David Leonhardt’s excellent piece in today’s New York Times explains that while the U.S. statutory corporate tax rate is relatively high, the amount that U.S. corporations actually pay in taxes — the effective tax rate — is much lower. A primary reason, he notes, is that our corporate code is riddled with tax preferences that significantly reduce many corporations’ taxes and have created wide disparities in effective tax rates across the economy.
For example, private equity firms pay less than 1 percent of their profits in taxes and petroleum producers pay only around 11 percent — far below the statutory rate of 35 percent (see graph; dataset here).
Congress has begun discussing corporate tax reform, and President Obama has expressed support for lowering the statutory rate and closing some of these loopholes. But “any system that creates as many winners as this one won’t be changed easily,” Leonhardt warns.
We plan to issue a report that outlines a number of tests by which policymakers should evaluate corporate tax reform proposals.