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The Truth About Corporate Income Taxes

My latest post for the US News & World Report Economic Intelligence blog provides a reality check on corporate income taxes.  Here are some excerpts:

Are you hearing that U.S. corporations are taxed much more than their international competitors, making it harder for them to compete in global markets? Those who think so want policymakers to substantially cut corporate income taxes, protect corporate tax loopholes or both. But that claim highly misleading to begin with, as this recent Wall Street Journal analysis of pharmaceutical giant Pfizer's accounting methods illustrates.

First, some background. The U.S. federal corporate tax rate is 35 percent, and that "statutory" rate is what corporate tax critics cite most often. Additional state corporate taxes bump the overall number up closer to 40 percent.

The statutory rate, however, doesn't reflect the write-offs in the tax code (so-called tax expenditures) that reduce the "effective rate" on corporate profits — that is, what corporations actually pay in taxes as a share of their profits. Indeed, while the U.S. statutory rate is about 14 points higher than the average among industrialized countries, the effective rate differential is much smaller, a Congressional Research Service analysis found. . . .

In 2014, Pfizer reported $3.1 billion of tax obligations worldwide and an effective tax rate of 25.5 percent. That's well below the U.S. statutory rate, but Pfizer actually paid less than $1 billion in taxes for an effective rate of just 7.5 percent. The difference between its tax obligations and tax payments lies in the profits Pfizer has not yet repatriated – and may never repatriate – and hence profits on which they haven't paid taxes. . . .

Those who want to cut corporate tax rates are uninformed or disingenuous to point to statutory rates or artificially high effective rates like Pfizer's to argue that corporate taxes are too high. As my Center on Budget and Policy Priorities colleague Chye-Ching Huang says here, the big problem with taxing multinationals today is "stateless income": profits that aren't taxed anywhere. Cutting the corporate rate doesn't bring that income into the U.S. tax base or greatly reduce multinationals' search for "tax havens" (countries with very low or zero corporate tax rates); it mostly just costs public revenue on the profits that the government would otherwise tax.

Click here for the full post.