David Leonhardt gives us a nice roundup of the corporate-tax issue, which you’re bound to be hearing a lot more about this year as Obama continues his move toward business interests.
Said business community loves to mislead people about how corporate taxes in the U.S. are the “highest in the world.” That’s not true. Our (marginal) statutory corporate-tax rate is now the highest in the world, but our effective tax rate, which is what businesses actually pay, isn’t. That’s in no small part because of all the corporate welfare larding up the tax code.
Check out these numbers the Leonhardt found (which includes state income taxes, too):
Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.
So while statutory rates are high, taxes paid is relatively low. As the World Bank says in its 2011 Paying Taxes report that:
The statutory rate of corporate income tax is often not a good indicator of the rate of tax paid.
Corporate income tax is only part of the burden of taxes on business. Around the world, the company pays on average 9.4 taxes. Corporate income tax accounts for just 12% of the tax payments made, 25% of the compliance time, and 38% of the (total tax rate).
U.S. companies’ total tax rate is below that of major trade partners like China, Brazil, Germany, Italy, Japan, Sweden, Australia, and India, according to the World Bank.
One good way to see how hard corporate taxes really hit is the percentage of GDP. That rate has been halved over the last sixty years in the U.S., well below that of the rest of the developed world. In 2006, the last numbers I can find from the OECD, U.S. corporate taxes as percent of GDP were well below the OECD average.
Not that our corporate-tax policies aren’t a problem, as Leonhardt points out:
Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades.
But the thing is, as Leonhardt is good to point up high, the likes of the Business Roundtable love the loopholes. They want to keep those and just lower the overall rates, which just means they’d get a tax cut.
The official position of the Business Roundtable, one of the most important corporate lobbying groups, is telling. The Roundtable says it supports corporate tax reform. But it actually favors only a reduction in the tax rate. The group refuses to say whether it also favors a reduction of loopholes.
The real problem is that the corporate tax code, riddled with loopholes, tilts the playing field toward those who game the system aggressively:
A third group of companies simply seems to have become expert at avoiding taxes. When the three accounting professors analyzed more than 2,000 companies, they found big variations in tax rates within almost every subset of companies. Companies in the same industry often paid very different rates, even when they were similar in size.
G.E. is so good at avoiding taxes that some people consider its tax department to be the best in the world, even better than any law firm’s.
Those with the best tax lawyers don’t necessarily have the best products, but this system allows them to get a competitive advantage via chicanery. Bloomberg’s Jesse Drucker has vividly pointed out how companies, including “Don’t Be Evil” Google with its monopoly and 30 percent profit margins, game the system to avoid taxes. That means the rest of us are effectively subsidizing these businesses—to the tune of up to $60 billion, Drucker reported.
And the impact of taxes varies widely from industry to industry. The NYT’s Binyamin Appelbaum posted this revealing chart the other day. At the high end, the electric utility industry pays a 34 percent rate. Compare that to the biotech industry’s 4 percent and the metals and mining industry’s 7 percent.
There are legitimate reasons why we might want to help nascent industries get off the ground via tax breaks. But when the hotel/gaming industry only pays a 13 percent rate, something’s wrong.