Paul L. Caron

Friday, February 25, 2011

U.S. Effective Corporate Tax Rate Among Highest in World

Cato Institute, New Estimates of Effective Corporate Tax Rates on Business Investment:

This bulletin presents estimates of effective corporate tax rates on new capital investment for 83 countries. “Effective” tax rates take into account statutory rates plus tax-base items that affect taxes paid on new investment, such as depreciation deductions, inventory allowances, and interest deductions. Our calculations also account for other taxes that affect investment, such as retail sales taxes on capital purchases and asset-based taxes.

We find that the U.S. effective corporate tax rate on new investment was 34.6% in 2010, which was the highest rate in the OECD and the fifth-highest rate among 83 countries. The average OECD rate was 18.6%, and the average rate for 83 countries was 17.7%.


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Now I'm no partisan think tank hack, but didn't Cato just go ahead and calculate the effective statutory tax rate on a new investment (minus any bonus depreciation which made last year and makes this year so special) with this year's statutory deductions and expenses applied?

Effective tax rate is the rate that companies actually PAY. Such as the 3.6% effective tax rate on GE's profits. Or, and this is coming from a Brookings sponsored think tank, the average effective tax rate of about 25%. Right in the middle of the OECD world.

Posted by: Will Lewis | Feb 25, 2011 8:06:56 AM

Dear Sir,
Isn't it true that corporations pay little to no tax simply by passing on the costs to the consumer?

Posted by: Valerie | Feb 25, 2011 8:26:31 PM

Supply and demand, my friends. The US tax rate is high because everyone wanted to do business here. Therefore, we got away with charging more than the competition. Pretty simple really. It will actually be a symptom of something terrible to see a major decline in our rates since the corporate tax (effective or otherwise, Willy) will only shrink when we desperately need to draw business from the ROW. So we'll be in sorry shape when that happens. (umm, kinda like now) Until the politicos catch on to our need to be competitive worldwide once again, get used to the high rates. And in the meantime, we'll just export inflation to devalue our outstanding debt.

Posted by: Guns N. Butter | Feb 25, 2011 8:30:10 PM

Don't forget state corporate taxes and taxes on corporate earnings paid out as dividends.

Posted by: triplesec | Feb 25, 2011 8:57:47 PM

actually lower taxes permits lower prices to consumers, or higher wages to workers. Higher taxes mean lower wages to workers, and higher prices to consumers, unless you are in the magical world where government is more efficient than the private sector

Posted by: Donm | Feb 25, 2011 10:27:12 PM

I'd be interested in seeing this with the effective tax rate reflecting the actual amount of tax paid. Although even this is misleading because it is based on the "profit" which itself is manipulatable through transfer pricing etc.

I'm all for low taxes. Although I am not sure how low, I'd certainly get rid of most corporate and individual welfare - despite whatever the likes of Paulson and Geithner may say. Given the size of recent handouts to the financial sector I'd say corporate welfare is more of a problem than assistance to individuals. It is also less defensible, particularly in the current environment.

The USA is displaying all the characteristics of a kleptocracy with both major parties captured by financial vested interests. But what would I know, I'm just a dumb Australian. I'm off to drink a cup of tea. I wish you all well, there are tougher times ahead.

Posted by: Robert | Feb 25, 2011 10:40:40 PM


That makes about as much sense as saying that you don't pay any income tax because your money comes from your employer.

Posted by: jvon | Feb 26, 2011 2:36:20 AM

Will Lewis, did you miss the "on new investment" part?

Posted by: FreddyB | Feb 26, 2011 3:40:38 AM

Here's one way to look at it. Suppose we have a corporation with one shareholder who also happens to be the one employee and suppose she gives haircuts. If you tax her 90%, then she needs to charge $100 just to keep $10 for herself. Sure, she passed it on to the customer, but pretty soon there will be no customers. They will cut their own hair. This argument also applies to restaurant meals, DIY services, landscaping, etc etc.

You can perhaps pass on the costs of things like IPODS where the customer cannot make one for themselves. However, here the consumer might just forgo having one. The bottom line is that higher taxes end up reducing the activity that is being punished.

Posted by: gazzer | Feb 26, 2011 4:25:41 AM

If you actually read the NPR article referred to in the comment above, you'll find that US companies avoid taxes by moving their operations overseas. Sure, that's how we want them to lower their effective rates. A company like Walmart with little to no overseas presence pays 34 cents on the dollar, as mentioned in the same article. Even after shipping our jobs overseas, the average of 25% would be in the top 20 highest.

Posted by: The Dude Abides | Feb 26, 2011 4:26:39 AM

Just wondering about the negative tax rates in Belgum and Serbia. How does that come about?
And can I get in on it?

Posted by: pipedreams | Feb 26, 2011 7:28:45 AM

Valerie wrote: "Dear Sir, Isn't it true that corporations pay little to no tax simply by passing on the costs to the consumer?"

The ability to pass on taxes to the consumer depends largely on what is called the own price elasticity of demand for what the corporation (or partnership, or sole proprietor, etc.) is selling. If this elasticity of demand is low, meaning that the change in quantity demanded is low relative to changes in price, then the seller can pass taxes and other costs to the consumer. However, if the elasticity of demand is high, then the seller can't pass along taxes and other costs. What increases this elasticity of demand? For one, the availability of substitutes, which results from healthy competition in the marketplace.

Competition decreases the ability of sellers to pass taxes to consumers, and America still has robust competition in most markets.

Posted by: will | Feb 26, 2011 7:52:09 AM

If taxes are the same for everyone, the corporation can pass them on. However, the consequence of raising prices is lowered demand, which means less profit, which means less growth, which means less jobs, etc.

But taxes are different for corps from other countries. So it means that US corps will be at a competitive disadvantage globally. While free traders argue against protectionism and corporate welfare, they also don't think we should cripple our business with heavy taxation and regulation. Some businesses will leave the US market altogether, simply exporting goods to us and avoiding the corporate taxes that way.

In local markets, heavy taxes create a barrier to expansion. Investors are going to do the math, and taxes have to be factored into the business plan of someone seeking to go public. So, some businesses will simply never go public meaning fewer jobs are created. And that barrier to entry can protect monopolies within a particular market.

Posted by: Ben | Feb 26, 2011 8:30:52 AM

Now is a perfect time to end this tax on consumers, labor and its negative impact on all pension plans and retirement savings. Unlike 125 years ago, 12 men do not own corporate America.

Posted by: blaine rollins | Feb 26, 2011 8:59:48 AM

I can't figure out how or if the VAT figures in these effective rates. Does it?

Posted by: Edgar | Feb 26, 2011 10:03:11 AM

Most countries that impose a VAT under the credit method allow a complete credit for any VAT paid in the year of purchase. If the enterprise is exempt (e.g., finance, insurance, gambling) then the enterprise is not able to claim a credit and must bear the burden of the VAT or pass it on to customers or suppliers if it can. China was not following the method noted in the first sentence but was, I believe, in the process of converting to that method.

Posted by: Bill | Feb 26, 2011 7:29:40 PM

Corporations [or businesses generally] do not pay taxes. Businesses collect taxes and pass them on. To survive, a business must have revenue sufficient to cover all costs. Taxes are just another cost, along with raw materials, labor, rent, etc.

There is some variability as to how that cost is apportioned within the business: to customers (in the form of higher prices), labor (in the form of lower compensation) or ownership (in the form of lower profits).

Posted by: Jeff | Feb 26, 2011 7:37:48 PM