The U.S. has the highest corporate 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. rate in the developed world. There are lots of problems associated with that, including less investment and a shrinking of the corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , i.e. profits. Some of the profits have just disappeared through less investment, i.e. the high corporate tax causes less domestic investment and production but more consumption of both domestic and foreign-made products. The result is fewer domestic jobs, lower domestic wages and lower domestic profits. Some of the profits have left the U.S. corporate tax regime, either through migration to the individual tax code, i.e. the pass-through sector, or through corporate tax planning.
The latter is sometimes called corporate "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. " and is the subject of intense scrutiny by tax authorities, Congress, academics, journalists, and the general public. For instance, most big corporations have IRS agents going through their books year round. In addtion, the U.S. Congress periodly holds public hearings in which representatives of particular corporations are interrogated regarding the company's tax planning techniques.
How big a problem is corporate profit shifting? In terms of lost federal corporate tax revenue, estimates vary but some researchers think it as much as $90 billion a year, or roughly a quarter of total collections. But are the companies avoiding taxation or just paying taxes elsewhere?
A new study indicates U.S. multinationals are paying taxes somewhere, and quite a lot relative to their competitors based in other countries. It finds U.S. multinational companies, despite tax planning, have extremely high effective tax rates (ETRs), calculated as worldwide income taxes over worldwide income. In the developed world only Japan has higher ETRs. This is in line with most estimates of corporate ETRs.
It indicates that tax planning or "profit shifting" is not so large as to change the basic ranking of high and low-tax countries. The U.S. remains extremely uncompetitive due to the high corporate tax rate, and investment and economic growth are harmed accordingly.
The new study is by accounting professors Kevin Markle and Doug Shackelford and it is published by the National Bureau of Economic Research. The authors examined the financial statements of 9,022 multinationals from 87 countries over the years 2006 to 2011. It is important to note that in those years Japan had a higher corporate tax rate than the U.S. and since then Japan has lowered their corporate tax rate below the U.S. rate leaving the U.S. with the highest rate in the developed world.
Here are the authors’ main findings:
Our primary finding is that, despite decades of international tax planning and continuing reports of elaborate innovative schemes to avoid taxes, the effective tax rates of multinationals vary considerably depending on the sites of the company. We find dramatic differences in effective tax rates based on the headquarters of the multinational. Japanese-headquartered multinationals face the highest ETRs, by far. After controlling for industry and size, their ETRs average 8.5 percentage points higher than their runner-up counterparts from the U.S. The ETRs of American multinationals are slightly ahead of those from two major trading partners, France and Germany. On the other end of the distribution, multinationals from the Middle East (Tax Havens) enjoy ETRs that average 12.5 (10.8) percentage points lower than American firms. In short, we find that differences continue to persist in ETRs between high-tax and low-tax countries despite vast investment in international tax avoidance.
Other findings include the following: (1) Prior work had shown that worldwide ETRs fell in recent decades. We find stable ETRs from 2006 to 2011. (2) Industries are taxed similarly around the world, albeit with construction taxed a bit lightly and information a bit more heavily. Compared with the rest of the world, the U.S. taxes the financial services more heavily and information more lightly. (3) When a company first enters a tax haven, ETRs fall but only by a small amount. (4) Whether a subsidiary is an equity holding company or a terminal operating subsidiary alters its ETR effect.
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