The Myth of High US Corporate Tax Rates

By: David Dayen Tuesday May 3, 2011

But I suppose we need yet another article about this. So David Kocieniewski writes it again, with the excellent topic heading “But Nobody Pays That”:

By taking advantage of myriad breaks and loopholes that other countries generally do not offer, United States corporations pay only slightly more on average than their counterparts in other industrial countries. And some American corporations use aggressive strategies to pay less — often far less — than their competitors abroad and at home. A Government Accountability Office study released in 2008 found that 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it studied.

The paradox of the United States tax code — high rates with a bounty of subsidies, shelters and special breaks — has made American multinationals “world leaders in tax avoidance,” according to Edward D. Kleinbard, a professor at the University of Southern California who was head of the Congressional joint committee on taxes. This has profound implications for businesses, the economy and the federal budget.

I would argue that, when 55% of US companies pay no federal income tax during at least one year out of seven, more than “some” American companies pay less than their competitors abroad. I’d go with “most.”

The best way to judge the efficiency of the corporate tax code is to look at results, and in the US, corporate tax topped out at 1.3% of GDP last year. Most industrialized countries collect DOUBLE that, around 2.5% of GDP. The corporate tax rate is a useless parameter in the face of these numbers.

The claim made by conservatives is that lowering the nominal tax rate for corporations will encourage less tax evasion, but I’m not sure why I should believe that. If we want to stop tax evasion, we can simply eliminate loopholes that don’t encourage anything but corporate profits and clean out the more anachronistic parts of the corporate tax system, and if that brings US corporate tax revenues up toward the level of similarly situated companies abroad, all the better. A focus on the nominal tax rate is a distraction to get you to ignore all the massive tax avoidance going on.

The other piece of the Kocieniewski article that’s important is that different industries pay different effective tax rates. Retailers and construction pay a much higher rate than financial services, real estate and mining. Is there any justification for that? Should we value Wall Street, real estate and Big Coal through the tax code more than building and selling things?

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