Download Tax Foundation Fiscal Fact No. 261
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. Foundation Fiscal Fact No. 261
There is increasing recognition in Washington that the U.S. corporate tax rate is out of step with the lower tax rates of most industrialized and emerging nations. Indeed, 2011 marks the 20th year in which the U.S. statutory tax rate has been above the simple average of non-U.S. countries in the Organization for Economic Cooperation and Development (OECD).
It is now well known that with a combined federal and state corporate tax rate of 39.2 percent, the U.S. has the second-highest overall rate among OECD nations. Only Japan, with a combined rate of 39.5 percent, levies a higher rate.
As Figure 1 indicates, the simple average of non-U.S. OECD nations has fallen from 38 percent in 1992 (the first year in which it fell below the U.S. rate) to 25.5 percent today. Similarly, the weighted average—which accounts for country size—has fallen from 42.5 percent in 1992 to 30.1 percent today. The weighted average rate of non-U.S. countries fell below the U.S. rate in 1998. Thus, 2011 marks the twelfth straight year in which the U.S. has been above the weighted average rate.
Figure 1
These figures and rankings do not reflect the changes that have occurred this year or will take place later in the year. On January 1, 2011, Canada’s national corporate tax rate was reduced from 18 percent to 16.5 percent, which gives the country an overall rate of 28 percent. On April 1, both Japan and the United Kingdom are scheduled to lower their rates as well. Japan is planning to reduce its national rate by 4.5 percentage points, which will bring its overall rate to below 35 percent. The U.K. rate will fall from 28 percent to 27 percent as a first step of a multi-year plan to lower the British rate to 24 percent by 2014.
After the scheduled rate cuts in Japan and Great Britain take effect, the simple average of non-U.S. OECD nations will drop to about 25 percent and the weighted average will hit 29 percent. This will leave the U.S. rate a full 10 percentage points higher than the weighted average of our major economic competitors.
Falling Behind by Standing Still
Japan and the U.S. have not always held the number one and number two corporate tax rate rankings. As Table 1 shows, just 10 years ago Germany and Canada held the top spots while Japan and the U.S. held the third and sixth spots, respectively. During that ten-year period, the corporate tax rates in Japan and the U.S. stood still while Germany cut its rate by roughly 22 percentage points, more than any other country. This dramatic change lowered Germany’s rate from first to fifth among OECD nations.
Canada’s story is even more impressive. The Canadian government has explicitly set the goal of having the lowest corporate tax rate among the major G-7 nations. Over the past ten years, Canada has cut its rate more than 13 percentage points, which dropped it eight places in the OECD rankings.
Between 2000 and 2010, nine countries cut their corporate tax rates by double-digit figures. In addition to Germany and Canada, these countries include: Greece (16 points), Turkey (13 points), Poland (11 points), the Slovak Republic (10 points), Iceland (15 points), and Ireland (11.5 points). All of these nations fell considerably in the OECD rankings.
By contrast, some nations cut their corporate rates or remained static but still rose in the rankings. Aside from the U.S., the most notable were Sweden and the United Kingdom. Sweden cut its corporate tax rate from 28 percent to 26.3 percent and still rose 11 places in the rankings. Similarly, the U.K. cut its rate from 30 percent to 28 percent, yet rose 10 places in the rankings. Australia and New Zealand cut their corporate rates by 4 and 3 percentage points respectively, but still rose eight places in the rankings.
