Corporate Taxes from the AEI perspective–the AEI report gets an F
by Linda Beale
Corporate Taxes from the AEI perspective–the AEI report gets an F
crossposted with Ataxingmatter
[edited to correct typos and add link to CTJ and Leonhardt articles 2/19pm]
Kevin Hassett, an economic grunt at the American Enterprise Institute and frequent contributor to the Wall Street Journal op-ed pages, prepared a report for the institute on corporate taxation. Guess what–it claims that the US overtaxes its corporations and that is the reason that we are losing jobs.
There are all sorts of things wrong with this report.
1) it disregards the impact of globalization on corporate decisions to move enterprises, and the fungibility of operations if jurisidictions left don’t make the exit a highly taxing moment. It also disregards the lack of protection for US workers–yes, US workers are better paid than workers in undeveloped countries, and if multinational enterprises (MNEs) can merely substitute the one for the other, they will.
2) It first spends a lot of ink on the US statutory rate, complaining that it is higher than that of most other OECD countries. That is true, but really meaningless in itself. You can’t have a decent understanding of a country’s tax policies without looking at both tax rates and the base against which they are assessed. Since the corporate tax base in the US has more holes than Swiss cheese, looking at the rate tells you almost nothing about the corporate burden.
3) It notes that corporate taxes raise much less in revenue as a percent of GDP in the US than in other OECD countries. Somehow, the report intends this to be an indictment of the US corporate tax system as overtaxing corporations. I suppose the authors reach that by implying that corporations have fled the system and that’s why. But it is really an indication that the thesis in the title of the report–that the US gets an F for bad taxes that are making US corporations uncompetitive–is wrong. The US has such a loophole riddled corporate tax system that corporations are easily able to avoid paying their fair share of taxes. IN fact, other countries have more effective tax systems that get more corporate taxes out of their corporations as a percent of GDP, so the US must be a tax haven. It is rather surprising that we haven’t had an upsurge of grass-roots, tea party-style protests against all the big MNEs that manage to benefit mightily from the use of tax revenues (from roads to water to workers’ comp to subsidized health care) yet pay next to nothing in taxes in return.
For some examples of these MNEs with low taxes and much use of benefits, see David Leonhardt, The Paradox of Corporate Taxes in America, New York Times, Feb. 2, 2011 . Leonhard points out that Carnival Corporation “wouldn’t have much of a business without help from various branches of government” from the Coast Guard to Customs to road building and bridges and port maintenance, but the biggest benefit mayh be the price it pays, since it has only paid total (federal, state, local and foreign) taxes over the last five years equal to 1.1% of its $11.3 billion in profits.” Other major US corporations with substantial economic profits pay corporate taxes less than 10%–Yahoo (7%), Boeing (4.5%), Prudential Financial (7.6%). Id. (And wasn’t Prudential one of the banks that got to use the Treasury’s ultra vires notice permitting banks that acquired other banks to use their losses without the strict limitation provided in the tax code section 382?)
4) It claims that the US corporations’ effective tax rate is still way higher than for other countries. To do this, it uses two formulaic calculations for effective tax rates, neither of which is particularly trustworthy as to actual effective tax rates. It finds that its two hypothetical measures of effective tax rates come out at 29% and 23.6%. These are probably too high, but are considerably less than the statutory rate. it doesn’t, for example, look at the amount of actual taxes paid compared to the amount of taxable income reported. That figure would suggest a higher effective rate than actually experienced, since taxable income is much less than economic income. It doesn’t do what makes even more sense, look at actual current taxes paid as noted on financial statements of reporting companies compared to economic income as noted on financial statements of reporting companies. That number would be fairly accurate, and in fact comes out very low indeed. See, e.g., CTJ study, Revenue-Positive Reform of the Corporate Income tax, Jan 25, 2011 (noting that a Bush study in 2007 found only a 13.4% effective tax rate for 2000-2005, compared to a 16.1% rate for other OECD countries).
5) In comparing US corporations’ statutory taxes to those in other OECD coutnries, it takes into accout state and local corporate taxation (average) rates. But note that the US has primarily corporate income taxes, while OECD countries may have a host of other taxes, including in most cases a substantial value-added tax system (VAT). The report doesn’t bring that tax into the comparison. As a result, its comparison is again meaningless, because it isn’t really comparing the overall tax burden to determine whether the US corporations are in fact paying tax haven rates or being stymied in competition.
6) And of course, these corporate excusers provide only the slimmest of rationales for asserting that the US is aided by improving the competitiveness of MNEs in other countries–usually along the lines that helping them invest more abroad will also have a spillover effect in terms of more investment here. Actually if we help them succeed there by reducing taxes here, we are cutting off our noses to spite our face, since they will move operations there and do less here. We’d be much better off using that money to fund education and basic scientific research that can improve our quallity of life and give us new things to manufacture!
As usual with the AEI, the ideological agenda has resulted in a report that primarily serves a propaganda purpose. I’d say that it isn’t US corporate taxes that get an F, but rather this AEI report!
thanks linda…
this bloomberg article —
Dodging Repatriation Tax Lets U.S. Companies Bring Home Cash
adds a bit.
Executives including John T. Chambers of Cisco Systems Inc. say a tax break would return a flood of cash and boost the economy.
[BUT]
What nobody’s saying publicly is that U.S. multinationals are already finding legal ways to avoid that tax. Over the years, they’ve brought cash home, tax-free, employing strategies with nicknames worthy of 1970s conspiracy thrillers — including “the Killer B” and “the Deadly D.
http://www.bloomberg.com/news/2010-12-29/dodging-repatriation-tax-lets-u-s-companies-bring-home-cash.html
Two words: Flat Tax.
Actually the US system tends to overtax those companies doing business largely within our borders and undertax the multinationals.
waitaminit
U.S. taxes are higher than Germany’s?
then howcum they’s allus telling me about Germany going on the ropes because of high taxes?
Domestic business takes the hit….more to come.
juan
obvious to you and me, perhaps, but a lot of people don’t get it yet that people like John T Chambers always say this, they always say anything they think will get them a little more money. these people have no interest in the economy or the people. all they want is more money for themselves.
of course they tell themselves that “greed is good” it’s the dynamic that makes the economy grow.
actually its the behavior that would have got them run out of the village back when people still knew that it takes cooperation for humans to survive. Even Darwin, and Adam Smith, knew that.
As in the individual taxpayer cases, it is the compliant taxpayers that end up bearing the burden for sophisticated tax avoidance and tax evasion. Many of the big MNEs use aggressive transfer pricing strategies–especially in respect of transfers of intangible assets–to lower their US tax burden. But the “corporate reforms” passed as part of the Bush tax changes are a big contributor to the lopsided low taxation of MNEs. We ought to have a country by country foreign tax credit, since pooling the credits from various countries permits companies to manipulate the foreign tax credit–pooling high tax jurisdictions with low-tax jurisdictions to get a full credit on all, even though they paid minimal tax on much of the income. We had a fairly sophisticated provision of different foreign tax credit baskets, but then they were reduced to two, making the credit game much more lucrative. Much of the argument there was in terms of “simplification”. Guess what, when you simplify the system for sophisticated MNEs, you are essentially giving them a tax cut. At the same time, we “simplified” other rules in the Subpart F context, resulting in more ability to avoid taxes. Bush also permitted cross-border mergers to qualify for nonrecognition reorganization treatment–hey, that’s a way to encourage offshoring of US businesses, now isn’t it.
By the way, US MNEs essentially do have a “flat tax”–there are catchup provisions so the rate becomes a flat 35% on corporations with about $19 million in taxable income. Flat taxes don’t solve compliance problems–you still have to define income, decide what deductions and credits are permissible, etc.
The solution is better enforcement, which Obama’s Treasury has been doing. But the GOP complaint about adding a few additional IRS staffers shows that they aren’t interested in enforcing taxes. Many in the GOP have used noncompliance as arguments for needing to cut/eliminate the corporate tax–essentially arguing that we should reward the corporate sector for its bad behavior.
I still think that the APT tax system thought up by Edgar L. Feige, Professor-emeritus of economics at U of Wisconsin is the way to go.
Now you capture all money regardless of above or below ground, income or cap gains, etc.
And, it’s automatically keyed to how much government you are using simply by being tied to the one monsterous thing everyone uses that the government produces: currency.
Linda Beale gets an ‘F’ for her presentation of the AEI report.
1) She doesn’t even provide a link to the report so that readers here might judge for themselves. Here it is: http://www.aei.org/outlook/101024
2) The report does not focus on statutory rates exclusively as Linda criticizes, but spends equal time on “effective tax rates” which are also the highest in the OECD.
3) The report also makes the point that “Corporate tax revenue in the United States is consistently lower than revenues in other OECD countries, despite higher US corporate tax rates.”
