The global 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. news today once again highlights how out of step U.S. lawmakers are with the trends taking place worldwide. As American newspapers recount yesterday’s hearing in the House Ways and Means Committee on how the “carried interest” hedge fund managers receive as compensation should be taxed, the headlines in Malaysia were that the government will continue to cut their corporate tax rate while exempting dividends from taxation.
The Malaysia Star reports in today’s online edition, that the government’s new budget proposes reducing their corporate tax rate to 25 percent in 2009. The rate is being cut from 28 percent to 27 percent this year and to 26 percent in 2008.
Moreover, they will move to a “single-tier tax system” in 2008, which means that profits will be taxed only at the company level and dividends paid to shareholders will be exempt from taxation.
The U.S. currently has the second-highest overall corporate tax rate among OECD countries at 39.3 percent. Only Japan’s 39.4 percent rate is higher. Moreover, the U.S. taxes corporate income twice, first at the company level and then again at the individual level. According to OECD calculations, our combined rate of 50.8 percent on dividend income is the eighth highest among our major trading partners.
Overall Effective Statutory Tax Rate on Dividend Income by Rank in 2005
|
OECD Nations |
Top Rate on Corporate Income Plus Individual Tax Rate on Dividends |
Percentage Point Change 2000 to 2005 |
||||
|
2005 |
|
2000 |
||||
|
Rate |
Rank |
|
Rate |
Rank |
||
|
Japan |
63.7% |
1 |
64.5% |
3 |
-0.8 |
|
|
Denmark |
59.0% |
2 |
59.2% |
7 |
-0.2 |
|
|
Canada |
56.1% |
3 |
62.5% |
5 |
-6.4 |
|
|
France (d) |
55.9% |
4 |
63.2% |
4 |
-7.2 |
|
|
Switzerland (g) |
54.7% |
5 |
56.5% |
10 |
-1.8 |
|
|
Germany |
52.4% |
6 |
60.9% |
6 |
-8.5 |
|
|
Netherlands |
52.1% |
7 |
74.0% |
1 |
-22.0 |
|
|
United States |
50.8% |
8 |
58.9% |
8 |
-8.1 |
|
|
Spain |
50.0% |
9 |
52.7% |
12 |
-2.7 |
|
|
Sweden |
49.6% |
10 |
49.6% |
16 |
0.0 |
|
|
Ireland |
49.3% |
11 |
57.4% |
9 |
-8.2 |
|
|
Korea |
48.7% |
12 |
44.6% |
21 |
4.1 |
|
|
Australia (a) |
48.5% |
13 |
48.5% |
18 |
0.0 |
|
|
United Kingdom (a) |
47.5% |
14 |
47.5% |
19 |
0.0 |
|
|
Hungary (e) |
45.4% |
15 |
55.7% |
11 |
-10.3 |
|
|
Italy |
44.8% |
16 |
45.9% |
20 |
-1.1 |
|
|
Turkey |
44.0% |
17 |
65.0% |
2 |
-21.0 |
|
|
Luxembourg |
44.0% |
18 |
52.2% |
13 |
-8.3 |
|
|
Belgium (b) |
43.9% |
19 |
49.1% |
17 |
-5.3 |
|
|
Austria |
43.8% |
20 |
50.5% |
15 |
-6.8 |
|
|
Portugal |
42.0% |
21 |
51.4% |
14 |
-9.4 |
|
|
New Zealand (a) |
39.0% |
22 |
39.0% |
26 |
0.0 |
|
|
Finland (c) |
37.8% |
23 |
29.0% |
29 |
8.8 |
|
|
Czech Republic |
37.1% |
24 |
41.4% |
23 |
-4.3 |
|
|
Poland (f) |
34.4% |
25 |
44.0% |
22 |
-9.6 |
|
|
Greece |
32.0% |
26 |
40.0% |
24 |
-8.0 |
|
|
Mexico |
30.0% |
27 |
35.0% |
28 |
-5.0 |
|
|
Norway |
28.0% |
28 |
28.0% |
30 |
0.0 |
|
|
Iceland |
26.2% |
29 |
37.0% |
27 |
-10.8 |
|
|
Slovak Republic |
19.0% |
30 |
39.7% |
25 |
-20.7 |
|
|
Average |
44.3% |
50.1% |
-5.8 |
(a) For Australia, New Zealand and the UK, all with a non-calendar tax year, the rates shown are those in effect as of July 1, April 1 and April 5, respectively.
(b) For shares issued before January 1, 1994, the (withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests.
) personal income tax rate is 25 per cent. The withholding tax is final, if the shareholder so chooses.
(c) Part of the dividends from non-listed companies is taxed as earned income. Since the highest marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax.
is higher for earned income than for capital income, the net personal tax in this table would not be zero for such companies.
(d) For companies not paying the CSB (Contribution Sociale sur les Bénéficies), the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
rates are 1.1 percentage points lower. Included in the rate in column 6 is the prélèvements sociaux (CSG,CRDS) of 11%, which is levied on distributed profits (100). As shown in column 10, taxpayers only have to declare 50 per cent of the dividends that are grossed-up with the prélèvements sociaux that have been withheld at source. The 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.
is further reduced by a part of the prélèvements sociaux (up to 5.8 per cent of the grossed-up dividends).
(e) Distributed dividends that exceed a threshold equal to 30 percent of the value of the share are taxed at the shareholder level at a personal income tax rate of 35%. For dividends below this threshold, the rate is 20 percent.
(f) Source for the information: KPMG’s Corporate Tax Rate Survey and the IBFD European Tax Handbook.
(g) The corporate income tax rate includes the church tax, while the personal income tax rates excludes it.
Source: Organization for Economic Cooperation and Development
Our lawmakers need to recognize that many of the issues highlighted by the carried interest debate are the result of unevenness in how the tax system taxes different forms of business and different sectors of the economy. These issues will continue to plague Congress until they pay attention to the headlines abroad. The following headline from today’s Business Line in India should be motivation enough: “China’s New Corporate Tax Code to Spur Foreign Investments: Tax Rate to be Cut to 25% from 33%.”
Click here for a new Tax Foundation Q&A on the carried interest debate.
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