ACT Tax Facts: Busting the Top 6 Corporate Tax Myths of 2015
The Alliance for Competitive Taxation’s 2016 resolution is to set the record straight about the U.S. corporate tax system.
MYTH 1. “Corporations have more than $2 trillion in untaxed profits sitting offshore.”
To succeed in foreign markets, U.S. companies frequently need local operations for product development, marketing, and manufacturing in close proximity to customers. The income earned by these business operations is subject to tax in the country where it is earned. The United States is the only G7 country that imposes a second tax on this income when repatriated to the parent company. The other G7 countries have modern international tax systems that encourage domestic job growth and investment by allowing repatriation of active foreign business earnings with little or no home country tax (i.e., without a second layer of tax).
As a result of this second tax, the U.S. tax code encourages American companies to retain their foreign earnings overseas, rather than bring them back for investment in the United States. Aligning U.S. tax rules with other advanced economies would unlock earnings trapped in foreign subsidiaries so they can be invested here in the United States.
Berkeley Research Group has estimated that adoption of a modern international tax system similar to the other G7 countries would boost the economy, resulting in an immediate repatriation of an additional $1 trillion, increasing GDP by over $200 billion and employment by 1.46 million. On a sustained basis, the study finds repatriation of foreign earnings would increase by $114 billion per year, increasing GDP by $22 billion and employment by 154,000.
MYTH 2. “Increasing the corporate tax rate would benefit hard working Americans.”
The Organisation for Economic Co-operation and Development (OECD) has studied the effect of tax systems on economic growth and concluded, “Corporate income taxes are the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and productivity improvements.” Corporate tax increases are the most economically damaging way to raise revenue, as they reduce economic growth, reduce jobs, depress wages and hurt all American families.
The burden of the corporate tax is borne by Americans in their roles as workers (through lower wages), consumers (through higher prices), and savers (through a lower return on their savings)—not by corporations. A review of the economic literature published by the U.S. Treasury Department concluded, “studies suggest that labor may bear a substantial burden from the corporate income tax.” In fact, President Obama’s Treasury Department, while assuming labor bears a smaller burden of the corporate income tax than found in many academic studies, nevertheless estimates that low- and middle-income families bear a greater tax burden from corporate income taxes than from individual income taxes.
MYTH 3. “After deductions and credits, American corporations actually pay a similar effective tax rate as their competitors in other countries.”
Including state taxes, the United States has the world’s highest statutory corporate tax rate at 39 percent. This is 14.4 percentage points higher than the average of the other OECD countries (24.6 percent). Meanwhile, according to the OECD, corporate taxes accounted for 10.2 percent of all U.S. tax revenue in 2012, 20 percent higher than the OECD average of 8.5 percent.
A study by Profs. Markle and Shackelford finds that between 2005 and 2009, only companies based in France and Japan paid a higher effective tax rate than what was paid by U.S. multinationals.
While U.S. corporate revenues as a share of GDP are lower than the OECD average, this is because more than half of U.S. business income is earned by business entities that are not subject to corporate tax, such as partnerships, S-corporations, and sole proprietorships. Use of the corporate form of business organization is much more common abroad, in part because other countries have lower corporate tax rates than the United States.
MYTH 4. “The tax rate corporations actually pay to the U.S. Government after they take advantage of deductions, exceptions, and credits is only 20 percent”
Estimates that corporations only pay a 20-percent tax rate misconstrue findings in Prof. Zucman’s Fall 2014 Journal of Economic Perspectives article, which includes profits from S-corporations, even though they are not subject to corporate tax. Removing S corporations, the effective tax corporate tax rate based on Zucman’s data is 29 percent. Moreover, Zucman’s analysis excludes foreign taxes paid on income earned by U.S. companies outside of the United States; the effective tax rate is even higher when foreign income taxes are properly taken into account.
MYTH 5. “The largest U.S. American businesses don’t pay any taxes at all.”
This myth is based on a study that looked at the 2008-12 period, which includes the largest economic recession in U.S. history since the Great Depression. Many companies lost money during the recession and didn’t owe corporate tax because they didn’t have any taxable income. Moreover, following the recession that started in December 2007, Democrats and Republicans alike voted to allow companies to accelerate the deduction of the cost of domestic investment (so-called “bonus” depreciation) in order to stabilize the economy. Bonus depreciation temporarily deferred corporate tax payments in order to stimulate jobs and investment. Notwithstanding the Great Recession and the enactment of bonus depreciation, between 2008 and 2012 U.S. corporations paid over $1 trillion in federal income taxes and more than $200 billion in state and local income taxes.
MYTH 6. “Every year corporations are paying less and less taxes to the federal government.”
The Congressional Budget Office estimates that corporate income taxes increased to $344 billion in 2015. This was a 7 percent increase over 2014, a 149 percent increase over 2009 when the recession bottomed out, and the third highest level of corporate taxes in U.S. history after 2006 and 2007. As a share of GDP, corporate income taxes rose to 1.9 percent, the highest share of GDP since 2008, and exceeding the 1.8 percent of GDP average between 1975 and 2014. While corporate tax receipts declined during the recession, this was an anomaly and not reflective of the long-term trend.
The growth in corporate tax revenues has occurred despite the fact that the number of corporations has declined while the number of businesses that are not subject to corporate tax (e.g., partnerships and S-corporations) has increased. The share of business income earned by companies subject to corporate tax has declined by almost half, from 78.3% in 1980 to 40.3% in 2012.