At about 39 per cent, the statutory rate on U.S. business profits is one of the highest in the world. But in reality, the rate American companies pay on their income is much lower, thanks to a tax code that’s loaded with various credits, breaks and loopholes.
The Obama administration makes this clear in its plan to overhaul the country’s business tax system.
While among rich countries only Japan has a higher corporate tax rate on paper than the United States, the Treasury Department calculates the U.S.’s “effective” corporate rate at a fairly competitive 29.2 per cent. According to the Treasury, the effective rate that American companies pay on their income is lower than the average of the other Group of Seven countries. Canada’s effective rate is 33 per cent, compared with a statutory rate of 27.6 per cent, according to the Treasury.
The U.S. business lobby prefers to focus on the statutory rate, of course. It makes the case for lower corporate tax rates a lot easier to make. Who can argue that American businesses risk a shellacking in a global economy where their Chinese competitors pay a statutory rate of 25 per cent, according to OECD figures? Even those stodgy European welfare states like France and Germany claim less of their companies’ profits. Viewed this way, the need for change takes on an air of urgency.
There is no definitive measure of effective tax rates. There are lots of studies and all produce slightly different numbers. This report, by Gary Hufbauer and Martin Vieiro of the Peterson Institute International Economics, sites separate studies that put the U.S. marginal effective tax rate at 34.6 per cent and 23.6 per cent. Both rates are among the highest measured in each study, but both also are more in line with the effective rates of other large developed economies.
A more normal effective rate isn’t necessarily an argument against tax reform. The gap between the U.S. statutory rate and the effective rate suggests the tax code has become highly distortive, with some industries enjoying competitive tax rates at the expense of others that end up paying more. The Treasury analysis shows four industries pay effective tax rates of less than 20 per cent: leasing, utilities, mining and transportation and warehousing. Construction and wholesale and retail pay 31 per cent. The effective rate for the services industry is 29 per cent.
So, competiveness at the company level in the U.S. has a lot to do with hiring lobbyists, accountants and tax lawyers. That doesn’t make for a competitive economy, as all that money could be used for more productive purposes, such as research and development, or higher salaries for workers.
“We want to restore a system in which American business succeed of fail based on the products they make and the services they provide, not the creativity of their tax engineers or the lobbyists they hire,” Treasury Secretary Timothy Geithner said Wednesday.