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April 22. 2015

ACT Tax Facts: The U.S. Has a High Effective Corporate Income Tax Rate

Economists and policymakers have long agreed that the United States has a high statutory corporate income tax rate. At 39.1 percent when state and local taxes are included, it’s the highest in the developed world – and a significant impediment to attracting businesses and economic growth to our shores. This high rate discourages business investment and ultimately hurts American businesses and workers through lower wages and a less favorable economic environment.

Too often overlooked, though, is that the effective corporate income tax rate in the U.S. is also high compared to other countries.

In a 2011 review, the Tax Foundation identified 13 separate studies of cross-country corporate effective rates and concluded that “it is incontrovertible that the U.S. imposes a highly burdensome effective tax rate on its corporate sector.” The findings were clear:

“Taken as a whole, these studies indicate that the average effective tax rate for U.S. corporations—like the statutory rate—is one of the highest in the world. By every available measure, the U.S. imposes a very high tax burden on its corporate sector, in comparison to other nations, even after credits and deductions are considered.”

The study concludes that, with all studies weighted equally, “the average U.S. effective corporate tax rate registers a cumbersome 7.6 percentage points above the aggregate study-wide averages” between 2005 and 2011.

More recent studies have supported these findings. The World Bank’s 2015 “Paying Taxes” report finds that the U.S. tax on corporate profits is 28.2 percent – among the highest rates for developed nations.

In a 2013 study of financial statements for more than 9,000 multinational companies over the 2006-2011 period, Kevin S. Markle and Douglas A. Shackelford estimated the effective tax rate for U.S. multinationals to be 28 percent.[1] Only Japanese multinationals had a higher effective tax rate. Since the Markle-Shackelford study, however, Japanese policymakers have reduced their corporate rate and are implementing additional cuts. In contrast, the United States has not reduced its federal corporate rate since it was increased to 35 percent in 1993.

An analysis done by the Government Accountability Office in May 2013, purported to show that effective rates for U.S.-based corporations were actually quite low. However, serious questions have been raised about the validity of this report’s methodology. Andrew B. Lyon’s analysis, published in the October 21, 2013, edition of Tax Notes, identifies significant flaws in the report’s analysis:

“…the 2010 effective tax rates presented in the GAO report are not representative of the long-term effective tax rates faced by corporations…In addition to being limited to a single year, this measure of the effective tax rate reflected only a partial picture of the taxes paid or incurred by U.S. companies because it omitted state and local taxes and foreign taxes. As shown in this analysis, the effective tax rate based on worldwide current tax payments for all U.S. corporations exceeded 35 percent for the 2004-2010 period.” (emphasis added)

The GAO report was shown to have understated effective tax rates of U.S. corporations by primarily focusing on a single year in which rates were distorted from the impact of losses incurred during the recession and omitting foreign taxes paid. Properly measuring all taxes and all corporate income over an extended period shows that effective tax rates exceeded 35 percent.

In response to Lyon’s analysis, the Wall Street Journal wrote that “the GAO researchers were off by a statistical mile,” and that “Every year that the U.S. fails to reform its tax code, America becomes less competitive and more jobs are put at risk.”

Opponents of tax reform are quick to argue that we should ignore the statutory rate and instead focus on the effective tax rate. While the effective corporate tax rate is lower than the statutory rate, this is also is true in other countries, as it is common for governments to provide incentives for investment and research, among other things. In Europe, a dozen countries have adopted or are implementing “patent boxes,” under which income from qualifying intellectual property is taxed at rates that are on average less than 10 percent. An apples-to-apples comparison shows that the United States not only has the highest statutory corporate tax rate among advanced economies, its effective corporate tax rate also is high by international standards.

The facts are clear: U.S.-based corporations are laboring under the highest corporate tax rate in the developed world and an outdated international system that disadvantages U.S.-based companies in the global marketplace. There is no excuse for further inaction; the U.S. needs tax reform to boost the economy and help American companies and their workers succeed.

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[1] Kevin S. Markle, Douglas A. Shackelford, “The Impact of Headquarter and Subsidiary Locations on Multinationals’ Effective Tax Rates,” Tax Policy and the Economy, vol. 28, University of Chicago Press, Oct. 2014, p. 33-62.