Standing at a hefty 35%, there’s no question that the Untied States has the highest marginal corporate tax rate in the world.
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One myth that Corey Iacono and yours truly debunk in our book “In Defense of Classical Liberalism” is that “the rich used to pay over 90% of their income in taxes” – a myth stemming from the fact that the top marginal income tax rate in this country was once over 90%.
We show that with deductions and tax breaks accounted for, most of the top earners paid around 30% of their income in taxes. The same applies to the corporate income tax. The U.S.’s relative standing should be measured by the effective rates, not marginal.
Supporters of the corporate tax usually seize upon a single 2010 Government Accountability Office (GOA) study which estimates the U.S. corporate tax rate at 12.6%. Noteworthy is that this is the only study that puts the figure that low.
A year later, another government agency, the Congressional Research Services, puts the figure at 27.1%, more than double that GAO estimate, but lower than the average among OECD nations of 27.7%.
Before surveying the literature to approximate a better estimate of what the U.S. effective tax rate truly is, it’s worth showing the flaws in the infamous GAO report.
First, the GAO report didn’t include any taxes on foreign earnings that corporations pay when determining the 12.6% estimate. So what’s being measures is what American corporations allegedly pay on domestic earnings. According to GAO data, the effective rate would rise to 16.9% with taxes on foreign earnings reported.
But the biggest flaw in the 12.6% figure isn’t the lack of inclusion of taxable foreign earnings, it’s that 2010 began just as the 2008-2009 recession ended. Since many corporations had suffered losses in the recession, there was a spike in write-offs, thus lowering their effective tax rate.
Additionally, any measurement of what the average corporation pays that focusses on all corporations is likely to understate the true effective tax rate that successful corporations pay, because poorly performing corporations with no taxable income drag the average down.
It would thus make sense to measure effective corporate tax rates as a percentage of taxable income.
Using the GAO’s own data, merely measure from 2008-2010 instead of just 2010 and the average effective tax rate for U.S. corporations (with foreign taxes included) was 30.3%. Stretch the measurements from 2004-2010 and that figure increases to 37.1%.
Thus, the oft-cited GAO number only holds true in telling us the U.S. corporate tax rate for a single year, and under poor economic conditions.
Tabled below is a series of recent studies on the U.S. effective corporate tax rate, and whether or not it’s above or below the average of OECD nations. Because different studies differ not only on what the U.S. effective corporate tax is, but what the corporate tax of other nations is as well, there are some cases where studies find a similar effective corporate tax rate in the U.S. but different relative to other nations.
When I refer to the U.S. corporate tax rate as being the “highest” or “second highest” in the world in the chart, I’m solely speaking of OECD nations.
| Study | Organization | Effective U.S. Corporate Tax Rate | Above/Below OECD Average |
| “Paying Taxes 2013: The Global Picture.”(2014) | World Bank | 27.9% (in 2014) | Above, second highest in world |
| “U.S. Corporations Suffer High Effective Tax Rates by International Standards.” (Dittmer, 2011) | Tax Foundation | 27% (average from 2005-2011) | Above, second highest in world |
| “International Corporate Tax Rate Comparisons and Policy Implications.” (Gravelle, 2011) | Congressional Research Service | 27.1% (in 2011) | Below by 0.6 percentage points |
| “Report Card on Effective Corporate Tax Rates.” (Hassett, Mathur, 2011) | American Enterprise Institute | 29% (in 2010) | Above by 8.4 percentage points |
| “Another Look at Corporate Effective Tax Rrates 2004-2010.” (Lyon, 2013) | Alliance for Competitive Taxation | 37.1% (2004-2010) | Above |
| “Corporate Inversions.”(Clausing, 2014) | Tax Policy Center (Urban Institute, Brookings) | N/A | “…similar to that firms from many other countries pay.” |
| “The Budget and Economic Outlook: 2014 to 2014.” (2014) | Congressional Budget Office | 16% (in 2013) | Below |
| “Cross-Country Comparisons of Corporate Income Taxes.” (Markle, Shackelford, 2011) | National Bureau of Economic Research | N/A | Above. “U.S. multinationals are among the highest taxed.” |
Notes: First three studies found via Politifact
Of the eight studies above, five found the U.S. corporate tax to be above the OECD average, two found it to be below, and one “similar.” Noteworthy however is that of the studies above that found the U.S. corporate tax to be below average, one (from the Tax Policy Center) was referencing a GAO report for the claim.
Another, the Congressional Budget Office included S-corporations in their sample, but S-corps don’t pay the corporate income tax. They pass their profits or losses onto shareholders who then pay tax on them. In other words, S-corps have the tax advantage of avoiding double taxation that C-corporations face.
The CBO’s methodology was to take revenues from the corporate income tax and divide them by the combined profits of C and S-corporations. Roughly 30% of the profits divided came from S-corps. With S-corporation profits removed from the data, the CBO’s effective corporate tax estimate would be roughly 50% higher.
Indeed, the only study I could find that placed the US effective corporate tax rate below the OECD average was the Congressional Research Service study. Not coincidentally, when Media Matters set out to “debunk” the claim that the U.S. has one of the highest corporate tax rates in the world, that was the only study cited.
Media Matters then casually mentioned (without citation) that reports by the GAO, Treasury Department, and World Bank have found that the U.S. corporate tax rate is “in line with that of other industrialized nations.”
As we’ve seen, the GAO report study is horribly flawed, and the World Bank found the U.S. effective corporate tax to be the second highest in the world. The only Treasury report I could find on the matter found that the U.S. effective corporate tax rate is slightly below the G-7 average – but it would be wise to work with a larger sample size than seven countries when we’re trying to compare ourselves to the rest of the developed world.