(“The glaring result from comparing the relative tax position of the United States to its relative revenue position is that despite (or perhaps because of) its relatively higher corporate tax rates, the United States earns less federal revenue from corporate income as a percentage of GDP than the average OECD economy.”)
In other words, because the tax rate is higher than in other countries, NME are shifting profits there in order not to pay higher US tax rates. If the tax rates in the US were lower, companies whould not have the incentive to play the transfer pricing games, resulting in more corporate tax collections by the US Treasury.
Linda Beale gets an ‘F’ for her presentation of the AEI report.
1) She doesn’t even provide a link to the report so that readers here might judge for themselves. Here it is: http://www.aei.org/outlook/101024
2) The report does not focus on statutory rates exclusively as Linda criticizes, but spends equal time on “effective tax rates” which are also the highest in the OECD.
3) The report also makes the point that “Corporate tax revenue in the United States is consistently lower than revenues in other OECD countries, despite higher US corporate tax rates.”
(“The glaring result from comparing the relative tax position of the United States to its relative revenue position is that despite (or perhaps because of) its relatively higher corporate tax rates, the United States earns less federal revenue from corporate income as a percentage of GDP than the average OECD economy.”)
In other words, because the tax rate is higher than in other countries, NME are shifting profits there in order not to pay higher US tax rates. If the tax rates in the US were lower, companies would not have the incentive to play the transfer pricing games, resulting in more corporate tax collections by the US Treasury.
sammy,
Thanks for the link to the aei report. Which country need we emulate for lower taxes…Ireland is not available anymore. There is the issue of transfer pricing roulette while the US provides a lot of support for international trade…should it be fee based??
sammy: The report does not focus on statutory rates exclusively as Linda criticizes, but spends equal time on “effective tax rates” which are also the highest in the OECD.
Perhaps you have a reading comprehension problem. Effective tax rate as defined by the report is “taxable” income divided by taxes paid. But the whole point is that taxable income is after all of the deductions and loopholes that exclude most of their income from taxation. So if I exclude 50% of my income from taxation and pay 35% on the taxable part, the AEI says that is an “effective” tax rate of 36%, but is is really only a tax rate of 18%.
All of the data show that the real corporate taxes collected in the U.S. as a percentage of GDP are the lowest in the OECD.
sammy: The report does not focus on statutory rates exclusively as Linda criticizes, but spends equal time on “effective tax rates” which are also the highest in the OECD.
Perhaps you have a reading comprehension problem. Effective tax rate as defined by the report is “taxable” income divided by taxes paid. But the whole point is that taxable income is after all of the deductions and loopholes that exclude most of their income from taxation. So if I exclude 50% of my income from taxation and pay 35% on the taxable part, the AEI says that is an “effective” tax rate of 36%, but is is really only a tax rate of 18%.
All of the data show that the real corporate taxes collected in the U.S. as a percentage of GDP are the lowest in the OECD.
sammy: The report does not focus on statutory rates exclusively as Linda criticizes, but spends equal time on “effective tax rates” which are also the highest in the OECD.
Perhaps you have a reading comprehension problem. Effective tax rate as defined by the report is “taxable” income divided by taxes paid. But the whole point is that taxable income is after all of the deductions and loopholes that exclude most of their income from taxation. So if I exclude 50% of my income from taxation and pay 35% on the taxable part, the AEI says that is an “effective” tax rate of 36%, but is is really only a tax rate of 18%.
All of the data show that the real corporate taxes collected in the U.S. as a percentage of GDP are the lowest in the OECD.
All of the data show that the real corporate taxes collected in the U.S. as a percentage of GDP are the lowest in the OECD.
BillB,That is very possibly because US MNE’s are paying taxes in other countries with lower tax rates.
rdan,
We probably just need to get our corporate tax rate down near the average, or lower, of the OECDs.
This would 1) Encourage investment, and therefore jobs, in the US and 2) Discourage US MNE from paying other countries tax.
Both of these would increase taxes paid in the US. It’s not technically “supply side economics” it’s more like “making the venue more attractive.”
Dan’l B
even i don’t use much currency anymore, and i’m a bottom feeder. debit card.
Sammy
even if you have a heart of gold, y’know, you can’t just keep giving it away.
How about an AMT for corporations? A corporate AMT would make ME feel better knowing that a corporation would be paying some tax no matter how much their accountants and laywers were paid.
