With Corporate Taxes, Less Is More

There is no shortage of alarmism when it comes to corporate taxes. Earlier this year, Mitt Romney said that the U.S. tax code “looks like it was devised by our worst enemy to tie us in knots.” A more recent memo drafted by the Senate Republican Caucus claimed that the “corporate income tax harms workers, consumers, job creation, investment, and innovation” (you have to wonder what else exactly is left).

These statements are enough to scare anyone into thinking that the entire U.S. economy will crumble if corporate tax rates aren’t slashed tomorrow. But, as Republicans often claim, are U.S. corporate tax rates really among the highest in the world? And are workers really so dependent on protecting corporate profits? More important, is there any reason the U.S. shouldn’t raise more revenues from corporations during this time of great fiscal need? 
 
Falling Corporate Taxes
Those pushing for corporate tax cuts commonly cite the fact that, as of April 1, 2012, the U.S. officially has the highest corporate income tax rate in the world. When you add together federal, state, and local taxes, the combined rate shakes out at 39.2 percent. 
 
Of course, nobody really pays that: A widely-cited study last fall revealed that the 280 most profitable corporations in the U.S. collectively paid an average rate of 18.5 percent from 2008-2010. Seventy-eight of these corporations actually paid zero in taxes during one of these years. The disparity between the official, statutory corporate tax rate and the effective rate is due primarily to the countless deductions and exemptions that corporate lobbyists have successfully woven into the tax code over the years.
 
The good news is that a growing bipartisan consensus has developed around the idea of seriously rolling back these deductions. The bad news is that President Barack Obama’s framework for corporate tax reform, put forth in February, advocates making it revenue-neutral. This outcome would contrast starkly with the last major overhaul of the corporate tax system in 1986, signed by President Ronald Reagan, which closed loopholes while increasing overall revenues.
 
Consider the budgetary impact of revenue-neutral corporate tax reform. In 1955, corporate taxes made up 27.3 percent of all federal revenue; today, that share is estimated at 9.6 percent. And although soaring corporate profits have driven steady GDP growth over the past decades, corporate taxes as a share of GDP are a quarter of what they were in 1955.
 
Revenue from corporate taxes has not only fallen from its historic level, but also remains significantly below that in other countries. While corporate taxes make up 1.5 percent of GDP in the U.S. today, they are 1.9 percent of GDP in Germany, 3.3 percent in Canada, and 3.9 percent in Japan. The average of corporate taxes among member nations of the Organisation for Economic Co-operation and Development (OECD), a European group that promotes economic and social well-being around the world, is 3.5 percent. 
 
These statistics underscore how misleading it is to claim that the U.S. imposes a uniquely onerous tax burden on corporations compared with other developed countries. In fact, the opposite is true. With this added revenue, moreover, our global competitors have more resources to fund the infrastructure projects and human capital programs that are vital to securing an upwardly mobile and internationally competitive economy. By insisting on revenue-neutral corporate tax reform, we risk making this imbalance worse even as global economic competition intensifies. Already, the fiscal crunch in the U.S. has driven cutbacks in education at a time when key indicators show the U.S. falling behind in this crucial area.