Wednesday February 10, 2010 3:03 PM ET
SmartMoney
Published January 25, 2008  |  A A A
Economy by Igor Greenwald (Author Archive)

High Corporate Tax Rate Is Misleading

IF YOU SAY SOMETHING long enough and loud enough, there's every chance people will come to believe it's true, especially if your opponents tire of rebuttals.

This time-honored political strategy has been working overtime of late, as Republican presidential hopefuls romance the richer Florida retirees with appeals for cuts in corporate taxes.

You may have heard: U.S. corporations face one of the highest income tax rates in the world, though the mention of "rate" is often enough excised, so that what comes through is the assertion that corporations pay too much in taxes. This is simply untrue if your basis for comparison is the developed world. The truth is that while the 35% corporate income tax rate is high indeed, the creativity and global reach of U.S. corporations make them among the most lightly levied.

Between 2000 and 2005, U.S. corporate taxes amounted to 2.2% of the GDP. The average for the 30 mostly rich member countries of the Organization for Economic Cooperation and Development was 3.4%.

Why the disparity given the high federal rate, which rises to 39% counting state taxes? Part of the answer is that big U.S. companies have become expert at hiding profits in tax havens overseas. And many of the smaller ones simply pass through their income to owners who then report it on their personal returns.

According to one analysis, if so much corporate income hadn't moved to the personal tax rolls over the last 20 years, U.S. corporate taxes would account for 3.2% of the GDP, still a bit below the OECD average. "Usage of pass-through forms of business organization can be viewed as a form of 'self-help' corporate tax integration," writes Peter R. Merrill, a partner at PricewaterhouseCoopers.

The income not squired away overseas or channeled to the personal returns still enjoys protection in the form of various tax breaks that depress the effective rate to 27%, according to the Treasury Department. Such breaks are expected to cost the Treasury $1.2 trillion over the next 10 years, reducing the corporate tax revenue by 25%.

Meanwhile, there's growing evidence that, despite the occasional crackdowns on especially creative tax accounting, routine corporate tax dodges are way up by historical standards, as multinationals play an increasingly profitable shell game.

According to one study, corporate taxable income has increasingly diverged from the (much higher) financial profits reported to shareholders. Another more recent analysis estimates that the effective corporate rate in the U.S. peaked at nearly 32% in 2000 but has declined to 25% by 2005.

There are so many ways to play the game: One can park valuable royalty-bearing intellectual property with foreign subsidiaries (hello, Microsoft (MSFT)) or merely make sure that U.S. operations incur tax-deductible interest payments by borrowing money from cash-rich subsidiaries overseas. This is what's known in industry parlance as "income-shifting." It passes the time while one waits for the next U.S. tax holiday on repatriated overseas profits.

It doesn't take a rocket scientist to figure out the solution here: Drop the corporate income tax rate to, say, the Swedish socialist level of 28% to reduce the attraction of tax havens, while eliminating the broad exemptions and industry-specific perks that have turned our tax code into Swiss cheese feeding a regiment of millionaire tax lawyers. Make sure the total share of the tax bill sent to corporations either stays the same or goes up. In recent decades, corporate receipts have declined dramatically in relation to the highly regressive payroll taxes. It's long past time to reverse that trend, restoring work incentives to what they once were.

This is not a left/right issue, as one of the country's foremost corporate tax experts points out. Martin A. Sullivan writes that in Europe, it's the progressive governments that have often pushed for lower tax rates, applied more uniformly. Meanwhile, in Canada, it's the free-market Conservatives who've moved to eliminate tax-favored trusts in order to shore up the national tax base.

The choice is clear: a fairly enforced code that's deaf to special pleadings and thus capable of sustaining rates broadly competitive with those overseas, or else continued erosion of the tax base and tremendous waste from attempts to game the system, leading to various economic distortions and perversions. But this would not amount to a tax cut. And so I guess it wouldn't sell well in Boca Raton.


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User Comments
Posted by: Allen36
vernhuffer, you are an idiot if you can't get who pays for corporate taxes. If you raise the corporate tax rate by 50% do you think all of a sudden the people taking the risk to bring you your big screen tv would not expect to be compensated for it. People invest to get a return not pay taxes. People also work for large profitable companies to earn large checks. Those groups are not giving up their money. Now they have to add the tax expense to the price of your TV. Possibly by a couple hundred dollars to equal the tax you wanted them to pay to keep their profits high enough to stay in business, keep their investors, and keep their employees. The only one that goes negative is you. You now have a couple hundred extra balance on your credit card that you have to pay off with your after tax income. Get it?
Posted by: NYNYNYNY
Hey! jrainer! Have you any idea just what the word 'average' means? We can't all be 'smarter than average' or 'richer than average' or 'stronger than average' or even 'better-looking than average.' Like, if EVERYONE made 200 grand a year, then 200 grand would be 'average.' So you're saying... what?
vernhuffer

87 Comments
First: somebody has to pay taxes, we can not continue to borrow money from the Chinese and the Arabs forever. Second: corporation taxes are on profits and almost all of that extra money would go to executive bonuses and dividends. The rates should be raised and the loopholes closed. The country was better off when the rate was 50%. Wealthy individuals also send money out of the country otherwise there would not so many banks on dessert islands.
Posted by: waldis1
There is a simple solution to this everyone, and it's called the Fair Tax!

Let's put an end to this sort of meaningless debate by eliminating corporate income tax altogether.....corporations only account for about 5% of the annual tax collections now anyways! It's harder to cheat when you are sitting on the bench!

http://www.fairtax.org

Posted by: sansbrook
I?m shocked, shocked! Corporations take advantages of all the loopholes congress puts in the tax code. This is of course unlike the average taxpayer. For direction on what to do about this we should look at Europe? Of all the economic juggernauts over there, which one do we choose?

What does the tax paid by corporations have to do with the GDP anyway? No, it may not take a rocket scientist to improve the tax code, but you ain?t no rocket scientist.

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