In current debates over corporate tax reform, you’ve likely heard that U.S. corporate tax rates are among the highest in the world. As true as this is, the full story is more complex.
How do American corporate tax rates compare worldwide?
At 35%, the top U.S. corporate tax rate is higher than that of any of the countries among the major industrialized nations—the so-called Group of Eight (G8) and the Organization for Economic Co-operation and Development (OECD):
Among the OECD countries, the lowest tax rates are in Ireland (12.5%) and Switzerland (8.5%). But because of tax breaks, what U.S. companies actually pay is much lower. Corporate income taxes made up 7.9% of federal revenues in 2011.
What kind of tax breaks do companies get?
Like individuals, companies can take deductions and credits to lower their taxes and taxable income. These tax breaks fall into several very broad categories (with many rules, exceptions and devils in the details):
- Costs of doing business. Companies can deduct from their income what they spend on worker wages and benefits, rent, utilities, raw materials, inventory and most other costs of keeping a business operating.
- Investments. Money spent on research, equipment, building a factory or other “capital expenditures” intended to help expand a business can also qualify for a tax break. These costs are generally spread out over several years (i.e., they are amortized, depreciated or depleted, depending on the type of investment).
- Tax credits for certain activities. Current law also gives tax benefits to companies engaged in activities Congress wants to encourage, such as domestic manufacturing, building low-income housing, producing renewable energy and so on.
Why is corporate tax reform an issue?
Aside from the question of whether companies pay “enough,” most analysts point to a couple major structural problems with current law. First, it’s highly complex, which means many companies—especially smaller ones—spend vast resources on tax compliance that could otherwise go toward developing new products or hiring workers. Second, many economists argue that companies’ business decisions are often distorted by their efforts to seek tax breaks. This is why many reformers favor a lower overall rate but with fewer tax breaks to exploit.
- Joint Committee on Taxation—Present Law and Background Relating to Selected Business Income Tax Provisions
- Organization for Economic Cooperation and Development (OECD)—Center for Tax Policy and Administration
- Congressional Research Service—Corporate Tax Reform: Issues for Congress (RL34229)
- National Taxpayer Advocate—2010 Annual Report to Congress