story is even more impressive. The Canadian government has explicitly set the goal of having the lowest corporate tax rate among the major G-7 nations. Over the past ten years, Canada has cut its rate more than 13 percentage points, which dropped it eight places in the OECD rankings.

Between 2000 and 2010, nine countries cut their corporate tax rates by double-digit figures. In addition to Germany and Canada, these countries include: Greece (16 points), Turkey (13 points), Poland (11 points), the Slovak Republic (10 points), Iceland (15 points), and Ireland (11.5 points). All of these nations fell considerably in the OECD rankings.

By contrast, some nations cut their corporate rates or remained static but still rose in the rankings. Aside from the U.S., the most notable were Sweden and the United Kingdom. Sweden cut its corporate tax rate from 28 percent to 26.3 percent and still rose 11 places in the rankings. Similarly, the U.K. cut its rate from 30 percent to 28 percent, yet rose 10 places in the rankings. Australia and New Zealand cut their corporate rates by 4 and 3 percentage points respectively, but still rose eight places in the rankings.

Table 1: Corporate Tax Rates in OECD Countries

 

2010 Rate

2010 Rank

2000 Rate

2000 Rank

Change in Rate

Change in Rank

Japan

39.54

1

40.87

3

-1.3

2

United States

39.2

2

39.3

6

-0.1

4

France

34.43

3

37.76

7

-3.3

4

Belgium

33.99

4

40.2

4

-6.2

0

Germany

30.2

5

52.0

1

-21.9

-4

Mexico

30

7

35

11

-5.0

4

Spain

30

9

35

13

-5.0

4

Australia

30

6

34

14

-4.0

8

New Zealand

30

8

33

16

-3.0

8

Canada

29.52

10

42.57

2

-13.1

-8

Luxembourg

28.59

11

37.45

8

-8.9

-3

United Kingdom

28

13

30

23

-2.0

10

Norway

28

12

28

26

0.0

14

Italy

27.5

14

37

9

-9.5

-5

Portugal

26.5

15

35.2

10

-8.7

-5

Sweden   

26.3

16

28

27

-1.7

11

Finland

26

17

29

24

-3.0

7

Netherlands

25.5

18

35

12

-9.5

-6

Austria

25

19

34

15

-9.0

-4

Denmark

25

20

32

18

-7.0

-2

Korea

24.2

21

30.8

20

-6.6

-1

Greece

24

22

40

5

-16.0

-17

Switzerland

21.17

23

24.93

28

-3.8

5

Turkey

20

24

33

17

-13.0

-7

Czech Republic

19

25

31

19

-12.0

-6

Poland

19

27

30

22

-11.0

-5

Slovak Republic

19

28

29

25

-10.0

-3

Hungary

19

26

18

30

1.0

4

Chile

17

29

15

31

2.0

2

Iceland

15

30

30

21

-15.0

-9

Ireland

12.5

31

24

29

-11.5

-2


Emerging Nations Have Cut Corporate Rates Too

Of course, OECD nations have not been the only countries reducing their corporate tax rates to remain competitive. As illustrated in the appendix to this report, since 2006, some 75 nations have cut their rates, many multiple times.

In addition to the 17 OECD nations that lowered their corporate rates during this period, there were 17 nations in Eastern Europe and Central Asia that followed suit, including Russia which lowered its rate from 24 percent to 20 percent.

Mexico was the only nation to increase its corporate rate during this period, from 28 percent to 30 percent. However, Mexico had cut its corporate rate from 29 percent to 28 percent in 2007. Macedonia perhaps went the furthest of any country by lowering its tax rate on undistributed profits from 10 percent to zero.

Among Asian nations, America's biggest economic competitor, China, lowered its corporate tax rate from 33.3 percent to 25 percent in 2008. Nearby Vietnam lowered its rate from 28 percent to 25 percent in 2009, while Taiwan reduced its corporate rate from 25 percent to 17 percent in 2010. No doubt, these Asian trends are a factor in Japan's decision to lower its own rate.

