While the media has been feasting on Lux Leaks and other stories of “multinational tax dodging”, academic accountants have determined that U.S. multinational corporations (MNCs) have no particular taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. advantage over U.S. domestic firms. In fact, a new study finds the average effective tax rate for U.S. MNCs is slightly higher than that of U.S. domestic firms: 28 percent versus 24 percent. The study calls into question policy makers’ emphasis on international “profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. ,” including the elaborate efforts by the OECD and rich-country governments to crack down on MNCs exclusively.
The authors of the study, Scott Dyreng of Duke University and three other academic accountants, looked at the financial statements of more than 4,000 U.S. firms over the last 25 years. They found that overall there has been a decline in effective tax rates but the decline has been about the same for MNCs and domestic firms. The effective tax rate for MNCs declined from 34 percent in 1988 to 28 percent in 2012, while the effective tax rate for domestic firms declined from 32 percent in 1988 to 24 percent in 2012.
Other studies have shown a similar decline in effective tax rates across the developed world, which is attributable to the decline in statutory corporate tax rates everywhere except the U.S. The mystery is that effective tax rates have dropped in the U.S. despite no significant change in the corporate tax rate over the last 25 years. Nonetheless, the U.S. continues to have one of the highest effective tax rates in the world.
The authors of the new study explored many possible explanations for the decline in U.S. effective tax rates, including tax breaks targeting domestic firms, such as the manufacturing deduction and bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings, in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. , and the increased opportunities for profit shifting among MNCs. However, these factors do not appear to explain the trends. As they note:
Overall, we conclude that corporate effective tax rates have indeed declined over time, and that the decline is not concentrated in multinational firms. Most of the other conventional explanations, such as the rising prevalence of intangible assets or the presence of more loss firms are equally unable to explain the decline. The decline in statutory tax rates around the world (other than the U.S.) explains part of the decline in effective tax rates, but only for multinational firms.
It appears policy makers should go back to the drawing board on profit shifting. We simply don’t have a handle on how big it is or what the causes are. Rather than passing intricate laws aimed at MNCs and their intangible assets, interest deductions, etc., Congress should focus on making the U.S. corporate tax system simpler and more competitive. That requires cutting the corporate tax rate and switching to a territorial system that does not double-tax foreign earnings.
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