Whenever advocates for new business tax breaks state their case, you can bet they will complain that the 35 percent corporate income tax rate in the U.S. is one of the most burdensome in the world.
"The United States has the second-highest corporate tax rate in the industrialized world," Sen. Judd Gregg, R-N.H., said in a common refrain earlier this year to introduce a bill that would slice the corporate tax rate to 24 percent. "After this law goes into effect, which I certainly hope it will, we will be pretty much competitive with everybody who's a major player in the corporate world but, certainly, the countries which are our primary competition in Europe and Asia."
Here's what these folks won't say next: Almost no company pays that 35 percent rate. A report from the Internal Revenue Service pegged the effective rate for large U.S. corporations at 27 percent in 2006. And a 2009 World Bank report ranked the U.S. effective tax rate in the middle of the countries with the 11 largest economies.
A note about the "effective tax rate." Companies don't have to disclose how much they actually pay in taxes, but they are required by federal securities rules to calculate the effective tax rate in their annual reports. This rate represents a combination of state, foreign and federal tax rates they paid minus various deductions, and experts say it is a useful proxy for understanding corporate taxes and comparing it to the U.S. rate.
How do our local companies fare? Here are a few examples:
Though imprecise, these corporate disclosures give us some big clues as to how companies are cutting their effective tax rates. The biggest strategy across the board is to keep the bulk of the cash that they earn from foreign operations overseas, where they pay lower foreign income taxes and little or no U.S. taxes. Other big deductions come from things like research-and-development tax credits and deductions for employees exercising stock options.
"Statutory tax rates do not provide a complete measure of the burden that a tax system imposes on business income because many other aspects of the system, such as exemptions, deferrals, tax credits and other forms of incentives, also determine the amount of tax a business ultimately pays on its income," the authors of the GAO report wrote.
So if the actual rates are this low, why do companies seek a lower statutory rate? Because cutting the statutory rate is likely to make the actual rate they pay even lower because of the way deductions and credits work.
And what's interesting is that in most cases, these companies have more deductions and credits than they can take in a given year. This does make me wonder just how much impact something like renewing and expanding the R&D tax credit will have.
"If you say, 'In addition to all the other deductions you can't use, here are some more,' it's not going to do any good," Auerbach said.
Rob Atkinson, president of the Information Technology & Innovation Foundation, is among those who would like to see the R&D tax credit expanded. Even if not all big companies can use a bigger credit, he argues that enough would take advantage for it to still have a sizable impact.
"Overall, the evidence on the credit by economists suggests that every dollar spurs from $1.30 to $2 in additional research spending," he said.
Maybe, but I'm still skeptical about the wisdom or need for a big rate cut, or a larger R&D tax credit to address the complaints of a heavy tax burden. It's not just that our governments can't afford it, or that it won't have much impact on the economy. I just don't see the need to fix a problem that doesn't exist.