Paul L. Caron

Tuesday, August 19, 2014

NY Times: Tax Burden in U.S. Not as Heavy as It Looks, Kleinbard Says

New York Times DealBook:  Tax Burden in U.S. Not as Heavy as It Looks, Report Says, by Andrew Ross Sorkin:

NY Times Dealbook (2013)For years, chief executives have complained bitterly about the United States corporate tax code, arguing that it is too complicated and that rates are too high. The issue has reached a near boiling point this summer as many large American companies have sought to buy smaller foreign rivals so they can renounce their United States corporate citizenship and reincorporate overseas to lower their tax bills. Others are considering the move, known as an inversion.

Again and again, we hear that these deals are being driven by an effort to make our companies more competitive globally and that unless we “reform” our tax system — which is code for “lower our corporate tax rate” — we will lose business to foreign rivals.

It is a compelling narrative. But it may be wrong.

Edward D. Kleinbard, a professor at the Gould School of Law at the University of Southern California and a former chief of staff to the Congressional Joint Committee on Taxation, makes a captivating argument in an academic paper ['Competitiveness' Has Nothing to Do With It] that the United States tax code — counter to the conventional wisdom — is not impeding global competitiveness. In fact, the opposite is true.

“Despite the claims of corporate apologists, international business ‘competitiveness’ has nothing to do with the reasons for these deals,” he writes. “Whether one measures effective marginal or overall tax rates, sophisticated U.S. multinational firms are burdened by tax rates that are the envy of their international peers.”

What? We’ve been told repeatedly that the United States has the highest corporate tax rate in the developed world — 35 percent — which is higher than the nominal tax rates in places like Ireland (12.5 percent), Britain (21 percent) and the Netherlands (25 percent) and the 24.1 percent average rate of all countries that are part of the Organization for Economic Cooperation and Development.

All of that’s true, but Professor Kleinbard contends that most United States multinational companies don’t pay anywhere near 35 percent. Companies paid, on average, 12.6 percent, according to the Government Accountability Office, which last measured it in 2010, by deliberately stashing piles of cash abroad.

Professor Kleinbard argues that lower tax rates are not driving companies to inversions; instead, he contends it is all the money that companies have overseas — some $2 trillion — and don’t want to bring back to the United States despite protestations by many chief executives that they wish they could.

The provocative paper is worth reading even if you disagree with its conclusions because it helps explain why corporate tax change will be so difficult to accomplish even with the backing of both Democrats and Republicans, who have routinely provided lip service to the idea of lowering rates, but taken no action. Professor Kleinbard’s paper may also help explain why companies themselves may end up lobbying against various corporate tax proposals, even those that lower the statutory rate.

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Kleinbard is confusing inversion (moving corp.’s HQ) with U.S. based corps. simply deferring or avoiding taxes by leaving their profits overseas – taxes aren’t pad until money is repatriated. GE and several other multinationals (e.g. Boeing and Verizon Communications) paid no federal income tax in at least one of the previous five-years. As the NYT points out there are other tax gymnastics (all legal) that these companies use to reduce their taxable income. See NYT article;

Posted by: bruce | Aug 20, 2014 10:46:37 AM

The argument (as summarized) doesn't make sense. Sure, the 12.6% U.S. effective rate is less than other OECD nominal rates, but what’s the effective apples to effective apples comparison? Not provided in the article. And, if we’re discussing multi-nationals, isn’t the overall rate more pertinent than just the HQ jurisdiction? Without honest comparisons, it's hard to believe that the U.S. is really the “envy” of UK, Dutch, Luxembourg based multinationals.

(Let me emphasize: I’m sure Kleinbard himself addresses these points in his paper, it's just the summary that is bad).

Posted by: YoGabbaGabba | Aug 19, 2014 5:03:01 PM