International Corporate Tax Rate Comparisons and Policy Implications
Congressional research reportJan 6, 2014
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International Corporate Tax Rate Comparisons
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Senior Specialist in Economic Policy
January 6, 2014
Congressional Research Service
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R41743
International Corporate Tax Rate Comparisons and Policy Implications
Summary
Advocates of cutting corporate tax rates frequently make their argument based on the higher
statutory rate in the United States as compared with the rest of the world; they argue that cutting
corporate taxes would induce large investment flows into the United States, which would create
jobs or expand the taxable income base enough to raise revenue. President Barack Obama has
supported a rate cut if the revenue loss can be offset with corporate base broadening. Others have
urged on one hand, a revenue raising reform, and, on the other, setting deficit concerns aside.
Is the U.S. tax rate higher than the rest of the world, and what does that difference imply for tax
policy? The answer depends, in part, on which tax rates are being compared. Although the U.S.
statutory tax rate is higher, the average effective rate is about the same, and the marginal rate on
new investment is only slightly higher. The statutory rate differential is relevant for international
profit shifting; effective rates are more relevant for firms’ investment levels. The 13.7 percentage
point differential in statutory rates (a 39.2% rate for the United States compared with 25.5% in
other countries), narrows to about 9 percentage points when tax rates in the rest of the world are
weighted to reflect the size of countries’ economies. (The OECD rates fell by slightly over onehalf of a percentage point between 2010 and 2012.)
Regardless of tax differentials, could a U.S. rate cut lead to significant economic gains and
revenue feedbacks? Because of the factors that constrain capital flows, estimates for a rate cut
from 35% to 25% suggest a modest positive effect on wages and output: an eventual one-time
increase of less than two-tenths of 1% of output. Most of this output gain is not an increase in
national income because returns to capital imported from abroad belong to foreigners and the
returns to U.S. investment abroad that comes back to the United States are already owned by U.S.
firms.
The revenue cost of such a rate cut is estimated at between $1.2 trillion and $1.5 trillion over the
next 10 years. Revenue feedback effects from increased investment inflows are estimated to
reduce those revenue costs by 5%-6%. Reductions in profit shifting could have larger effects, but
even if profit shifting disappeared entirely, it would not likely offset revenue losses. It seems
unlikely that a rate cut to 25% would significantly reduce profit shifting given these transactions
are relatively costless and largely constrained by laws, enforcement, and court decisions.
Both output gains and revenue offsets would be reduced if other countries responded to a U.S.
rate cut by reducing their own taxes. Evidence suggests that the U.S. rate cut in the Tax Reform
Act of 1986 triggered rate cuts in other countries.
It is difficult, although not impossible, to design a reform to lower the corporate tax rate by 10
percentage points that is revenue neutral in the long run. Standard tax expenditures do not appear
adequate for this purpose. Eliminating one of the largest provisions, accelerated depreciation,
gains much more revenue in the short run than in the long run, and a long-run revenue-neutral
change would increase the cost of capital. Other revisions, such as restricting foreign tax credits
and interest deductibility or increasing shareholder level taxes, may be required.
This report focuses on the global issues relating to tax rate differentials between the United States
and other countries. It provides tax rate comparisons; discusses policy implications, including the
effect of a corporate rate cut on revenue, output, and national welfare; and discusses the outlook
for and consequences of a revenue neutral corporate tax reform.
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International Corporate Tax Rate Comparisons and Policy Implications
Contents
Effective Tax Rate Comparisons...................................................................................................... 1
Types of Tax Rates..................................................................................................................... 2
Types of Taxes Included ............................................................................................................ 2
Simple (Unweighted) versus Weighted Averages of Tax Rates ................................................. 3
Tax Rate Comparisons: United States Compared with OECD and Large Economies .............. 3
Summing Up .............................................................................................................................. 9
Economic Effects of a U.S. Rate Cut ............................................................................................... 9
Effects on Revenue, Output, and National Welfare, Assuming No Tax Rate Changes
by Other Countries or Offsetting Base Broadening in the United States ............................. 10
Revenues ........................................................................................................................... 10
Effects on U.S. Output and Wages .................................................................................... 11
Effects on National Income and National Welfare ............................................................ 14
Revenue Feedback Effects ................................................................................................ 15
Profit Shifting and Revenue Effects ........................................................................................ 16
Other Countries’ Reactions to a U.S. Rate Reduction ............................................................. 18
Revenue-Neutral Rate Reduction and Corporate Reform ....................................................... 20
Accelerated Depreciation .................................................................................................. 21
Production Activities Deduction ....................................................................................... 22
