Faulty Reasoning, Excellent Cartoons

September 1, 2011

The Institute for Policy Studies (IPS) has issued a study claiming that many U.S. corporations are paying their CEOs more than they pay in federal taxes. It’s a clever premise so it is understandable that it was picked up by major news outlets such as the New York Times and Washington Post. However, the basis of their claim — that U.S. corporations pay an effective tax rate of 10.5 percent — is simply incorrect. Actual data from the IRS, and the findings of numerous international studies, shows that U.S. corporations face a much higher tax burden.

Indeed, next week the Tax Foundation will release a report analyzing IRS corporate tax return data since 1994, when the top corporate tax rate was raised to 35 percent from 34 percent. We find that over this 15 year period, corporations paid an average effective tax rate of 26 percent on their domestic profits. The chart below summarizes this data:

Moreover, this is the effective tax rate paid on corporation’s domestic profits only. When we include taxes paid to foreign governments (roughly $100 billion per year), we find that the effective rate on worldwide corporate profits is about 33 percent. These figures are consistent with other studies that compare the effective corporate rate in the U.S. to other countries. In another forthcoming report we survey the 13 most recent academic studies on global effective corporate tax rates and find that the estimates of the effective U.S. corporate tax rate range from 23 percent to 34.9 percent.

The bottom line is that the IPS study made for good headlines but it is based on very flawed methodology and stands in stark contrast to actual IRS data and a host of credible international studies. But let’s give them a hand for their clever cartoons.

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