Word is out that Donald Trump wants a 15% top corporate tax rate rather than the current 35%, according to the Wall Street Journal, as part of his tax plan expected to be unveiled Wednesday. Dropping the corporate rate reportedly is more important to him than losing government revenue and sending the federal deficit higher.
The Trump administration argues that dropping corporate taxes would keep more money in the U.S., increase investment, create jobs, and in the long run help the economy. But the plan ignores the realities of the tax system and the massive numbers of corporations that pay no or few taxes in any given year. As a result, the effective rate corporations pay now is already close to that 15% level. A major cut in top rates without eliminating huge numbers of tax loopholes would create a disastrous loss of income and result in even more burden on individual.
Are U.S. corporate taxes really that high?
A long-running assumption among many in business has been that the top domestic corporate tax rate of 35% has been unreasonably high compared to the rest of the world and that doesn’t include state taxes. As such, so the logic goes, companies look to do more business overseas, invest in facilities and jobs in locations with lower taxes, and, as a result, pull money out of the US economy.
It is true that tax rates in other parts of the world are lower at the high end. According to the Tax Foundation, the average top corporate rate is 22.5%, across 188 countries (including the U.S.). That is down from 30% in 2003. In Europe, the tax rate is 18.9%, or 26.2% when weighted by country GDPs. (Generally, larger and more developed countries have higher corporate tax rates.)
On the surface it would seem that U.S.-based corporations are more heavily taxed. (They also, in theory, owe taxes on the money made in other parts of the world, even through wholly-owned subsidiaries. Most countries tax only on money made in their geographies. However, this gets complicated because of tax treaties that allow corporations to essentially deduct the taxes they paid in other countries from the associated revenue.)
That is tax in theory. What the U.S. Government Accountability Office found in a 2016 study is that the effective tax rate — the amount paid in taxes relative to taxable income — is far lower. The study examined the tax years of 2006 through 2012. (Remember that this included the worst of the Great Recession, so total revenues were down, though that shouldn’t necessarily affect tax percentages.) Below is a graph of the results.
In any one of these years, at least two-thirds (between 67% and 72%) of all active corporations had zero tax liability after credits. The peak came at the end of the recession, but in 2012, it was still 70.1%. Moreover, the low of 67% happened in 2006, before the financial meltdown set in.
The power of tax credits
In 2012, among large corporations that met that $10 million in assets threshold, 42.3% paid no federal income taxes after tax credits. Among profitable large companies, 19.5% paid no federal income taxes. The average effective tax rate among the profitable large corporations was 16.1%, under federal tax treatment. Compared to the pretax net income these corporations showed in their annual reports the rate was 14%.
As the GAO notes, one reason is that in the years from 2008 through 2012, about half of the corporations in any year had negative net tax income, based on federal accounting rules. But the number of companies paying no taxes didn’t change significantly. That raises the question of how unusual the economic circumstances ultimately were. For all active corporations in each of those years, only about one percentage point of the companies not paying taxes were attributable to federal tax credits. This was probably business as usual.
To put it into a global context, as national tax rate competition is supposedly the goal, the GAO graph below shows U.S. federal corporate effective tax rates on the left and the total effective tax rates, taking into account federal, state, local, and foreign income taxes.