Corporate Tax

A better corporate tax charge would hurt our financial system. Reuters tax article misses the mark.

Tax analysis is difficult, so it’s usually best to leave it to the professionals. When amateurs try to pose as economists, accountants, and lawyers, bad things happen. This time, Reuters reporters posed and the expected biased analysis resulted.

The Reuters article, which conveniently argues that the White House wants corporate taxes to rise, seeks to prove that U.S. companies pay lower taxes than their foreign competitors, even under President Biden’s proposal to raise the corporate tax rate to 28. to increase would continue to do% from the current 21%. Indeed, it doesn’t do such a thing.

Reuters’ analysis covers only the 52 largest US multinationals. In 2019 there were 2.15 million corporate tax filers. This corresponds to 0.002% of all company filters. A tiny fraction of companies is hardly a representative sample when it comes to assessing how much taxes companies pay.

Reuters also uses data from 2020, the most unusual year for economic and financial data ever due to the COVID-19 pandemic. Over the past year, several new provisions were added to the tax law that lowered taxes to ease the burden on the virus-ridden economy. This strange choice of timing further distorts an already biased analysis.

It is also a mistake to look at a single year of a company’s tax bill. The US tax companies based on their average income over several years. To get a more accurate picture, you need to look at tax bills for many years.

The biggest mistake in Reuters’ analysis is that it made the amateur mistake of using financial earnings to analyze corporate taxes. As the tax foundation explains, year-end data is different from tax information. They use different standards and measure different things. Analysts should never use them to make a statement about a company’s tax liability.

Financial statements use accounting principles to measure a company’s financial well-being in such a way that it is possible to compare companies with one another. This is key: you don’t measure taxes in the first place the way an actual tax return would.

Tax returns are private (or at least should be). It’s incredibly difficult to calculate how much a company will actually pay in taxes in any given year. For this reason, professionals usually refrain from analyzing tax policy in terms of the tax bill of a particular company or even a group of them.

The truth is that the marginal effective tax rate has an impact on investment decisions and thus on where companies ultimately locate jobs. That is the additional tax on the next dollar of investment. Reuters’ calculation is an average tax rate. Average tax rates say little about location decisions. The marginal effective rate is heavily influenced by the legal rate, which President Biden intends to raise.

Everything is relative in economics. When the tax reform lowered the corporate tax rate to 21%, it made the US a much more attractive investment location for businesses as it lowered all major marginal effective tax rates significantly. If Congress accepted President Biden’s proposal to increase it to 28%, it would become a less attractive investment location for companies. It really doesn’t get any more complicated than that. The question for Congress and the President is: Why do we want to make the US a less attractive investment location for companies?

It is also important to remember that the tax reform has significantly broadened the corporate tax base as it has increased many taxes for businesses. The price cut more than made up for these increases. However, that means that raising the interest rate is more damaging to the economy now than it was before the tax reform. For this reason, the Biden government shouldn’t get away with saying that the 28% rate would be lower than it was before the tax reform. It’s an apple-to-orange comparison.

The Reuters story also argues that the US has generous deductions for things like research and development that lower taxes. But that’s the point! Deductions for things like research and development give our companies an incentive to take risks that will allow them to develop life-saving vaccines in record time. The world envies the dynamism of our economy. Tax increases for our companies will dampen this dynamic.

At the end of the day, taxes are important because they change incentives. Analysts can calculate the numbers in a million different ways, but it doesn’t change the fundamental fact that increasing taxes on corporations from where they are now makes it less attractive for corporations to invest, which ends up being American workers will harm. No need to complicate matters further.

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