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US Fails On Effective Corporate Taxes

by Leroy Baker, Tax-News.com, New York

14 February 2011


A new report by the American Enterprise Institute for Public Policy Research (AEI) has pointed out that, while, at 35%, the United States’ statutory federal corporate tax rate is the highest among all the countries in the Organization for Economic Cooperation and Development (OECD), it is more important that the US also has higher-than-average effective average and effective marginal tax rates.

The last two rates are, it says, the “best indicators for capital investors of their true tax liability”, and “policymakers seeking to understand why some companies are moving plants abroad should consider the impact of tax rates on competitiveness. The Obama administration and Congress should lower effective tax rates so the US can compete in the global economy.”

The report notes that, while there appears to be a building consensus that the US corporate tax code needs a broad overhaul, which could, as hinted by the Treasury Secretary Timothy Geithner, be revenue-neutral by lowering the top 35% corporate tax rate accompanied by an elimination of the loopholes and deductions of the current system, some have questioned the extent to which effective taxes paid by corporations are equally high.

The report, therefore, examines relative tax rates in the United States and OECD economies, with a special focus on effective average and effective marginal tax rates. Unfortunately, even by these indicators, it finds that the US competes poorly in the global economy.

The statutory tax rate is looked at as “an imperfect measure of tax competitiveness, because it does not take into account the breadth of the tax base. This causes countries with high rates and a narrow base, such as the US, to appear less competitive. Effective average tax rates (EATRs) resolve this issue by taking into account tax offsets, the present value of depreciations, and other deductions that narrow the base.”

The AEI has calculated that in 1996, the US EATR was slightly below the OECD average, 29.2% versus 30.2%. In later years, the OECD average improved by almost 10% to 20.6%, while the US EATR remained relatively unchanged. In 2010, the US EATR was 29%.

However, it is said that, with US corporate tax rates so high, the expectation that the share of revenues from corporate taxes would also be higher in the US than in other OECD economies turns out not to be the case. Except for a brief period in the 1990s, US corporate tax revenues have been consistently lower, as a percentage of gross domestic product, than those of the OECD economies.

The US is currently underperforming in global tax comparisons, with both statutory and effective tax rates far above the OECD average. Any effort at corporate tax reform is therefore incomplete, the AEI concludes, “without a push toward addressing not only the high statutory rates, but also the relatively high effective rates.”

TAGS: tax | business | law | corporation tax | tax rates | United States | tax reform

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