Statutory rates hide the truth about corporate taxes
|April 16, 2012||Posted by Karina Stenquist under News, Print Issues, Volume 2, Issue 3 (May/June 2012)|
Recently, President Obama called for a reduction of the corporate tax rate. Most discussions of this particular tax revolve around the 35% figure – frequently cited as one of the highest rates in the world. But as with most policy conversations, if you can boil it down to one number, you’re probably oversimplifying. There’s more than one way to look at corporate taxation.
Statutory vs. Effective Rates
The 35% rate is the statutory rate. Think of that as the “in theory” tax rate. And yes, among the Organization for Economic Cooperation and Development (OECD) nations, the 35% rate of the U.S. is currently the highest. According to the OECD database, Switzerland for example, has only an 8.5% statutory rated. Iceland has 15% and Spain, Japan, and New Zealand come in at 30%. The combined statutory rate, which includes state and local taxes, nudges the U.S. up to 39.2%, with Japan just beating us to the top spot at 39.5%.
But the statutory rate, the “in theory” rate, doesn’t really tell us very much about what proportion of total profits a corporation actually pays in taxes.
The effective corporate tax rate is the “in practice” rate.
Why are the “in theory” and “in practice” rates different? Because corporations have many ways, varying depending on size and industry, to keep some of their income from counting as taxable income, the total that that 35% is taken from. Some corporations keep income overseas, others find loopholes with bizarre industry nicknames like the “Double Irish” or the “Dutch Sandwich”.
A 2008 report from the U.S. Government Accountability Office (GAO) put the US effective corporate tax rate at an average of 25.2% in 2004, almost ten points below the statutory rate that gets to much attention in policy discussions and political debates.
Slightly more recent data from the World Bank’s 2009 Doing Business report on taxes compares the effective rate (slightly higher in their statistics that the GAO’s) to several other G8 and BRIC nations and the U.S. comes in lower than several nations, including Italy, Brazil and China.
What’s in an average?
Even this figure, the “in practice” rate – 25.2% in 2004 – doesn’t tell the whole story, because it’s still an average. And there’s a lot of variation in the effective tax rates among U.S. corporations.
That GAO report from 2008 broke it down by 5% increments, and found that over a third of corporate taxpayers had rates of 10% or less, while a quarter had rates over 50%.
In the graph above, you can see (those grey bars) that there’s not a very large proportion of corporations around that 25.2% average rate – certainly not as many as pay over 50% there at the bottom and nowhere near the share that pay less than 5% at the top there. Over half of corporations are in either that lowest or highest bracket as measured by the GAO.
Who pays more, who pays less?
As for the white bars in that graph above – that’s the share those companies have in the total pool of corporate taxes paid. Theoretically, if there were no differences in the types of companies then that quarter who pay over 50% in taxes, would contribute the same share (about a quarter) of the overall taxes collected. But they don’t. They contribute far less – about 15%.
Which makes one wonder – are there trends in what types of corporations pay high taxes and what types pay low taxes?
“At the high end, American retailers paid 31 percent in total income taxes, construction 30 percent and manufacturers 26 percent. Financial services companies paid an average of 20 percent, real estate 19 percent, and mining 6 percent.”
A report by Citizens for Tax Justice, also studied differences in effective tax rate by industry. At the high end were corporations working in retail and wholesale (27.7%), household and personal products (24.2%), and food, beverage and tobacco (23.8%). At the low end were industrial and farm equipment (6.2%), transportation (4.3%), and aerospace and defense (1.6%).
A report by researchers from the Universities of North Carolina and Michigan found that companies that managed to pay less than the statutory rate of 35% over an extended period (ten years) tended to cluster in industries like oil and gas, and railroads, both of which managed to come in under 20% over that ten-year period. Of this subset of long-term tax avoiders, the study found some very broad similarities: they tended to be larger, and to be incorporated in tax havens, for example.
How do corporate taxes relate to the bigger picture?
Two more ways to look at corporate taxes is to consider how much they contribute to the overall taxes collected by the government, and to what share of a country’s GDP they make up.
In terms of what U.S. corporations contribute to the overall tax receipts, in 2010, it was 10.9%, sixth among OECD countries. Norway led the pack at 22.6%, and Hungary was down at 3.3%. Look just one year earlier, however, and corporate taxes were just 6.9% of total U.S. revenues and we fall much farther down the list (White House budget numbers put these figures lower – 8.9% in 2010 and 6.6% in 2009).
If we look at U.S. corporate taxes as a percentage of the country’s total GDP, we fall somewhere in the middle of the OECD countries. In 2010, corporate taxes made up 2.7% of U.S. GDP – comapred to Norway (9.7%) and Luxembourg (5.3%)at the top, and Germany (1.4%) and Estonia (1.2%) at the bottom.
Focusing on one year can be deceptive though, and is we had looked at the number from a year before, we would’ve fallen much lower on the scale, with only a 1.7% share of GDP coming from corporate taxes (again, White House budget figures are lower: 1.3% in 2010 and 1.0% in 2009).
Have corporate tax rates always been like this?
As we saw above, looking at one year can also be deceptive. There can be significant variations from one year to the next. So it’s also nice to look at these measures over time to get some historical perspective. This is when graphs are super helpful.
Let’s look first to that 35% “in theory” number. Over the last 70 years or so, it’s been falling since a high point in the 60s when the top corporate rate was at 52.8%.
The effective corporate tax rate has also fallen over time. Data from the Economic report of the president shows it as around 20% in 2009, 25% in 2010. This is down from a high of around 45% in the mid-seventies.
Though there’s been significant fluctuation over the last couple of decades, the overall trend is that corporate taxes are a smaller proportion of tax revenues than they used to be, compared to, say income tax revenue.
And corporate tax as a percentage of GDP? Again, there’s been a lot of fluctuation, but it’s been a downward trend since hitting a high of a little over 7% of GDP in the 40s.
Even beyond what has been outlined above, there are other measures (like marginal effective corporate tax rate) that add layers to this issue. The focus on the 35% statutory rate and it’s comparison to other nations, without taking into account other measures or a historical perspective, is a choice to see the issue through only one of many lenses.