The debate over US Corporate tax rates recently has been a hot topic of debate among politicians, economists, the media, and more. Some have stated that the US has the highest corporate statutory tax rate in the world, while others state that the effective tax rate is lower. They are both right, but what about the US effective corporate tax rate vs. other developed countries?
Highest US Corporate Statutory Rate in the World
The Heritage Foundation, many politicians, and economists have argued that we now have the highest corporate income tax rate in the world. After Japan lowered its rate to 36.8% recently, the US’s rate of 39.2% percent becomes the world leader (35% Federal rate plus the average rate states add on). Are they correct that nominal US statutory corporate tax rate is the highest in the world? Yes. However, the effective tax rate would be a better metric to look at.
Effective Tax Rate Has Fallen for US Corporations
Warren Buffet recently stated that high US corporate income tax rates are a “Myth.” He backs this statement, by claiming that the real effective corporate tax rate in 2011 was 12.1% according to the Congressional Budget Office (CBO). He is correct that the effective tax rate is much lower than the statutory rate, for now. Yes, the effective corporate tax rate is low in relation to the past. From 1987-2008, the effective corporate tax rate was 25.6% according to the same CBO study Buffet is referring to. Corporations suffered massive losses during the great recession and the drop in profits is correlated with when the downturn started. It can also be attributed to accelerated depreciation or “bonus depreciation” and other legislation that was passed. Either way, the CBO projects that US corporations will get back to the 25.6% effective corporate tax rate average in the next few years.
Our Effective Corporate Tax Rate Vs. Other Developed Countries?
An important part of figuring out whether the US corporate effective corporate tax rate is low is by seeing how we fare against the international competition. There is data on the effective tax rate for corporations in Japan and other countries from 2010. A report from the American Enterprise Institute last year shows that our effective corporate tax rate is one of the highest in the OECD or Organization of Economic Cooperation and Development (OECD) which comprises 34 market-based countries. For 2010, the average effective tax rate for the OECD (excluding the US) was 20.5% while the United States was 29%. Can anyone explain this?
Please let us know your thoughts.