Last month, while Treasury was rolling out new rules to clamp down on corporate inversions, the Chair of the President’s Council of Economic Advisors, Jason Furman, gave a speech at NYU titled Business Tax Reform and Economic Growth. Furman acknowledged that the U.S. 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, at 39 percent, is the highest in the developed world. However, he then argued that “more generous depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. allowances and other structural features of the U.S. tax system combine to result in effective 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. s on U.S. investment roughly in line with, and even slightly lower than, other G7 countries,” and referred to the following chart.
The first thing to note is that the effective tax rates shown are from 2011. Since then 8 developed countries have cut their statutory corporate tax rates, including Japan, Canada and the UK. Japan’s tax cut is what moved the U.S. from second-highest to highest statutory corporate tax rate in the developed world.
However, Furman’s estimated effective tax rates even for 2011 do not square with what other researchers have found. Jack Mintz and Duanjie Chen, of the University of Calgary, find that the U.S. has the highest marginal effective tax rate on corporate investment in the developed world, and it has been the highest since 2007. Further, Mintz and Chen find the approach used by the White House and Treasury improperly accounts for how sales and property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es fall on corporate investment.
Other academic studies using different techniques come to similar conclusions as Mintz and Chen, i.e. they find the U.S. has the highest or nearly the highest effective corporate tax rate in the developed world.
The first step in corporate tax reform is acknowledging the problem, which is that the U.S. has an uncompetitive corporate tax system that gets less competitive every year. Thus far, the Obama White House has been unwilling to make that first step.
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