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Another Perspective on America's Supersized Corporate Tax Rate

Jason Russell | 04/02/2014 |

With April 15th only two weeks away, many Americans are focusing on filing their individual income tax returns. However, a National Bureau of Economic Research working paper reiterates the burden of America’s corporate income tax rate and its effect on job creation. Americans would be remiss to focus their entire disdain for taxes on the individual tax code and gloss over the distortionary effects of the corporate tax code.

Economists Kevin Markle (University of Waterloo) and Douglas Shackelford (University of North Carolina at Chapel Hill) analyze effective tax rates for more than 9,000 multinational corporations from 87 countries over the period 2006 to 2011. Notably, their detailed data set was developed by examining corporations’ financial statements rather than the tax return data that are the basis of many studies. Markle and Shackelford acknowledge that this is cause to view their findings with some caution.

Markle and Shackelford find the U.S. effective corporate tax rate to be 28 percent, the second highest in the world. This is just slightly higher than France and South Africa’s effective tax rates. Through 2011, Japan had the highest effective tax rate at 38 percent. 

These rates differ from the effective tax rates calculated by the nonpartisan Tax Foundation.  It uses a method called marginal effective tax rate analysis instead of Markle and Shackelford’s use of financial statements. The Tax Foundation finds the U.S. effective tax rate to be the highest in the world, 35.3 percent, compared to Markle and Shackelford’s 28 percent. Both measures show the U.S. effective corporate tax rate to be above the international average, evidence that the United States’ tax code is falling behind its international competitors.

 

Table of International Corporate Tax RatesSources: Markle, Kevin and Douglas Shackelford, "The Impact of Headquarter and Subsidiary Locations on Multinationals' Effective Tax Rates," National Bureau of Economic Research, November 2013. Mintz, Jack and Duanjie Chen, "The U.S. Corporate Effective Tax Rate: Myth and the Fact," Tax Foundation, February 6, 2014. Note: The Tax Foundation value under "Full Sample" is an OECD weighted average and is not directly comparable to the Markle & Shackelford value.

 

One of the perspectives that Markle and Shackelford address is that statutory corporate income tax rates do not matter, since companies use tax planning to practically nullify the effects of living in a high-tax nation. Transfer pricing, hybrid entities, and intracompany financing are all commonly suggested as tax avoidance mechanisms that companies may use to avoid a high tax bill. Markle and Shackelford dismiss this argument, pointing to the high level of variation in effective tax rates dependent on where a multinational corporation is headquartered. They acknowledge that “vast investment in international tax avoidance” occurs, but is not enough to significantly alter effective tax rates on a macro level.

Markle and Shackelford also found that global effective tax rates over the period 2006 to 2011 held steady, though the prior decades experienced a decrease in effective tax rates.

The corporate tax system in the United States is a major disincentive to doing business in the United States.  Instead, multinationals hire more overseas workers. U.S. multinationals have created more jobs overseas than in the United States since 1999. This is partially caused by the abnormal U.S. worldwide-taxation system, in which profits earned abroad are still taxed when brought back to the United States.  The United States is one of X countries that taxes companies on world-wide earnings, rather than domestic earnings.

A change to lower tax rates and domestic taxation—known as territorial taxation—would create jobs, spur investment in capital, and pay dividends to stockholders. It does not make sense to punish corporations for bringing their profits back to the United States for investment. In an era of persistently high unemployment, low labor force participation, and weak GDP growth, the U.S. tax code should encourage corporate investment.

A simplified, territorial corporate tax code with a low rate would create incentives for multinationals to bring jobs back home and boost the economy. With total employment over half a million jobs lower than before the Great Recession, corporate tax reform would create jobs and get the economy closer to a full recovery. President Obama and Congress would be wise to put partisan differences aside and pursue corporate tax reform as soon as possible.

 

Jason Russell is a research associate at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here.

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