TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, November 27, 2013

Bartlett: Effective Corporate Tax Rates

New York Times:  Effective Corporate Tax Rates, by Bruce Bartlett:

Although the prospects for tax reform in Congress have dimmed of late, the lobbying activity has not. The corporate community continues to put pressure on Congress to reduce the statutory corporate tax rate, which, at 39.1 percent including state and local taxes, is the highest among members of the Organization for Economic Cooperation and Development.

What tends to get lost in the debate is how much corporations actually pay in taxes once various deductions and credits are taken into account. A corporation’s total tax bill divided by its profits is its effective tax rate. It’s hard to imagine a corporation paying anywhere close to 39 percent of all its profits in taxes, as that would mean it has no deductions or credits whatsoever.

According to the IRS, corporations had gross profits of $1.8 trillion in 2007 and taxable income of $1.2 trillion. Since the Tax Reform Act of 1986, new corporate tax preferences have widened the gap between gross income and taxable income. In 1987, gross corporate profits reported on tax returns were $328 billion and taxable income was $312 billion. Thus since 1987, taxable income has fallen to 68 percent from 95 percent of gross income. ...

On Nov. 19, Senator Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, released a proposed reform of international corporate taxation. It would tax foreign profits as earned and end deferral. Previously deferred profits would be subject to a 20 percent tax rate. Writing in The New York Times, Victor Fleischer, a professor at the University of San Diego law school, saw merit in the Baucus plan but noted that it differs sharply from one previously put forward by Representative Dave Camp, Republican of Michigan and chairman of the House Ways and Means Committee.

The path to corporate tax reform is not yet clear, but it’s useful to have two substantive proposals on the table. Regardless of how the effective corporate tax rate is calculated, it’s a bad idea to encourage companies to hold their profits abroad simply because the tax code makes it lucrative to do so.

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