For a PDF of the full study, click here. A summary of the report and the key findings are below.
Tax Foundation Special Report No. 195
Key Findings
• The U.S. has the second-highest statutory corporate income tax rate in the developed world. Despite anecdotes regarding a few companies that exploit the dubious carve-outs in the 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. code to minimize their tax liabilities, the results of 13 unique studies of the effective tax rate on corporate investment across the globe show that the average U.S. effective corporate tax rate, like the statutory rate, is nearly the highest in the world.
• By every available measure, the U.S. imposes a very high tax burden on its corporate sector, in comparison to other nations, even after credits and deductions are considered.
• The most recent studies show that the average effective corporate tax rate for corporations headquartered in the U.S. is roughly 27 percent, while the average of other nations is about 20 percent. The effective average rate for new investment in the U.S. is roughly 29.8 percent, 7.4 point above worldwide competition.
• The U.S. effective corporate tax rate consistently ranks among the five highest of nations considered. The only nation with a higher effective tax rate in each study is Japan, which not by coincidence is the only developed nation with a higher statutory rate than the U.S.
• The literature shows that high corporate taxes and high effective tax rates are detrimental to attracting investment, and subsequently detrimental to economic growth.
Introduction
The United States currently lays claim to the second-highest statutory 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. rate in the developed world. At 39.2 percent, the rate is only 0.35 percentage points behind OECD-leading Japan.1 Since 1997, 30 of the OECD’s 34 member nations have lowered their statutory rates in an effort to retain and attract investment while the U.S. has sat idle. In the process, the average statutory corporate tax rate for OECD nations has dropped from 36.5 percent to the current 25.1 percent. While this shift has been noted by the Tax Foundation3 and others—including Presidents Obama and Clinton—as reason for a competitive rate reduction, skeptics accurately note that statutory rates do not reflect the effective rates that corporations actually experience.
So how do U.S. effective corporate tax rates differ from the very high statutory rate? More importantly, how do effective tax rates for U.S.-headquartered firms compare to the rates of their competitors across the globe? This report addresses these questions by synthesizing the latest academic literature regarding effective corporate tax rates. Recent years have produced a multitude of credible studies to facilitate this enquiry.
Taken as a whole, these studies indicate that the average effective tax rate for U.S. corporations—like the statutory rate—is one of the highest in the world. By every available measure, the U.S. imposes a very high tax burden on its corporate sector, in comparison to other nations, even after credits and deductions are considered. As the issue of corporate taxation is currently mired in a great deal of misinformation and confusion, this discussion should serve to illuminate the facts underlying the ongoing corporate tax reform debate.
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