A new study by the Organisation for Economic Co-operation and Development (OECD) that compares the key role of businesses in the tax systems of member countries finds that U.S. businesses rank highest for taxes remitted on behalf of other taxpayers in the economy as a share of total government 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. revenues.
Analyses of business taxes can sometimes focus solely on the corporate income tax (CIT) while excluding other forms of taxes. However, as the author of the OECD working paper, Anna Milanez, points out, considering just the CIT is problematic for several reasons. It ignores the wide range of taxes for which businesses must legally pay, overlooks businesses’ role of remitting taxes on behalf of others, and avoids any discussion of economic incidence, or who bears the final burden of the tax. These points are becoming increasingly acute as countries rely less on corporate income taxes. For example, from 1982 to 2015, the average top marginal CIT rate in OECD countries declined from 48 percent to 25 percent. And now the United States’ top marginal rate of 35 percent has dropped to a flat rate of 21 percent.
As such, this paper offers a more complete view of business taxes, including the understudied area of remittance, utilizing OECD data and additional information gathered from member countries. Across 24 OECD countries for which data is available, this study sorts business taxes into one of two broad categories—legal tax liability or legal remittance responsibility. Legal liabilities include the full range of taxes for which businesses are themselves liable, while legal remittance responsibilities include taxes for which other parties are legally liable but businesses are responsible for collecting and remitting to the government. The study also reviews how the cost of taxes can be shifted to others in the economy, such as workers, consumers, or capital owners.
| Legal Tax Liability | Legal Remittance Responsibility |
|---|---|
| Noncorporate business taxes and corporate income taxes | Withholding taxes on labor and capital income |
| Employer and self-employed social security contributions | Employee social security contributions |
| Payroll taxes | Value-added taxes and sales taxes |
| Immovable property taxes (land and buildings) paid by businesses | |
| Excise and motor vehicle taxes | |
| Other taxes |
Legal liability includes six types of taxes, listed in the table above, and is measured as a share of total tax revenue. Across the countries examined, the unweighted average share of taxes that businesses themselves are liable for is just over one-third, making up 33.5 percent of total revenues governments collect. Values range from a low of 19.4 percent in Portugal to a high of 52.0 percent in the Czech Republic. While the United States comes in below average in this category, at 28.9 percent, it’s important to note that property taxes paid by businesses were not available for the U.S.—if 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. collection data were available, the share of businesses’ total tax liability would rise. The United States comes in above average for its share of noncorporate business and corporate income taxes, which make up 13.5 percent of government collections compared to the average of 11.5 percent across countries in the study.
Legal remittance responsibility includes three types of taxes, also listed in the table above, and is measured as a share of total tax revenue. It is in this category that U.S. businesses rank far above competitors in other countries. The unweighted average share of taxes remitted by businesses on behalf of others is 46.3 percent of total government collections, with a low of 24.5 percent in France and a high of 64.2 percent in the United States. Though individual workers, investors, and consumers are legally liable for taxes in this category, it is the responsibility of businesses to collect and send these taxes to the government, for example, when they pay wages, distribute dividends, or sell products. An interesting finding within this category is that the share of individual income and capital gains taxes remitted by businesses in the United States (45.7 percent) is greater than the average share of all taxes remitted by businesses in other countries.
These measures show that in addition to their legal liability as business entities, businesses serve another crucial role in the tax structure as remitters on behalf of other taxpayers. In the United States, businesses collect and remit on behalf of other taxpayers more than half of government tax revenues (64.2 percent)—meaning their own tax liability plus remittance responsibility totals 93.1 percent of government tax revenue. Factors such as administrative ease, economies of scale, and improved tax compliance make businesses a good fit for remitting taxes; however, this responsibility also implies additional costs for businesses as they work to comply.
Considering this evidence, we see that focusing on the 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. alone misses the bigger picture of not only other taxes that businesses directly face, but also their role in remitting a large share of tax revenue to governments. It is important for lawmakers to be aware of both the key role businesses have in the tax structure and the costs businesses incur in fulfilling this role.
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