Here one thing you can say that's true about U.S. corporate taxes: the statutory rate (35% at the federal level; 39.2% when you average in state rates) is the highest on earth.
Here's another thing you can say that's true about U.S. corporate taxes: The average effective tax rate is more like 25%, and the biggest corporations generally pay much less than that. Corporate tax revenue has also been on a decades-long decline as a share of overall government revenue. ...
[W]hen you examine how big U.S. corporations keep their taxes low, you have to wonder whether lowering rates by a few percentage points will make any difference. What's depressing corporate tax revenue is not companies choosing to locate operations in, say, Germany (30.2%) or Canada (27.6%), to avoid higher U.S. rates. A far bigger issue is the increasingly sophisticated operations that multinationals use to shuffle income from country to country and avoid paying almost any tax at all. USC law professor Edward Kleinbard refers to these operations as "tax distilleries," where the company's tax director sets about mixing together foreign income and foreign tax credits to create a blend with the lowest possible overall tax bill. ...Kleinbard, who before going into academia in 2009 was a partner at the law firm Cleary Gottlieb Steen & Hamilton in New York and then chief of staff of Congress's Joint Committee on Taxation, got in touch with me after I quoted him in my post last week on the tax implications of Apple's vast overseas tax hoard. Apple argues that because the IRS would tax its overseas income at high rates if it brought that income back to the U.S., it has to keep the money (about $64 billion at the moment) overseas instead of handing it to shareholders. Kleinbard says there's definitely truth to this assertion, but that the most-discussed solution — switching the U.S. to a "territorial" corporate tax system that doesn't even try to tax overseas income — would make the problem of stateless income even worse.
Kleinbard has written two long-but-readable journal articles on the stateless income phenomenon ("Stateless Income" and "The Lessons of Stateless Income"). The only solutions he sees are either a territorial system with vastly stepped-up efforts to counter abuses like Google's ... a system in which the U.S. would tax the worldwide earnings of U.S.-based corporations (with deductions for foreign taxes paid, of course). He thinks the latter would be much simpler to administrate, and that with a lower tax rate and deductions for overseas losses, it wouldn't disadvantage U.S.-based multinationals. ...
As the Fiscal Times reported today, there's a group of big U.S. corporations that for various reasons (mostly the lack of huge overseas operations or easy-to-move-around intellectual property) are unable to partake of Double Irish Dutch Sandwiches and wouldn't mind seeing a Kleinbard-style reform at all. Then there are the Googles, Ciscos, GEs, Microsofts, and Apples of the world, which do quite well under the current system and would pay more under any corporate tax reform that took the problem of stateless income seriously. Don't take their squeals too seriously. They should pay more.
Wednesday, March 28, 2012
Harvard Business Review, Why Some Multinationals Pay Such Low Taxes, by Justin Fox: