Now up… a timely report from the Tax Foundation on corporate tax rates in select world economies. This year has seen quite a few corporate tax rates cuts in countries such as Canada and Sweden. The United States remains stubbornly high on the list of countries with the most oppressive tax regimes. In fact, the United States is number two. The only country with higher taxes is Japan, who recently gave us a new meaning to the phrase “lost decade“.
The Tax Foundation Breaks it Down
Fundamentally, business taxes are a worthless tax. Businesses produce products and sell services. When these products and services are taxed, businesses are forced to increase these prices in order to pay the tax. In effect, the business is just a proxy for the IRS… it is collecting taxes from its customers. Corporate taxes viewed in this framework are merely increasing tax complexity.
Corporate tax reform follows this basic principal. As the report states, the United States corporate average tax rate has been above the non-US OECD (Organization for Economic Cooperation and Development) average for the last 12 years. In fact, the United States’ combined tax rate (meaning State and Federal) of 39.1% is 50% higher than state-centric Sweden’s rate of 26.3%. Other notable names ahead of the United States: France (34.43%), Canada (31.32%) and Denmark (25%).
Weighted Average Non-US vs. United States Tax Rates (OECD Data, Tax Foundation)
What About the Deductions?
Yes, marginal tax rates don’t tell the whole story. Many politicians will point at things like the many tax deductions in saying that the corporate tax rates are fine as is. The effective tax rate in 2006 was around 22%, true, but what does this number tell us? In many instances, deductions are passed around to darling industries by lawmakers in order to ensure political loyalty. In this way, deductions are a conflict of interest… some particularly politically connected industries have the most deductions and benefits passed to them through the tax code. In this way, corporate tax rates in their current form can be used as a way to ensure that certain industries will survive.
Building on this first point is an even larger issue… the companies which weild the most political power are generally in mature industries. Mature industries lack the sort of high-growth prospects that emerging industries (even game changing business models we haven’t yet seen) can offer. There are businesses that haven’t yet even formed that will use creative new methods of generating revenue. Only corporate tax reform will have an effect on them- a level playing field won’t discriminate against the newcomers.
Finally, note that any deductions that the United States offers can easily be matched by other companies. This is particularly true for deductions that have proved successful. Even while the current administration is trying to close tax ‘loopholes’ in revenue generated overseas, countries like Japan are beginning to allow this practice. Is this really a loophole?
The Final Word
It may be politically unwise to rail for a 0% corporate tax rate, but think what that would mean… Companies would be free to hire more employees, diversify into new areas, and keep more profit from services and products. Additionally, the appearance of conflicts of interest in things like new deductions will disappear overnight. Note that contrary to popular belief, corporate taxes are a relatively small percentage of national revenue. In 2006, corporate tax revenues were merely 3.3% of GDP. Your thoughts?
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