Mark:
A corporate AMT already exists
sammy,
Thanks for the document source link. Linda Beale’s post didn’t do much for me. I have been on the fence over this issue for a long time. Unfortunately, Beale didn’t undertake a meaningful detailed comparative analysis of this important issue. Instead, Beale wrote an ugly slam piece, attempting to take down economists Kevin Hassett, Michael Devereux, and Rachel Griffith. Oddly, Beale gave the co-author, Aparna Mathur, a pass on her personal attack. Beale’s closing remarks appear to indicate that she is more inclined to rant emotionally over ideology than provide a serious professional analysis: “As usual with the AEI, the ideological agenda has resulted in a report that primarily serves a propaganda purpose. I’d say that it isn’t US corporate taxes that get an F, but rather this AEI report!”
I see some problems with the AEI analysis and Beale’s comments as well. It would be beneficial if a professional tax expert filled in some of the holes in a serious minded comparative analysis. As an example, Beale ignores the WTO case decision that allows VAT nations to gain a significant tax code advantage with their export products. This issue hasn’t escaped the attention of the U.S. Congress, though, including House Minority Leader Pelosi.
Here are some related AEI materials to the article you cited:
Testimony on the Importance of Comprehensive Tax Reform
by Kevin A. Hassett
Before The House Committee on Ways and Means
January 20, 2011
http://www.aei.org/speech/100184
and
http://www.aei.org/docLib/Hassetttestimonyjan2011.pdf
Race to the Top of the Laffer Curve
By Aparna Mathur, AEI
February 16, 2011
http://www.american.com/archive/2011/february/race-to-the-top-of-the-laffer-curve/
Revenue-Maximizing Corporate Income Taxes The Laffer Curve in OECD Countries
By Alex Brill, Kevin A. Hassett | AEI Online
July 31, 2007
http://www.aei.org/docLib/20070731_Corplaffer7_31_07.pdf
sammy,
Thanks for the document source link. Linda Beale’s post didn’t do much for me. I have been on the fence over this issue for a long time. Unfortunately, Beale didn’t undertake a meaningful detailed comparative analysis of this important issue. Instead, Beale wrote an ugly slam piece, attempting to take down economists Kevin Hassett, Michael Devereux, and Rachel Griffith. Oddly, Beale gave the co-author, Aparna Mathur, a pass on her personal attack. Beale’s closing remarks appear to indicate that she is more inclined to rant emotionally over ideology than provide a serious professional analysis: “As usual with the AEI, the ideological agenda has resulted in a report that primarily serves a propaganda purpose. I’d say that it isn’t US corporate taxes that get an F, but rather this AEI report!”
I see some problems with the AEI analysis and Beale’s comments as well. It would be beneficial if a professional tax expert filled in some of the holes with a serious minded detailed comparative analysis which addresses a range of considerations. As an example, Beale ignores the WTO case decision that allows VAT nations to gain a significant tax code advantage with their export products. This issue hasn’t escaped the attention of the U.S. Congress, though, including House Minority Leader Pelosi.
Here are some related AEI materials to the article you cited:
Testimony on the Importance of Comprehensive Tax Reform
by Kevin A. Hassett
Before The House Committee on Ways and Means
January 20, 2011
http://www.aei.org/speech/100184
and
http://www.aei.org/docLib/Hassetttestimonyjan2011.pdf
Race to the Top of the Laffer Curve
By Aparna Mathur, AEI
February 16, 2011
http://www.american.com/archive/2011/february/race-to-the-top-of-the-laffer-curve/
Revenue-Maximizing Corporate Income Taxes The Laffer Curve in OECD Countries
By Alex Brill, Kevin A. Hassett | AEI Online
July 31, 2007
http://www.aei.org/docLib/20070731_Corplaffer7_31_07.pdf
Dan,
Here are some related pro and con articles and reports:
The Multinational Tax Advantage
BusinessWeek
January 20, 2011
http://www.businessweek.com/magazine/content/11_05/b4213031803349.htm
Reform of U.S. International Taxation: Alternatives
By Jane G. Gravelle, Congressional Research Service
December 17, 2010
http://assets.opencrs.com/rpts/RL34115_20101217.pdf
2010 Corporate and Indirect Tax Survey
KPGM
October 12, 2010
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/2010-Global-Corporate-and-Indirect-Tax-Survey.aspx
High Corporate Tax Rate Is Misleading
SmartMoney
January 25, 2008
http://www.smartmoney.com/investing/economy/high-corporate-tax-rate-is-misleading-22463/
The Corporate Tax Conundrum
Tax Analysts
2007
http://www.taxanalysts.com/www/features.nsf/Articles/FE9DCA58402875D7852573680064DA50?OpenDocument