High U.S. Corporate Tax Rate Chases Away Companies, Jobs and Tax Revenue

May 21, 2014

In response to Pfizer and many other U.S. companies openly planning to leave the U.S. for tax reasons, yesterday Senator Levin introduced the Stop Corporate Inversions Act of 2014. Corporate inversions are where a U.S. company buys a smaller foreign company and takes its headquarters for tax purposes. For example, Pfizer is trying to merge with U.K.-based AstraZeneca and claim the U.K. as its new headquarters. The U.K.’s corporate tax rate as of next year will be 21 percent, compared to 39.1 percent in the U.S.

Rather than proposing to lower the corporate tax rate to compete with the U.K. and other developed countries, Senator Levin proposes to make it more costly for U.S. companies to invert. Under current law, U.S. companies are not allowed to invert unless the foreign company owns at least 20 percent of the combined company. Plus, as of an IRS ruling in 2012, the foreign company must have at least 25 percent of the combined company’s employees, assets and sales. Senator Levin proposes to raise the 20 percent ownership threshold to 50 percent, which is the same proposal put forth earlier this year by President Obama and Senator Wyden. In addition, Senator Levin proposes to disallow any inversion where “management and control of the merged company remains in the U.S. and either 25 percent of its employees or sales or assets are located in the U.S.”

Practitioners interviewed by Tax Analysts (subscription required) find the proposal is so broad, open-ended and left up to IRS interpretation that many foreign companies operating in the U.S. could suddenly become subject to U.S. tax on their worldwide earnings. That would cause a whole other category of companies to take flight. Further, the bill only addresses one of many ways companies can reduce their exposure to U.S. corporate tax. For instance, Merck just sold its consumer care business for $14.2 billion to German drug maker Bayer.

Senator Wyden did not co-sponsor the bill, nor did any Republican. The 14 Senators who did co-sponsor it are apparently concerned about the loss of tax revenue from inversions. However, the best way to prevent further losses of corporate tax revenue, and to protect American jobs, is to stop repelling businesses through punitive taxation. Cutting the corporate tax rate to somewhere closer to competitive levels would help immensely. So would acceptance of the international norm of taxing company earnings on a territorial basis, rather than going after profits earned in and taxed by other countries.

Looking at the corporate tax rate, countries with lower tax rates than ours tend to collect more tax revenue. This is true year in and year out. For instance, the table below shows the most recent three years of data on corporate tax rates and revenues in OECD countries. Most countries (28 or 29 out of 34) have corporate tax rates of 30 percent or less. These relatively low-tax countries collect more tax revenue, on average, than does the U.S. Further, the average low-tax country collects more tax revenue than the average high-tax country. The U.S., which now has the highest tax rate in the OECD since Japan cut its rate in mid-2012, is most likely in the self-defeating zone where the corporate tax rate is so high it is actually shrinking tax revenue.

The history of the developed world indicates cutting the U.S. corporate tax rate by 10 points or more would probably pay for itself. Our simulations of corporate rate cuts show even bigger returns in terms of total federal tax revenue, due to growth in jobs and wages. This is the way to preserve the U.S. tax base, and boost the U.S. economy.

 

Corporate Tax Rates and Revenue in OECD Countries from 2010 to 2012

 

Tax Rates

Tax Revenue (% of GDP)

Country

2010

2011

2012

2010

2011

2012

Japan

39.54

39.50

39.54

3.21

3.37

3.43

United States

39.20

39.20

39.13

2.68

2.27

2.59

France

34.43

34.40

34.43

2.14

2.52

2.55

Belgium

33.99

34.00

33.99

2.70

2.90

3.10

Portugal

26.50

28.50

31.50

2.84

3.22

2.79

Germany

30.20

30.20

30.18

1.51

1.75

1.81

Australia

30.00

30.00

30.00

4.75

5.23

 

Mexico

30.00

30.00

30.00

 

 

 

Spain

30.00

30.00

30.00

1.77

1.82

2.17

Luxembourg

28.59

28.80

28.80

5.74

5.04

5.08

New Zealand

30.00

28.00

28.00

3.85

4.07

4.37

Norway

28.00

28.00

28.00

10.10

10.70

10.39

Italy

27.50

27.50

27.50

2.83

2.71

2.86

Sweden

26.30

26.30

26.30

3.48

3.23

3.03

Canada

29.36

27.60

26.14

3.31

3.13

2.92

Austria

25.00

25.00

25.00

1.93

2.22

2.28

Denmark

25.00

25.00

25.00

2.74

2.77

3.03

Israel

25.00

24.00

25.00

2.91

3.09

2.83

Netherlands

25.50

25.00

25.00

2.17

2.07

 

Finland

26.00

26.00

24.50

2.55

2.73

2.19

Korea

24.20

24.20

24.20

3.48

4.01

3.99

United Kingdom

28.00

26.00

24.00

3.05

3.08

2.87

Switzerland

21.17

21.20

21.17

2.88

2.95

2.88

Estonia

21.00

21.00

21.00

1.35

1.24

1.45

Chile

17.00

20.00

20.00

 

 

 

Greece

24.00

20.00

20.00

2.40

2.10

 

Iceland

18.00

20.00

20.00

0.95

1.81

2.11

Slovenia

20.00

20.00

20.00

1.88

1.69

1.26

Turkey

20.00

20.00

20.00

1.90

2.08

2.05

Czech Republic

19.00

19.00

19.00

3.40

3.39

3.56

Hungary

19.00

19.00

19.00

1.23

1.21

1.30

Poland

19.00

19.00

19.00

2.00

2.08

 

Slovak Republic

19.00

19.00

19.00

2.51

2.41

2.48

Ireland

12.50

12.50

12.50

2.53

2.48

2.58

 

 

 

 

 

 

 

Average:

 

 

 

 

 

 

High-tax Group (Rate > 30%)

35.47

35.46

34.79

2.45

2.56

2.71

Low-tax Group (Rate = 30% or less)

23.95

23.81

23.50

2.98

3.06

3.08

Low-tax Group ex. Norway*

23.81

23.66

23.34

2.71

2.76

2.73

*Norway is a special case, due to huge oil reserves and taxes on oil reserves.

 

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