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Effective Corporate Income Tax Rates and the Corporate Tax Yield

By: Philip Dittmer

On the heels of numerous House Republican proposals to reduce 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. rates, there has been a trend among the fiscal policy punditry to claim that US corporate tax burdens are already minimal and that the economic burden of high 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 is exaggerated. Such was the nature of Tuesday’s post by Bruce Bartlett in the Economix blog, which reported that US corporate tax revenue as a share of GDP was a meager 1.8% for 2008 (this according to the OECD; CBO reports 2.1% for the same year). But because this statistic was relayed amidst a discussion of “effective tax rates,” it is important to clarify that 1.8% does not represent or approximate the average effective tax rate for US corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s.

The argument that low corporate tax revenue as a share of GDP directly indicates a low effective tax rate ignores that corporate earnings make up a minor share of GDP. Quite obviously, corporate profits-the base of corporate taxation-do not total the entirety of US GDP, and therefore 1.8% is not a figure that should be tossed around in the discussion of effective tax rates.

According to BEA data for years 2001-2008, corporate earnings as a share of GDP ranged from 7% to 13.7%, with a simple average of 10.1%. Using these figures alongside the OECD revenue data cited in the article, the chart below reveals that corporations paid an average effective tax rate of 24.1% for these years. (Because this rate is calculated with both OECD and BEA data, it should only serve as an approximation.) Employing BEA data for corporate tax revenue (as opposed to the OECD data) to keep sources consistent, the average effective rate for the same period was 25.7%.

US 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. Revenue as Shares of Corporate Activity and Gross

2001 2002 2003 2004 2005 2006 2007 2008 Average (3)
Pre-Tax Corporate Earnings, $billions (1) 712.72 765.35 903.47 1,229.40 1,640.16 1,822.72 1,738.36 1,333.21
GDP, $billions (2) 10,234 10,590 11,089 11,812 12,580 13,336 14,011 14,369
Corporate Earnings as Percentage (%) of GDP 7.0 7.2 8.1 10.4 13.0 13.7 12.4 9.3 10.14
Corporate Tax Revenue as Percentage (%) of GDP (2) 1.9 1.7 2.1 2.5 3.1 3.4 3.0 1.8 2.44
Corporate Tax Revenue as Percentage (%) of Corporate Income (2) 27.3 23.5 25.8 24.0 23.8 24.9 24.2 19.4 24.10
BEA reported Corporate Tax Revenues, $billions (1) 203.3 192.3 243.8 306.1 412.4 473.3 445.5 308.4
Corporate Tax Revenue as Percentage (%) of Corporate Income (1) 28.5 25.1 27.0 24.9 25.1 26.0 25.6 23.1 25.67


(1)Bureau of Economic Analysis

(2)Organization for Economic Cooperation and Development

(3)Average represents simple average rate across the eight years

These calculated averages generally reflect the findings of numerous recent analyses: In April, PricewaterhouseCoopers released its “Global Effective Tax Rates” report, which scored the US an average effective corporate tax rate of 27.7% for 2006-2009, sixth-highest in the world. Of the five countries with higher rates, three lowered their rates within or after the study, and one other, Japan, intends to in the near future.

PricewaterhouseCoopers Average Effective Corporate Tax Rates, 2006-2009

Rank Country AETR Rank Country AETR Rank Country AETR
1 Japan 38.8% 21 United Kingdom 23.6% 41 Netherlands 18.8%
2 Morocco 33.9% 22 France 23.1% 42 Portugal 18.7%
3 Italy 29.1% 23 Malaysia 22.8% 43 Turkey 18.6%
4 Indonesia 28.1% 24 Ireland 22.4% 44 Bermuda 18.4%
5 Germany 27.9% 25 Sweden 22.0% 45 Lebanon 16.6%
6 United States 27.7% 26 Spain 21.8% 46 Singapore 16.3%
7 Mexico 27.2% 27 Canada 21.6% 47 Chile 15.9%
8 Colombia 27.1% 28 China 21.5% 48 Taiwan 14.4%
9 Australia 27.1% 29 Egypt 21.4% 49 Hungary 13.7%
10 Israel 26.9% 30 Nigeria 21.1% 50 Oman 11.9%
11 South Africa 26.7% 31 Switzerland 20.7% 51 Liechtenstein 10.9%
12 Russia 26.0% 32 Czech Republic 20.4% 52 Panama 5.1%
13 Greece 25.2% 33 Jordan 19.9% 53 Cayman Islands 4.7%
14 India 25.1% 34 Austria 19.7% 54 SaudiArabia 4.4%
15 Denmark 24.9% 35 Luxembourg 19.6% 55 Bahrain 3.4%
16 Thailand 24.6% 36 Belgium 19.5% 56 Kuwait 3.1%
17 South Korea 24.3% 37 Poland 19.4% 57 Qatar 3.1%
18 Finland 24.2% 38 Kazakhstan 19.2% 58 UAE 2.2%
19 Brazil 24.1% 39 Norway 19.1% 59 Venezuela -3.4%
20 Philippines 24.0% 40 Peru 18.8%
Non-US Average:19.5%

Source: PricewaterhouseCoopers, “Global Effective Tax Rates” Report, 2011

Similarly, in February the American Enterprise Institute reported the US average effective rate to be 29.0%, second only to Japan. And in 2008 GAO calculated the average effective tax rate for domestic corporate investment to be 25.2%, with the median at 31.8%. While there remain the highly publicized cases such as GE, the idea that US corporations pay little or no taxes is simply not the full story.

It may be a surprise to some that corporate earnings account for only roughly 10% of GDP. This is partially due to the dramatic decrease in the existence and activity of traditional C Corporations over the past decades. From 1981-2007, the C Corp share of business activity decreased from 87% to 64%, with a 10% decline since 1999 alone. The C Corp share of taxable income has fallen even more dramatically, from 70.6% in 1987 to 48.5% in 2004. More and more, businesses are electing to organize as “pass-through entities” (Subchapter S Corporations and Limited Liability Companies) where business income is reported on the individual level and not subject to the double-taxation of the current corporate tax system. The Tax Foundation reported in 2008 that with all such business forms included in the analysis, the historical average of total business tax revenues as a percentage of GDP increases from 2.2% to 3.3%.

With respect, Mr. Bartlett has done well to highlight the rather meager yield of the corporate income tax and some of the implications of maintaining a tax code riddled with special exemptions and preferences. The Tax Foundation recognizes that effective tax rates vary from statutory rates due to these preferences, and the complexity of the corporate tax code provides a strong argument for broadening the base through eliminating certain tax preferences and lowering the rate. But in sum, it is misleading to directly equate our low reliance on the corporate tax to the idea that all corporations pay low effective tax rates.