Table 1: Corporate Tax Rates in OECD Countries
|
2010 Rate |
2010 Rank |
2000 Rate |
2000 Rank |
Change in Rate |
Change in Rank |
|
|
Japan |
39.54 |
1 |
40.87 |
3 |
-1.3 |
2 |
|
United States |
39.2 |
2 |
39.3 |
6 |
-0.1 |
4 |
|
France |
34.43 |
3 |
37.76 |
7 |
-3.3 |
4 |
|
Belgium |
33.99 |
4 |
40.2 |
4 |
-6.2 |
0 |
|
Germany |
30.2 |
5 |
52.0 |
1 |
-21.9 |
-4 |
|
Mexico |
30 |
7 |
35 |
11 |
-5.0 |
4 |
|
Spain |
30 |
9 |
35 |
13 |
-5.0 |
4 |
|
Australia |
30 |
6 |
34 |
14 |
-4.0 |
8 |
|
New Zealand |
30 |
8 |
33 |
16 |
-3.0 |
8 |
|
Canada |
29.52 |
10 |
42.57 |
2 |
-13.1 |
-8 |
|
Luxembourg |
28.59 |
11 |
37.45 |
8 |
-8.9 |
-3 |
|
United Kingdom |
28 |
13 |
30 |
23 |
-2.0 |
10 |
|
Norway |
28 |
12 |
28 |
26 |
0.0 |
14 |
|
Italy |
27.5 |
14 |
37 |
9 |
-9.5 |
-5 |
|
Portugal |
26.5 |
15 |
35.2 |
10 |
-8.7 |
-5 |
|
Sweden |
26.3 |
16 |
28 |
27 |
-1.7 |
11 |
|
Finland |
26 |
17 |
29 |
24 |
-3.0 |
7 |
|
Netherlands |
25.5 |
18 |
35 |
12 |
-9.5 |
-6 |
|
Austria |
25 |
19 |
34 |
15 |
-9.0 |
-4 |
|
Denmark |
25 |
20 |
32 |
18 |
-7.0 |
-2 |
|
Korea |
24.2 |
21 |
30.8 |
20 |
-6.6 |
-1 |
|
Greece |
24 |
22 |
40 |
5 |
-16.0 |
-17 |
|
Switzerland |
21.17 |
23 |
24.93 |
28 |
-3.8 |
5 |
|
Turkey |
20 |
24 |
33 |
17 |
-13.0 |
-7 |
|
Czech Republic |
19 |
25 |
31 |
19 |
-12.0 |
-6 |
|
Poland |
19 |
27 |
30 |
22 |
-11.0 |
-5 |
|
Slovak Republic |
19 |
28 |
29 |
25 |
-10.0 |
-3 |
|
Hungary |
19 |
26 |
18 |
30 |
1.0 |
4 |
|
Chile |
17 |
29 |
15 |
31 |
2.0 |
2 |
|
Iceland |
15 |
30 |
30 |
21 |
-15.0 |
-9 |
|
Ireland |
12.5 |
31 |
24 |
29 |
-11.5 |
-2 |
Emerging Nations Have Cut Corporate Rates Too
Of course, OECD nations have not been the only countries reducing their corporate tax rates to remain competitive. As illustrated in the appendix to this report, since 2006, some 75 nations have cut their rates, many multiple times.
In addition to the 17 OECD nations that lowered their corporate rates during this period, there were 17 nations in Eastern Europe and Central Asia that followed suit, including Russia which lowered its rate from 24 percent to 20 percent.
Mexico was the only nation to increase its corporate rate during this period, from 28 percent to 30 percent. However, Mexico had cut its corporate rate from 29 percent to 28 percent in 2007. Macedonia perhaps went the furthest of any country by lowering its tax rate on undistributed profits from 10 percent to zero.
Among Asian nations, America’s biggest economic competitor, China, lowered its corporate tax rate from 33.3 percent to 25 percent in 2008. Nearby Vietnam lowered its rate from 28 percent to 25 percent in 2009, while Taiwan reduced its corporate rate from 25 percent to 17 percent in 2010. No doubt, these Asian trends are a factor in Japan’s decision to lower its own rate.
What Rate Does the U.S. Need in Order to Be Competitive?
While there is a growing consensus that the U.S. corporate tax rate needs to be lowered to improve our global competitiveness, there is less agreement on the ideal rate. Indeed, a variety of proposals have been put forward in recent years that would lower the federal corporate tax rate while eliminating or scaling back many of the deductions available to businesses.
The first of these plans was proposed by former Ways and Means Chairman Charlie Rangel in 2007. Rangel’s plan cut the federal rate from 35 percent to 30.5 percent in exchange for eliminating provisions such as the Domestic Manufacturing Deduction and making significant changes to the tax rules affecting U.S. multinational firms.
