Corporate Tax Myths

There's no corporate income tax in Bermuda. Can we really compete with that?

In the The Wall Street Journal today, John McKinnon and Scott Thurm revive the zombie of too-high corporate taxes causing businesses to flee offshore. Needless to say, they give too large a megaphone to international outsourcers and too little to their critics. Based on their interviews with companies that have moved their businesses to commerce-centers like Bermuda and Ireland, McKinnon and Thurm find:

Companies cite various reasons for moving, including expanding their operations and their geographic reach. But tax bills remain a primary concern. A few cite worries that U.S. taxes will rise in the future, especially if Washington revamps the tax code next year to shrink the federal budget deficit.

The uncertainty fairy strikes again. The authors go on to make the claim that we need to “rewrite the tax code to give companies an extra incentive to stay in the U.S.” We couldn’t possibly raise taxes or business will flee. But is our corporate tax rate truly pushing companies overseas?

This argument rests upon several crucial fables that the McKinnon and Thurm leave unexplored. The statuatory metric itself is highly misleading. Although the US has a statuatory corporate tax rate of 39.2%, an OECD report found that we have an effective tax rate of 27.1%, compared with the OECD average of 27.7%. 

One reason for the discrepancy: The OECD weighs tax rates by country size, as smaller countries, like Ireland and Bermuda, tend to have lower corporate tax rates due to their lack of multinational corporations. Larger countries, like Germany, Britain or the United States, have higher corporate tax rates. Weighting provides a more accurate picture by mitigating the effect of smaller tax havens. But even weighting doesn’t capture the real tax burden of large companies.

Beyond discussion of the statuatory rate, corporate tax loopholes make the posted rate meaningless, making it more illuminating to look at the effective rate. The Citizens for Tax Justice found, in a study of the 280 Fortune 500 companies that made a profit between 2008 and 2010, that those companies paid an effective tax rate of just 18.5%. Of the 134 companies that made a significant profit in another country, 87 paid a higher tax rate abroad than in the US. It's clear we're not anomalous in our effective rate. The US only collects 13.4% in income tax receipts from corporations, compared to the OECD average of 16%. 

The United States doesn’t need a lower corporate tax rate, it needs a smarter one.