ANALYSIS: Are US Corporate Taxes Really the Highest in the World?
How high are U.S. corporate tax rates compared to the rest of the world? It’s a matter of some dispute.
In the ongoing debate over corporate inversions, whereby U.S. firms merge with foreign companies in order to relocate to lower-tax countries, there has been considerable ambiguity regarding U.S. corporate tax rates, according to Carl Tannenbaum, chief economist at Northern Trust.
Many commentators argue that the best way to prevent inversions is by lowering corporate tax rates, which they claim are significantly higher than in other developed countries, as represented by the OECD average. (RELATED: Do Corporate Inversions Really Cost Much Tax Revenue)
The U.S. has a top statutory corporate tax rate of 35 percent at the federal level, though once state taxes (which are deductible from federal taxes) are included the combined corporate income tax rate is 39.1 percent, according to PolitiFact. In comparison, the OECD has an average statutory rate of 24.1 percent.
This discrepancy, Tannenbaum says, is “often cited as evidence the United States is harming itself competitively,” and that “steep cuts in U.S. corporate taxes are required.” (RELATED: US Tax Code Causes Businesses to Flee Overseas)
Nor are those sentiments confined to conservatives; as Huffington Post reports, even former President Bill Clinton recently noted that, “We have the highest overall corporate tax rates in the world.”
Others, however, counter that the rate most companies actually pay (the “effective tax rate”) is considerably lower than the statutory rate due to the myriad credits, deductions, and exemptions available to corporations under the U.S. tax code.
Estimations of the effective corporate tax rate vary widely, in part because the average effective rate fluctuates from year to year, but also due to differing methodologies. (RELATED: Everybody Agrees: Cut the Corporate Tax Rate)
Huffington Post, for instance, cites a 2013 report from the Government Accountability Office to support the assertion that, “U.S. corporations pay an average effective rate of just 12.6 percent.”
That figure, however, is “limited to [profitable] corporations with assets of $10 million or more,” and did not include state or local taxes.
For his part, Tannenbaum cites a PriceWaterhouseCoopers report showing that, “the effective U.S. corporate tax rate is 27.7 percent, versus 22.6 percent for OECD countries excluding the United States.” However, he fails to note that those numbers were compiled for the period from 2006 to 2009.
A more recent PwC report, conducted in conjunction with the World Bank, listed the effective U.S. corporate tax rate at 27.9 percent for 2014, while the OECD average was only 15.9 percent.
Despite the inconsistencies, these estimates generally support Tannenbaum’s assertion that “differences in the corporate income tax rate are less than typically assumed,” when measured by effective, rather than statutory, rates.
Yet although the discrepancy between effective rates is smaller, it remains significant, and does nothing to contradict those who state, as House Speaker John Boehner did recently, that “the United States has the highest corporate tax rate in the developed world.”
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