Turn on conservative talk radio or television pundits and soon enough you’ll hear that the United States has a too-high corporate tax rate that is undermining American business competitiveness and weakening the U.S. economy. This talking point is not spouted just by Republicans and anti-tax conservatives: Democrat-in-chief President Barack Obama made the same claim during his State of the Union address two weeks ago, lamenting how American companies “get hit with one of the highest tax rates in the world.”
Time out. Let’s clear up a few things up about corporate taxes, shall we?
First, there is a big difference between the nominal rate, stated in the law, and the effective tax rate actually paid by any particular corporation or corporations nationwide. These would be identical if there were no exemptions, tax preferences, deductions or other business credits. Except, of course, that there are plenty of such tax breaks, which is how General Electric paid a zero effective tax rate last year even though the top nominal corporate tax rate is 35 percent.
But surely GE is the exception, and the rest of America’s corporations are paying at or near the 35 percent tax rate, right? Hardly. As reported last week by that liberal rag The Wall Street Journal, the average corporate tax rate for fiscal year 2011 (ending Sept. 30) was 12.1 percent. That’s roughly a third of the nominal rate and the lowest effective corporate tax rate on record in 40 years.
You can bet that corporate tax “reform” advocates will continue to focus on the nominal and not the effective rate, however. They’ll tell you that the U.S. has one of the highest rates in the industrialized world — which is, again, true but misleadingly so.
Indeed, when one compares the effective corporate tax burden in the United States with other industrialized nations, America actually ranks among the lowest. According to the Center for Tax Justice, in 2009 America ranked next to last (Iceland) among nations in the Organization for Economic Cooperation and Development in corporate taxes as a share of gross domestic product, at 1.3 percent. The average for all the OECD countries combined is 2.4 percent — that is, nearly twice as high as it is here.
And if comparing America with those socialist European countries troubles you, try this on for size: Corporate taxes as a share of GDP were 4.0 percent in the United States back in 1965, three times what they are today.
So we are not taxing our corporations to death. Nor are we funding our government on the back of corporations: Corporate taxes account for about 10 percent of total federal receipts.
To be fair, the share of federal receipts derived from corporate taxes has shrunk because the government today derives far more revenue from income taxes and especially payroll taxes. But again, even if those two taxes had not grown, corporate tax receipts as a share of GDP — the total wealth of the country — would still be a third today of what they were in the 1960s.
To their credit, several of the Republican presidential candidates and President Obama advocate lowering the nominal rate in exchange for eliminating various tax loopholes and exemptions. The government, they argue, should not be “picking winners and losers” through the tax code, which of course reflects the influence of the politically powerful companies and trade associations that lobby for the tax breaks that lower their effective rates.
In the State of the Union, Obama also called for keeping or creating tax preferences for companies that keep jobs and taking them away from companies that ship American jobs abroad. You’d think every Republican in the chamber would have stood and cheered that line. (Go back and watch the tape.)
At first glance, then, it looks like there is room for bipartisan compromise here. Eliminate tax breaks so government no longer picks winners and losers through the tax code, but move the corporate rate down to, say, something like 15 or 20 percent. Easy enough.
But look closer, and soon you’ll see corporations reminding both parties who’s really boss in D.C. After all, they really don’t want their rate “lowered” from 12 percent to, say, 20 percent, do they?
Thomas F. Schaller teaches political science at the University of Maryland, Baltimore County. His email is email@example.com. He wrote this for the Baltimore Sun.