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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

International Corporate Tax Rate Comparisons and Policy Implications

Jane G. Gravelle, Senior Specialist in Economic Policy

January 6, 2014

http://www.fas.org/sgp/crs/misc/R41743.pdf

[full-text, 33 pages]

 

Summary

Advocates of cutting corporate tax rates frequently make their argument based on the higher

statutory rate in the United States as compared with the rest of the world; they argue that cutting

corporate taxes would induce large investment flows into the United States, which would create

jobs or expand the taxable income base enough to raise revenue. President Barack Obama has

supported a rate cut if the revenue loss can be offset with corporate base broadening. Others have

urged on one hand, a revenue raising reform, and, on the other, setting deficit concerns aside.

 

Is the U.S. tax rate higher than the rest of the world, and what does that difference imply for tax

policy? The answer depends, in part, on which tax rates are being compared. Although the U.S.

statutory tax rate is higher, the average effective rate is about the same, and the marginal rate on

new investment is only slightly higher. The statutory rate differential is relevant for international

profit shifting; effective rates are more relevant for firms’ investment levels. The 13.7 percentage

point differential in statutory rates (a 39.2% rate for the United States compared with 25.5% in

other countries), narrows to about 9 percentage points when tax rates in the rest of the world are

weighted to reflect the size of countries’ economies. (The OECD rates fell by slightly over onehalf

of a percentage point between 2010 and 2012.)

 

Regardless of tax differentials, could a U.S. rate cut lead to significant economic gains and

revenue feedbacks? Because of the factors that constrain capital flows, estimates for a rate cut

from 35% to 25% suggest a modest positive effect on wages and output: an eventual one-time

increase of less than two-tenths of 1% of output. Most of this output gain is not an increase in

national income because returns to capital imported from abroad belong to foreigners and the

returns to U.S. investment abroad that comes back to the United States are already owned by U.S.

firms.

 

The revenue cost of such a rate cut is estimated at between $1.2 trillion and $1.5 trillion over the

next 10 years. Revenue feedback effects from increased investment inflows are estimated to

reduce those revenue costs by 5%-6%. Reductions in profit shifting could have larger effects, but

even if profit shifting disappeared entirely, it would not likely offset revenue losses. It seems

unlikely that a rate cut to 25% would significantly reduce profit shifting given these transactions

are relatively costless and largely constrained by laws, enforcement, and court decisions.

 

Both output gains and revenue offsets would be reduced if other countries responded to a U.S.

rate cut by reducing their own taxes. Evidence suggests that the U.S. rate cut in the Tax Reform

Act of 1986 triggered rate cuts in other countries.

 

It is difficult, although not impossible, to design a reform to lower the corporate tax rate by 10

percentage points that is revenue neutral in the long run. Standard tax expenditures do not appear

adequate for this purpose. Eliminating one of the largest provisions, accelerated depreciation,

gains much more revenue in the short run than in the long run, and a long-run revenue-neutral

change would increase the cost of capital. Other revisions, such as restricting foreign tax credits

and interest deductibility or increasing shareholder level taxes, may be required.

 

This report focuses on the global issues relating to tax rate differentials between the United States

and other countries. It provides tax rate comparisons; discusses policy implications, including the

effect of a corporate rate cut on revenue, output, and national welfare; and discusses the outlook

for and consequences of a revenue neutral corporate tax reform.

 

Contents

Effective Tax Rate Comparisons ...................................................................................................... 1

Types of Tax Rates..................................................................................................................... 2

Types of Taxes Included ............................................................................................................ 2

Simple (Unweighted) versus Weighted Averages of Tax Rates ................................................. 3

Tax Rate Comparisons: United States Compared with OECD and Large Economies .............. 3

Summing Up .............................................................................................................................. 9

Economic Effects of a U.S. Rate Cut ............................................................................................... 9

Effects on Revenue, Output, and National Welfare, Assuming No Tax Rate Changes

by Other Countries or Offsetting Base Broadening in the United States ............................. 10

Revenues ........................................................................................................................... 10

Effects on U.S. Output and Wages .................................................................................... 11

Effects on National Income and National Welfare ............................................................ 14

Revenue Feedback Effects ................................................................................................ 15

Profit Shifting and Revenue Effects ........................................................................................ 16

Other Countries’ Reactions to a U.S. Rate Reduction ............................................................. 18

Revenue-Neutral Rate Reduction and Corporate Reform ....................................................... 20

Accelerated Depreciation .................................................................................................. 21

Production Activities Deduction ....................................................................................... 22

Tax Treatment of Foreign Source Income ......................................................................... 23

LIFO Inventory Accounting .............................................................................................. 24

Other Tax Expenditures and Base Broadening Provisions ................................................ 24

Limits on Interest Deductions ........................................................................................... 25

Shifts Between Individual and Corporate Taxes: Restrictions on Using the Non-

Corporate Form, and Shifting Tax Burdens to the Shareholder Level ........................... 26

Summing Up ............................................................................................................................ 27

 

Figures

Figure 1. Statutory Tax Rates, United States and OECD (Excluding United States), 1981-2010 ................................. 19

 

Tables

Table 1. Corporate Tax Rates, United States and Rest of the OECD ............................................... 3

Table 2. Corporate Tax Rates in the 15 Largest Countries ............................................................... 4

Table 3. Effective Corporate Tax Rates, United States Compared with Six Countries .................... 5

Table 4. Effective Tax Rates, United States and OECD .................................................................. 5

Table 5. Effective Tax Rates in the 15 Largest Countries ................................................................ 5

Table 6. Marginal Effective Tax Rates, United States and Weighted OECD ................................... 6

Table 7. Marginal Tax Rates Including Transfer and Franchise Taxes, United States Compared with the OECD ................. 7

Table 8. Marginal Effective Tax Rates Including Transfer Taxes, 15 Largest Countries ................. 7

Table 9. “Effective Average Tax Rate,” United States and OECD .................................................. 9

Table 10. Rate Reduction Permitted by Certain Options, 2016 ..................................................... 20

Table A-1. Statutory Tax Rates in the United States and the Rest of the OECD Countries, 1981-2020 ..................................... 28

 

Appendixes

Appendix. Statutory Tax Rates, 1981-2010 ................................................................................... 28

 

Contacts

Author Contact Information........................................................................................................... 29

 

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