Corporate Income Tax Revenue Not Correlated with Statutory Rates

September 7, 2011

It is widely acknowledged that the U.S. has very close to the highest statutory corporate income tax rate in the industrialized world – just behind Japan. Yet, many commentators like to cite OECD data that indicates the U.S. has relatively low corporate tax revenues as a share of GDP. This is true, and it is a pattern that holds across OECD countries. As the following table illustrates, based on OECD data from 2009 (most recent), those countries with high statutory rates generally also have low revenues. In fact, there is essentially zero correlation between statutory rates and revenues, and when we exclude the outliers, Norway (oil revenue) and Greece (bankrupt), the correlation is slightly negative.

OECD Corporate Income Tax Revenue and Statutory Rates, 2009

OECD Rank (Combined Statutory Rate)

Country

Federal Rate

Top State or Provincial Rate

Combined Federal and State Rate (Adjusted)

Revenue as a Percentage of GDP

1

Japan

30

11.56

39.54

2.4

2

United States

35

6.3

39.1

2.1

3

France

34.43

34.4

1.4

4

Belgium

33.99

33.99

2.5

5

Canada

19

12.3

31.32

2.5

6

Germany

15.83

14.4

30.18

1.3

7

New Zealand

30

30

3.3

8

Spain

30

30

2.2

9

Australia

30

30

N/A

10

Luxembourg

21.84

6.75

28.59

5.4

11

UK

28

28

2.8

12

Mexico

28

28

N/A

13

Norway

28

28

8.2

14

Italy

27.5

27.5

3.1

15

Portugal

25

1.5

26.5

N/A

16

Sweden

26.3

26.3

2.8

17

Finland

26

26

2.0

18

Netherlands

25.5

25.5

N/A

19

Austria

25

25

1.7

20

Denmark

25

25

2.4

21

Greece

25

25

0.0

22

Korea

22

2.5

24.2

3.7

23

Switzerland

8.50

14.47

21.17

3.4

24

Czech Republic

20

20

3.7

25

Hungary

20

20

2.2

26

Turkey

20

20

1.9

27

Poland

19

19

N/A

28

Slovak Rep.

19

19

2.8

29

Iceland

15

15

1.1

30

Ireland

12.5

12.5

2.4

So, paradoxically, raising rates would have the effect of lowering revenues. Alex Brill and Kevin Hassett do a more rigorous analysis and find that revenue is maximized at about a 26 percent federal rate – a full 9 points lower than the current U.S. rate of 35 percent.

The reason is that capital is mobile, and increasingly so. Corporate decision makers have a fiduciary responsibility to maximize shareholder value, which is achieved by maximizing sales (making customers happy, both here and abroad) while minimizing costs, including tax costs. When a company chooses to move operations to, say, Switzerland, it is because there is a better mix of tax costs, social benefits, and business opportunities. America is simply losing on this front, and the tragedy is that it could be changed very quickly by lowering the statutory rate.


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