Rangel and others argued that the plan’s 30.5 percent rate was a good first step in restoring U.S. competitiveness. However, they overlooked the fact that 44 states impose their own 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. (at an average rate of 6.47 percent), so what matters for global comparisons is the combined federal and state-level rate.[1]
Therefore, as Table 2 shows, when the average state rate is added to the proposed 30.5 percent federal rate (and adjusted for the federal deductibility of state taxes), Rangel’s plan would reduce the overall U.S. rate to just 35 percent—a level that does not alter the U.S.’s high OECD ranking.
Table 2: How Different Plans Affect the Overall U.S. Rate and OECD Ranking
(Adjusted for federal deductibility of state taxes)
|
Federal Rate |
Average State Rate |
Combined Rate |
Resulting OECD Rank |
|
|
Current Law |
35 |
6.47 |
39.2 |
2 |
|
Rangel Plan (2007) |
30.5 |
6.47 |
35 |
2 |
|
Bowles/Simpson (2010) |
28 |
6.47 |
33 |
5 |
|
Match OECD Weighted Avg. |
25 |
6.47 |
30 |
7 |
|
Wyden/Gregg (2010) |
24 |
6.47 |
29 |
11 |
|
Match China/OECD Simple Avg. |
20 |
6.47 |
25 |
19 |
Two plans worth noting were released in 2010. President Obama’s National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson, presented a menu of tax reform options for both the corporate and individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. systems. The leading proposal eliminated most of the tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit (EITC), child tax credit (CTC), deduction for employer health-care contributions, and tax-advantaged savings plans. s available to corporations while lowering the corporate rate to 28 percent. This is the general direction that President Obama is reported to be favoring at this time.
However, Table 2 shows that, when combined with the state average rate, the Bowles/Simpson plan would reduce the overall U.S. corporate rate to 33 percent, which would still leave the country with the fifth-highest rate among OECD nations.
A plan developed by Senators Ron Wyden (D-OR) and Judd Gregg (R-NH), would reduce the federal corporate tax rate to 24 percent while significantly broadening 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. by eliminating most corporate deductions. But, contrary to the direction taken by most countries, the plan also eliminated the deferral of U.S. tax on income earned abroad. Table 2 shows that a 24 percent federal rate would lower the overall U.S. rate to 29 percent, slightly below the weighted average of all OECD nations.
While a 29 percent overall corporate tax rate would be vastly more competitive than the current rate—putting the U.S. on par with Spain, Australia, and New Zealand—it would still leave our rate above the majority of OECD nations, including major trading partners Canada and the U.K.
A Move to the Middle Means a 20 Percent Rate
As Table 2 indicates, for the U.S. to “move to the middle” and match China’s rate and the OECD simple average, lawmakers will have to reduce the federal rate to 20 percent. By all accounts, such a rate reduction could not be achieved within the revenue-neutral restrictions of broadening the corporate tax base alone.
If lawmakers see revenue neutrality as paramount, they will have to reach beyond the corporate tax base to find the budgetary offsets – such as new revenues or spending cuts—to the lower corporate rate. On the other hand, they could determine that the benefits of cutting the U.S. rate are so great, that they could justify relaxing the revenue-neutral restriction in the same manner they did when they enacted the “Tax Hike Prevention Act of 2010.”
Benefits of Cutting the Corporate Rate
A very important 2008 report by economists at the Organization for Economic Cooperation and Development (OECD)[2] measured the relationship between different taxes and economic growth and determined that the corporate income tax is the most harmful tax for long-term economic growth, followed by high personal income tax rates. Consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es 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 were seen as less harmful.
Indeed, the report found that lowering statutory corporate tax rates “can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.”[3] Moreover, “lower corporate tax and labour rates may also encourage inbound foreign direct investment, which has been found to increase productivity of resident firms.”
