Last week, analysis by Reuters suggested US firms pay less income tax than foreign competitors, in part because “the US tax law is unusually generous with tax breaks and deductions,” also known as corporate tax expenses. However, Reuters analysis contradicts other data and studies showing that US corporate tax expenditures and effective tax rates are roughly the same as in the Organization for Economic Co-operation and Development (OECD) comparison countries.
Various tax deductions, exemptions, and credits within US tax law and the tax laws of other countries reduce corporate income tax revenues. Some of these tax expenditures – such as research and development tax credits – are used to support certain types of economic activity. Others categorized as a tax expense, such as accelerated depreciation, are important in ensuring that corporate income is adequately taxed.
One way to compare tax expenditures across countries is to examine the revenue lost from tax expenditures as part of economic output. According to the Global Tax Expenditure Database (GTED), the US was close to or slightly above the OECD average from 1994 to 2017 and fell along with the OECD average after the 2017 corporate tax changes to the US tax law went into effect.
In fact, US corporate tax outperforms the OECD average on several types of tax expenditures: The US has saved around 0.10 percent of GDP in income tax exemption since 2008, while the OECD average has saved between 0.20 percent Percent and 0.30 percent. The US is also not a particularly generous provider of corporate tax credits and rebates: the US foregone about 0.16 percent of GDP on corporate loans and rebates in 2019, while the OECD averaged about 0.11 percent.
Data from the OECD also suggests that US corporation tax is not an outlier when it comes to tax incentives to promote economic activities such as research and development (R&D). For example, in 2018 the US allocated about 0.08 percent of GDP to R&D tax spending, compared to the OECD average of 0.09 percent. While the US is more likely to rely on R&D credits to encourage these activities in the tax code, other OECD countries offer incentives such as special deductions for R&D or reduced tax rates on intellectual property income (so-called patent boxes).
To see how corporate income tax expenses affect businesses across countries, we can compare the effective average tax rate (EATR), which is a forward-looking indicator of the tax burden on a business’s potential investment that takes into account tax interest rates, depreciation and other tax provisions. The EATR US companies faced in 2019 was 24.6 percent, higher than the non-US average of 21.9 percent and the 13th highest of 37 countries in the OECD.
These and other data suggest that US corporate tax expenses and effective tax rates do not differ materially from those of the benchmark countries, and the effective US tax rate is above the OECD average in at least some metrics.
There are ways to reduce or eliminate tax expenses that could create complexity or distortions in US corporate tax law. However, US corporate tax expenses are well on average compared to other OECD countries. US tax spending will not mitigate the economic damage of higher corporate taxes.
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