What Rate Does the U.S. Need in Order to Be Competitive?

While there is a growing consensus that the U.S. corporate tax rate needs to be lowered to improve our global competitiveness, there is less agreement on the ideal rate. Indeed, a variety of proposals have been put forward in recent years that would lower the federal corporate tax rate while eliminating or scaling back many of the deductions available to businesses.

The first of these plans was proposed by former Ways and Means Chairman Charlie Rangel in 2007. Rangel's plan cut the federal rate from 35 percent to 30.5 percent in exchange for eliminating provisions such as the Domestic Manufacturing Deduction and making significant changes to the tax rules affecting U.S. multinational firms.

Rangel and others argued that the plan's 30.5 percent rate was a good first step in restoring U.S. competitiveness. However, they overlooked the fact that 44 states impose their own corporate income tax (at an average rate of 6.47 percent), so what matters for global comparisons is the combined federal and state-level rate.[1]

Therefore, as Table 2 shows, when the average state rate is added to the proposed 30.5 percent federal rate (and adjusted for the federal deductibility of state taxes), Rangel's plan would reduce the overall U.S. rate to just 35 percent—a level that does not alter the U.S.'s high OECD ranking.  

Table 2: How Different Plans Affect the Overall U.S. Rate and OECD Ranking 
(Adjusted for federal deductibility of state taxes)

 

Federal Rate

Average State Rate

Combined Rate

Resulting OECD Rank

Current Law

35

6.47

39.2

2

Rangel Plan (2007)

30.5

6.47

35

2

Bowles/Simpson (2010)

28

6.47

33

5

Match OECD Weighted Avg.

25

6.47

30

7

Wyden/Gregg (2010)

24

6.47

29

11

Match China/OECD Simple Avg.

20

6.47

25

19

Two plans worth noting were released in 2010. President Obama's National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson, presented a menu of tax reform options for both the corporate and individual income tax systems. The leading proposal eliminated most of the tax expenditures available to corporations while lowering the corporate rate to 28 percent. This is the general direction that President Obama is reported to be favoring at this time.

However, Table 2 shows that, when combined with the state average rate, the Bowles/Simpson plan would reduce the overall U.S. corporate rate to 33 percent, which would still leave the country with the fifth-highest rate among OECD nations.

A plan developed by Senators Ron Wyden (D-OR) and Judd Gregg (R-NH), would reduce the federal corporate tax rate to 24 percent while significantly broadening the tax base by eliminating most corporate deductions. But, contrary to the direction taken by most countries, the plan also eliminated the deferral of U.S. tax on income earned abroad. Table 2 shows that a 24 percent federal rate would lower the overall U.S. rate to 29 percent, slightly below the weighted average of all OECD nations.

While a 29 percent overall corporate tax rate would be vastly more competitive than the current rate—putting the U.S. on par with Spain, Australia, and New Zealand—it would still leave our rate above the majority of OECD nations, including major trading partners Canada and the U.K.

A Move to the Middle Means a 20 Percent Rate

As Table 2 indicates, for the U.S. to "move to the middle" and match China's rate and the OECD simple average, lawmakers will have to reduce the federal rate to 20 percent.  By all accounts, such a rate reduction could not be achieved within the revenue-neutral restrictions of broadening the corporate tax base alone.

If lawmakers see revenue neutrality as paramount, they will have to reach beyond the corporate tax base to find the budgetary offsets - such as new revenues or spending cuts—to the lower corporate rate. On the other hand, they could determine that the benefits of cutting the U.S. rate are so great, that they could justify relaxing the revenue-neutral restriction in the same manner they did when they enacted the "Tax Hike Prevention Act of 2010." 

Benefits of Cutting the Corporate Rate

A very important 2008 report by economists at the Organization for Economic Cooperation and Development (OECD)[2] measured the relationship between different taxes and economic growth and determined that the corporate income tax is the most harmful tax for long-term economic growth, followed by high personal income tax rates. Consumption taxes and property taxes were seen as less harmful.