Lower Rates Do Not Always Mean Lower Revenues
In observing the worldwide trends toward lower corporate tax rates, the OECD has noted that “Despite the strong reduction in statutory corporate tax rates, corporate tax revenues have kept pace with – or even exceeded – the growth in GDP, and the growth in revenues from other taxes in many OECD countries.”[4]
This is not to say that corporate tax cuts “pay for themselves.” However, OECD economists do offer some possible explanations on why corporate tax collections have not typically fallen after rates were reduced:
• Lower rates were balanced by base-broadening measures such as reduced 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 fewer special deductions.
• “[M]ore profitable corporations pay more corporate taxes. This might not only be part of a cyclical movement but might also be the result of fundamental changes in profitability.”[5]
• Lower tax rates attract capital and investment from high-tax countries. Increased tax revenues in low-tax countries may have resulted from “the inflow of investment and/or mobile corporate profits that are shifted out of high-tax countries in order to avoid corporate taxes.”[6]
• Lower rates reduce the incentive for excessive tax planning and 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. . “The reduced corporate tax-planning efforts might therefore have increased the taxable corporate tax base, which may have partly offset the tax revenue loss due to the lower statutory and effective corporate tax rates.”[7]
• The move to lower rates was complemented by “stricter corporate tax enforcement policies enacted by OECD countries.”[8]
While it is difficult to quantify, the U.S.’s high corporate tax rate has undoubtedly caused some measure of profit-shifting out of the country and discouraged some amount of inbound investment. Thus, it is safe to assume that a meaningful reduction in the U.S. corporate rate would result in more corporate profits remaining within the country while encouraging more investment from abroad. These two factors alone could minimize the static revenue losses associated with a lower rate.
Conclusion
The U.S. is less than a month away from having the highest overall corporate tax rate in the industrialized world, when Japan lowers its top rate on April 1. Remarkably, 2011 marks the 20th year in which the statutory U.S. corporate tax rate has exceeded the simple average of the non-U.S. OECD nations and the twelfth year in which our rate has exceeded the weighted average OECD rate.
Already this year, Canada has lowered its corporate rate in a bid to have the lowest rate among the major G-7 nations. Great Britain too is scheduled to reduce its rate on April 1 in order to avoid losing more corporate headquarters to low-tax jurisdictions such as Ireland, Switzerland, and the Netherlands.
Cutting the U.S. rate while eliminating “loopholes” will not reduce the rate enough to meaningfully improve our ranking within the OECD and relative to our major economic competitors such as China.
If the U.S. is to “move to the middle,” lawmakers may have to find other budgetary offsets (such as lower spending) or abandon a strict policy of revenue-neutrality. The economic evidence suggests that a lower corporate tax rate will improve long-term economic growth and increase workers’ wages without necessarily diminishing tax revenues.
