Monday, July 15, 2013
Martin A. Sullivan (Tax Analysts), Behind the GAO's 12.6 Percent Effective Corporate Rate, 140 Tax Notes 197 (July 15, 2013):
On July 1 the Government Accountability Office made a lot of headlines when it released a study reporting that the average effective corporate tax rate in 2010 was only 12.6%. ... Although it is common knowledge that many U.S. multinationals have used tax planning to substantially reduce their tax bills, the GAO figure is surprisingly low. Other studies typically report average rates in the mid-20s. For example, 40 leading U.S. firms that recently formed a tax reform coalition had an average effective tax rate of 24% over the 2010-2012 period. The GAO itself (p. 28) cites eight prior studies using a variety of data, methods, and time periods, and the average rate of these studies was 28.4%, with a minimum of 22% and a maximum of 31.3%.
So what explains the difference between the GAO's 12.6 percent rate and other studies' rates? Mainly two items. First, the GAO did not include foreign taxes in the widely reported 12.6 percent figure. It did in fact provide a much more conceptually defensible measure that includes foreign taxes in the numerator and arrives at a worldwide rate of 16.9 percent as a result. The table below details the GAO calculation.
The second and more important reason for the GAO's low effective tax rate for 2010 compared with those found in other studies is that the effects of a recession are more dominant in 2010 than they are in other studies, which include both recession and non-recession years or no recession years at all. In 2010 the U.S. economy was still severely hobbled by the Great Recession. Figure 1 shows liability for all corporations from 1997 through 2010, as well as net and gross corporate tax receipts from 1997 through 2012. It shows that in 2010, corporate tax liabilities reported on tax returns used in the numerator of the GAO's effective tax rates were extraordinarily low in that year.
Putting all this together, it seems reasonable not to revise the consensus view that average worldwide effective corporate tax rates are somewhere in the mid- or upper 20s when we are not in the throes of a recession. It is important to keep in mind that these broad averages hide a lot of interesting detail. ... It is also important to keep on the lookout for misleading effective tax rate calculations from advocacy groups.
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