Indeed, the report found that lowering statutory corporate tax rates "can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth."[3] Moreover, "lower corporate tax and labour rates may also encourage inbound foreign direct investment, which has been found to increase productivity of resident firms."

Lower Rates Do Not Always Mean Lower Revenues

In observing the worldwide trends toward lower corporate tax rates, the OECD has noted that "Despite the strong reduction in statutory corporate tax rates, corporate tax revenues have kept pace with - or even exceeded - the growth in GDP, and the growth in revenues from other taxes in many OECD countries."[4]

This is not to say that corporate tax cuts "pay for themselves." However, OECD economists do offer some possible explanations on why corporate tax collections have not typically fallen after rates were reduced: 

•  Lower rates were balanced by base-broadening measures such as reduced depreciation allowances and fewer special deductions.

•  "[M]ore profitable corporations pay more corporate taxes. This might not only be part of a cyclical movement but might also be the result of fundamental changes in profitability."[5]

•   Lower tax rates attract capital and investment from high-tax countries. Increased tax revenues in low-tax countries may have resulted from "the inflow of investment and/or mobile corporate profits that are shifted out of high-tax countries in order to avoid corporate taxes."[6]

•  Lower rates reduce the incentive for excessive tax planning and profit shifting. "The reduced corporate tax-planning efforts might therefore have increased the taxable corporate tax base, which may have partly offset the tax revenue loss due to the lower statutory and effective corporate tax rates."[7]

•  The move to lower rates was complemented by "stricter corporate tax enforcement policies enacted by OECD countries."[8]

While it is difficult to quantify, the U.S.'s high corporate tax rate has undoubtedly caused some measure of profit-shifting out of the country and discouraged some amount of inbound investment. Thus, it is safe to assume that a meaningful reduction in the U.S. corporate rate would result in more corporate profits remaining within the country while encouraging more investment from abroad. These two factors alone could minimize the static revenue losses associated with a lower rate.

Conclusion

The U.S. is less than a month away from having the highest overall corporate tax rate in the industrialized world, when Japan lowers its top rate on April 1. Remarkably, 2011 marks the 20th year in which the statutory U.S. corporate tax rate has exceeded the simple average of the non-U.S. OECD nations and the twelfth year in which our rate has exceeded the weighted average OECD rate.

Already this year, Canada has lowered its corporate rate in a bid to have the lowest rate among the major G-7 nations. Great Britain too is scheduled to reduce its rate on April 1 in order to avoid losing more corporate headquarters to low-tax jurisdictions such as Ireland, Switzerland, and the Netherlands.

Cutting the U.S. rate while eliminating "loopholes" will not reduce the rate enough to meaningfully improve our ranking within the OECD and relative to our major economic competitors such as China.

If the U.S. is to "move to the middle," lawmakers may have to find other budgetary offsets (such as lower spending) or abandon a strict policy of revenue-neutrality. The economic evidence suggests that a lower corporate tax rate will improve long-term economic growth and increase workers' wages without necessarily diminishing tax revenues.

Appendix: Table 1

Region/Country

2006/2007

2007/2008

2008/2009

2009/2010

OECD High-Income

Canada

 

22.1 to 19.5

 

 

Czech Republic

 

24 to 21

21 to 20

20 to 19

Denmark

 

28 to 25

 

 

Germany

 

38.9 to 30

   

Greece

29 to 25

 

 

25 to 24

Hungary

     

20 to 19

Iceland

 

 

18 to 15

 

Italy

 

33 to 27.5

   

Luxembourg

 

 

29.63 to 28.59

 

Mexico

29 to 28

   

28 to 30

Netherlands

29.6 to 25.5

 

 

 

New Zealand

 

33 to 30

   

Portugal

27.5 to 26.5

 

 

 

Republic of Korea

   

