Video: How Much Do U.S. Corporations Really Pay in Taxes?

New Video Documents High Effective Rates

Washington, DC, February 6, 2012—U.S. companies pay among the highest corporate tax rates in the world, even after accounting for all deductions and loopholes, according to a new video produced by the Tax Foundation. This explanation of "effective" tax rates for corporations, based on recent academic studies of tax systems around the globe, is the third in a 5-part series on corporate taxes.

"The impression that a large number of U.S. companies are using loopholes and creative accounting to get out of paying taxes could not be more wrong," said Tax Foundation president Scott Hodge. "American corporations are consistently paying at the highest levels in the world, and that burden impacts their ability to compete both at home and abroad."

The U.S. currently has the second highest tax rate on corporations, and will soon become number one when Japan implements a planned rate cut later this year. When the average corporate tax rate on the state level is added in, the total is almost 40%. After deductions, the effective rate naturally falls several points, but remains well above the average for developed countries and our closest trading partners.

"Pointing to a handful of prominent companies with unusually low tax payments makes for catchy headlines, but in no way tells the real story," said Hodge. "The data on American businesses in general is clear: they’re paying much higher rates than their foreign competitors. That’s a problem, and comprehensive tax reform is the answer."

The Tax Foundation video "Effective Corporate Tax Rates" is available online.

Previous installments focused on the advantages of a territorial tax system and how the U.S. has fallen behind by standing still on tax policy.

Script: "Effective Corporate Tax Rates"

The U.S. has one of the highest corporate tax rates in the world at 35% -- almost 40% when you add in state taxes.

But, just like you and I get to deduct things like our mortgages and charitable contributions, corporations get to deduct things too – like the cost of research and development and building a factory.

These deductions – what some call “loopholes” – save businesses about $100 billion a year according to the U.S. Treasury.

And from what you hear in the press, you’d think that all those “loopholes” would help American companies compete against businesses from lower-tax countries.

It turns out that is not the case when you compare what is called the 'effective tax rate.' The "effective tax rate" is the tax rate that companies ACTUALLY pay after their deductions.

You see, other countries give tax breaks too and more than a dozen international studies have compared the effective tax rates US companies pay to the effective tax rates paid by companies in other countries.

And, no matter how you measure it, American companies almost always pay the highest effective tax rates.

Take this new World Bank study, for example. They looked at the effective tax rates paid by a typical company in 183 countries around the globe. They found that 164 countries have lower effective corporate tax rates than the U.S.

The global average rate, 16%. Our average rate, nearly 28% [27.6%].

Only New Zealand, Chad and a handful of much smaller countries had higher rates than the US.
[citation: World Bank/PWC “Paying Taxes 2012”]

Another study by British economists at Oxford University compared the average tax rates for a range of industries in 19 of the biggest economies in the world.

The US didn’t stack up so well.

The average rate for industries in the US, 34.9%.

But industries in countries such as Korea (19.8%), China (22.4%), Canada (25.7%), United Kingdom (26.3%), Germany (27%), and India (29.5%), all paid lower rates. Only Japan had a higher rate.

[citation: Devereux, et.al. (2011)]

And a study by American economists comparing the effective tax rates of large businesses in 15 countries found that US companies tended to pay among the highest tax rates.

Companies in places like Sweden (18%), Taiwan (18%), France (23%), and South Africa (25%), all paid lower effective tax rates than US firms (28%).

Only Japanese companies (36%) paid a consistently higher tax rate than those in the US. 
[citation: Markle/Shackelford (2011)]

But, Japan is cutting their corporate tax rate this year, which will leave us standing with the highest rate among large economies.

So not only do other nations offer lower rates, but their territorial tax systems can lower the tax burden for their companies even further.  It’s no wonder that they can out-compete US firms who pay high tax rates AND a second-layer of tax because of our worldwide tax system.

Headlines about a few companies that pay little in taxes may make for juicy political sound bites, but they don’t tell the whole story.

No matter how you look at the data, U.S. companies are paying one of the heaviest tax burdens in the world, and until our system is more competitive, we will struggle to keep jobs and industries in our country.

For more information visit tax foundation dot org.

The Tax Foundation video "Effective Corporate Tax Rates" is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.