President Joe Biden’s proposal to increase corporate taxes has renewed the argument about how much the US should collect in corporate tax revenue compared to other advanced countries. Proponents of corporate tax hikes argue that the US collects less from companies compared to its peers and that the US has an unusually low effective tax rate on corporate income. These claims tend to underestimate US corporate tax rallies compared to comparable countries in the Organization for Economic Co-operation and Development (OECD) and the effective tax rates US corporations face.
There are several ways to measure US tax revenue and tax burden. One way is to think of corporate tax revenue as part of US GDP. Deputy Assistant Secretary of the Treasury, Kimberly Clausing, argues that corporate tax revenues as a percentage of GDP fell from about 2 percent before the Tax Cut and Employment Act (TCJA) to 1 percent after it came into effect, which is below the OECD average of 3.1 percent in the United States Years 2018 and 2019.
However, it’s important to keep in mind that the U.S. also has a large pass-through business area where tax receipts are reported in individual income tax receipts. Non-corporate business tax revenues accounted for around 10 percent of total taxes on income and capital gains in 2014, above the OECD average of 6.5 percent. This means that total US business tax surveys as part of GDP are higher than looking at US corporate tax receipts in isolation.
Another way to compare corporate tax charges is to look at the effective average tax rate (EATR), which is a forward-looking indicator of the tax burden on a company’s potential investment, taking into account tax rates and depreciation. and other tax regulations.
According to the OECD, US companies had an EATR of 24.6 percent in 2019, which is higher than the non-US average of 21.9 percent and the 13th highest of 37 OECD countries. Before the TCJA, the U.S. EATR for business investment in 2017 was the highest in the OECD at 37.5 percent.
Instead of calculating a hypothetical EATR, you can also measure average effective tax rates using data from the Bureau of Economic Analysis (BEA) on corporate tax collections. However, this data would need to be adjusted to take into account that BEA includes S corporate profits in its broader definition of corporate profits, but not taxes that S companies pay in its corporate tax data. This tends to underestimate the effective tax rate faced by C companies in the US
Adjusted for S corporate income tax, the average effective tax rate increases from 20.5 percent to 26 percent in 2017 using BEA data. After the TCJA came into effect, the 2018 EATR fell to 19.4 percent according to BEA data.
A third way to compare the tax burden on business investments is by using the marginal effective tax rate (METR). It is also a forward-looking measure of how taxation will increase the cost of an investment that produces just enough profit to break even in real terms. This is a helpful measure as it shows how corporate taxes affect investment incentives.
According to the OECD, the US had a composite METR of about 11.2 percent in 2019, which was higher than the non-US OECD average of 7.2 percent, and ranked 17th out of 37 countries. In 2017, the US METR was among the top 10 of the OECD with 17.4 percent. Raising the corporate income tax rate and imposing other taxes on corporate income would rank the US worse or higher than 2017, which would reduce US investment incentives
Whether we use corporate tax collections as part of GDP, average effective tax rates, or marginal tax rates, each metric shows that the U.S.’s effective corporate tax rate is near or above average when compared to its OECD counterparts. An increase in corporate taxes would put the US at a competitive disadvantage, regardless of whether the tax rates are statutory or effective corporate tax rates.
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