Appendix: Table 1
|
2006/2007 |
2007/2008 |
2008/2009 |
2009/2010 |
|
|
OECD High-Income |
||||
|
Canada |
22.1 to 19.5 |
|||
|
Czech Republic |
24 to 21 |
21 to 20 |
20 to 19 |
|
|
Denmark |
28 to 25 |
|||
|
Germany |
38.9 to 30 |
|||
|
Greece |
29 to 25 |
25 to 24 |
||
|
Hungary |
20 to 19 |
|||
|
Iceland |
18 to 15 |
|||
|
Italy |
33 to 27.5 |
|||
|
Luxembourg |
29.63 to 28.59 |
|||
|
Mexico |
29 to 28 |
28 to 30 |
||
|
Netherlands |
29.6 to 25.5 |
|||
|
New Zealand |
33 to 30 |
|||
|
Portugal |
27.5 to 26.5 |
|||
|
Republic of Korea |
27.5 to 24.2 |
|||
|
Spain |
35 to 32.5 |
32.5 to 30 |
||
|
Sweden |
28 to 26.3 |
|||
|
United Kingdom |
30 to 28 |
|||
|
Eastern Europe & Central Asia |
||||
|
Albania |
20 to 10 |
|||
|
Azerbaijan |
24 to 22 |
22 to 20 |
||
|
Bosnia and Herzegovina |
30 to 10 |
|||
|
Bulgaria |
15 to 10 |
|||
|
Georgia |
20 to 15 |
|||
|
Kazakhstan |
30 to 20 |
|||
|
Kosovo |
20 to 10 |
|||
|
Kyrgyz Republic |
20 to 10 |
|||
|
Lithuania |
20 to 15 |
|||
|
FYR Macedonia |
15 to 12 |
12 to 10 |
10 to 0* |
|
|
Moldova |
18 to 15 |
|||
|
Montenegro |
15 to 9 |
|||
|
Russian Federation |
24 to 20 |
|||
|
Slovenia |
25 to 23 |
|||
|
Tajikistan |
25 to 15 |
|||
|
Turkey |
30 to 20 |
|||
|
Uzbekistan |
15 to 12 |
|||
|
Sub-Saharan Africa |
||||
|
Benin |
38 to 30 |
|||
|
Burkina Faso |
35 to 30 |
30 to 27.5 |
||
|
Cape Verde |
30 to 25 |
|||
|
Republic of Congo |
38 to 36 |
|||
|
Cote d’Ivoire |
35 to 27 |
27 to 25 |
||
|
Lesotho |
35 to 25 |
|||
|
Madagascar |
30 to 25 |
25 to 23 |
||
|
Mauritius |
25 to 22.5 |
|||
|
Niger |
35 to 30 |
|||
|
Sao Tome and Principe |
30 to 25 |
|||
|
Seychelles |
0-40 to 25-33** |
|||
|
South Africa |
12.5 to 10 |
|||
|
Sudan |
30 to 15 |
|||
|
Togo |
37 to 30 |
|||
|
Zimbabwe |
30 to 25 |
|||
|
Latin America & Caribbean |
||||
|
Antiqua and Barbuda |
30 to 25 |
|||
|
Columbia |
35 to 34 |
|||
|
Dominican Republic |
30 to 25 |
|||
|
Panama |
30 to 25 |
|||
|
St. Vincent and the Grenadines |
40 to 37.5 |
37.5 to 32.5 |
||
|
Trinidad and Tobago |
30 to 25 |
|||
|
Uruguay |
30 to 25 |
|||
|
Middle East & North Africa |
||||
|
Algeria |
25 to 19 |
|||
|
Israel |
31 to 29 |
29 to 26 |
||
|
Morocco |
35 to 30 |
|||
|
Syria |
35 to 28 |
|||
|
Tunisia |
35 to 30 |
|||
|
West Bank and Gaza |
16 to 15 |
|||
|
East Asia & Pacific |
||||
|
Brunei Darussalam |
25.5 to 23.5 |
23.5 to 22 |
||
|
China |
33.3 to 25 |
|||
|
Fiji |
31 to 29 |
|||
|
Indonesia |
28 to 25 |
|||
|
Malaysia |
28 to 27 |
27 to 25 |
||
|
Mongolia |
30 to 25 |
|||
|
Philippines |
35 to 30 |
|||
|
Samoa |
29 to 27 |
|||
|
Taiwan (China) |
25 to 17 |
|||
|
Thailand |
30 to 25 |
|||
|
Timor-Leste |
30 to 10 |
|||
|
Tonga |
15-30 to 25 |
|||
|
Vietnam |
28 to 25 |
*For Undistributed Profits
**Progressive
Source: OECD, World Bank “Doing Business”
[1] Nevada, South Dakota, and Wyoming do not levy a corporate income tax. Ohio, Texas, and Washington levy a “gross receipts” tax on businesses, but not a corporate income tax.
[2] Asa Johansson, Christopher Heady, Jens Arnold, Bert Brys and Laura Vartia, “Tax and Economic Growth,” Organization for Economic Cooperation and Development, OECD Economics Working Paper No. 620., July 11, 2008. p. 9.
[4] “Fundamental Reform of Corporate Income Tax,” Organization for Economic Cooperation and Development, OECD Tax Policy Studies No. 16., 2007.
Share