27.5 to 24.2

 

Spain

35 to 32.5

 

32.5 to 30

 

Sweden

   

28 to 26.3

 

United Kingdom

 

30 to 28

 

 

Eastern Europe & Central Asia

     

Albania

 

20 to 10

 

 

Azerbaijan

24 to 22

   

22 to 20

Bosnia and Herzegovina

 

30 to 10

 

 

Bulgaria

15 to 10

     

Georgia

 

20 to 15

 

 

Kazakhstan

   

30 to 20

 

Kosovo

 

 

20 to 10

 

Kyrgyz Republic

20 to 10

     

Lithuania

 

 

 

20 to 15

FYR Macedonia

15 to 12

12 to 10

 

10 to 0*

Moldova

18 to 15

 

 

 

Montenegro

   

15 to 9

 

Russian Federation

 

 

24 to 20

 

Slovenia

25 to 23

     

Tajikistan

 

 

 

25 to 15

Turkey

30 to 20

     

Uzbekistan

15 to 12

 

 

 

Sub-Saharan Africa

       

Benin

 

 

38 to 30

 

Burkina Faso

 

35 to 30

 

30 to 27.5

Cape Verde

 

 

30 to 25

 

Republic of Congo

     

38 to 36

Cote d'Ivoire

35 to 27

27 to 25

 

 

Lesotho

35 to 25

     

Madagascar

 

30 to 25

 

25 to 23

Mauritius

25 to 22.5

     

Niger

 

 

 

35 to 30

Sao Tome and Principe

     

30 to 25

Seychelles

 

 

 

0-40 to 25-33**

South Africa

12.5 to 10

     

Sudan

 

 

30 to 15

 

Togo

   

37 to 30

 

Zimbabwe

 

 

 

30 to 25

Latin America & Caribbean

       

Antiqua and Barbuda

 

30 to 25

 

 

Columbia

35 to 34

     

Dominican Republic

 

30 to 25

 

 

Panama

     

30 to 25

St. Vincent and the Grenadines

 

40 to 37.5

37.5 to 32.5

 

Trinidad and Tobago

30 to 25

     

Uruguay

30 to 25

 

 

 

Middle East & North Africa

       

Algeria

 

 

25 to 19

 

Israel

31 to 29

 

29 to 26

 

Morocco

 

35 to 30

 

 

Syria

35 to 28

     

Tunisia

35 to 30

 

 

 

West Bank and Gaza

16 to 15

     

East Asia & Pacific

       

Brunei Darussalam

 

 

25.5 to 23.5

23.5 to 22

China

 

33.3 to 25

   

Fiji

 

 

31 to 29

 

Indonesia

     

28 to 25

Malaysia

28 to 27

27 to 25

 

 

Mongolia

30 to 25

     

Philippines

 

 

35 to 30

 

Samoa

 

29 to 27

   

Taiwan (China)

 

 

 

25 to 17

Thailand

 

30 to 25

   

Timor-Leste

 

 

30 to 10

 

Tonga

     

15-30 to 25

Vietnam

 

 

28 to 25

 

*For Undistributed Profits
**Progressive
Source: OECD, World Bank "Doing Business"

[1] Nevada, South Dakota, and Wyoming do not levy a corporate income tax. Ohio, Texas, and Washington levy a "gross receipts" tax on businesses, but not a corporate income tax.

[2] Asa Johansson, Christopher Heady, Jens Arnold, Bert Brys and Laura Vartia, "Tax and Economic Growth," Organization for Economic Cooperation and Development, OECD Economics Working Paper No. 620., July 11, 2008. p. 9.

[3] Ibid. 9.

[4] "Fundamental Reform of Corporate Income Tax," Organization for Economic Cooperation and Development, OECD Tax Policy Studies No. 16., 2007.

[5] Ibid.  p. 33.

[6] Ibid. p. 33.

[7] Ibid. p. 34.

[8] Ibid. p. 34.

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