Tax Treatment of Foreign Source Income ......................................................................... 23
LIFO Inventory Accounting .............................................................................................. 24
Other Tax Expenditures and Base Broadening Provisions ................................................ 24
Limits on Interest Deductions ........................................................................................... 25
Shifts Between Individual and Corporate Taxes: Restrictions on Using the NonCorporate Form, and Shifting Tax Burdens to the Shareholder Level ........................... 25
Summing Up ............................................................................................................................ 27
Figures
Figure 1. Statutory Tax Rates, United States and OECD (Excluding United States), 19812010 ............................................................................................................................................ 19
Tables
Table 1. Corporate Tax Rates, United States and Rest of the OECD ............................................... 3
Table 2. Corporate Tax Rates in the 15 Largest Countries............................................................... 4
Table 3. Effective Corporate Tax Rates, United States Compared with Six Countries.................... 5
Table 4. Effective Tax Rates, United States and OECD .................................................................. 5
Table 5. Effective Tax Rates in the 15 Largest Countries ................................................................ 5
Table 6. Marginal Effective Tax Rates, United States and Weighted OECD ................................... 6
Table 7. Marginal Tax Rates Including Transfer and Franchise Taxes, United States
Compared with the OECD ............................................................................................................ 7
Table 8. Marginal Effective Tax Rates Including Transfer Taxes, 15 Largest Countries................. 7
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International Corporate Tax Rate Comparisons and Policy Implications
Table 9. “Effective Average Tax Rate,” United States and OECD .................................................. 9
Table 10. Rate Reduction Permitted by Certain Options, 2016 ..................................................... 20
Table A-1. Statutory Tax Rates in the United States and the Rest of the OECD Countries,
1981-2020 ................................................................................................................................... 28
Appendixes
Appendix. Statutory Tax Rates, 1981-2010 ................................................................................... 28
Contacts
Author Contact Information........................................................................................................... 29
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International Corporate Tax Rate Comparisons and Policy Implications
A
dvocates of cutting corporate tax rates frequently make their argument based on the
higher statutory rate observed in the United States as compared with the rest of the
world.1 Sometimes the higher rate alone is used as an argument, and in other cases the
arguments include claims that cutting corporate taxes would induce large investment flows into
the United States, which would create jobs or expand the base enough to raise revenue.
President Barack Obama has supported a rate cut if the revenue loss can be offset with corporate
base broadening, while the Citizens for Tax Justice has urged a revenue raising reform and
business leaders have urged setting deficit concerns aside.2 House Majority Leader Eric Cantor
has also proposed a 25% corporate rate in the context of tax reform and Ways and Means
Chairman Dave Camp has proposed a 25% combined with a move to a territorial tax system.3
Many issues arise regarding the corporate tax outside of the global perspective addressed in other
reports.4 This report focuses on the global issue relating to tax rate differentials between the
United States and other countries. The first section provides tax rate comparisons. The second
section discusses policy implications, including the effect of a corporate rate cut on revenue,
output, and national welfare; the possibility that a rate cut may induce reactions from other
countries; and the outlook for and consequences of a revenue-neutral corporate tax reform.
Effective Tax Rate Comparisons
Several important features affect the interpretation of the comparative tax rates: the type of rate,
what taxes are included, and the use of weighted measures to adjust for size differences. A
number of tax rate comparisons follow the discussion of these features.
1
These advocates include several economists. For example, see Kevin Hassett, “Let’s Cut Corporate Taxes to Create
More Jobs,” Bloomberg, January 9, 2006, http://www.bloomberg.com/apps/news?pid=newsarchive&cid=hassett&sid=
aZDVcYUY1j2c and “Laffer Curve Pays Billions If Obama Just Asks,” Bloomberg Business Week, February, 13, 2011,
http://www.businessweek.com/news/2011-02-13/laffer-curve-pays-billions-if-obama-just-asks-kevin-hassett.html;
Robert Carroll, “Comparing International Corporate Tax Rates: U.S. Corporate Tax Rate Increasingly Out of Line by
Various Measures,” Tax Foundation, Fiscal Facts, no. 143, August 28, 2008, http://www.taxfoundation.org/
publications/show/23561.html; Duanjie Chen and Jack Mintz, “New Estimates of Effective Corporate Tax Rates on
Business Investment,” CATO Institute Tax and Budget Bulletin, no. 64, February 24, 2011, http://www.cato.org/pubs/
tbb/tbb_64.pdf, and Curtis Dubay, “Corporate Tax Reform Should Focus on Rate Reduction ,”The Heritage
Foundation, February 11, 2011, http://www.heritage.org/Research/Reports/2011/02/Corporate-Tax-Reform-ShouldFocus-on-Rate-Reduction.
2
See “Obama Backs Corporate Tax Cut If Won’t Raise Deficit,” Bloomberg, January 25, 2011,
http://www.bloomberg.com/news/2011-01-26/obama-backs-cut-in-u-s-corporate-tax-rate-only-if-it-won-t-affectdeficit.html.
3
See “Leader Cantor Unveils Pro-Growth Economic Plan at Stanford University,” press release, March 21, 2011,
http://majorityleader.house.gov/newsroom/2011/03/embargoed-leader-cantor-unveils-pro-growth-economic-plan-atstanford-university.html. See CRS Report R42624, Moving to a Territorial Income Tax: Options and Challenges, by
(name redacted), for a discussion of the Camp proposal.
4
See CRS Report RL34229, Corporate Tax Reform: Issues for Congress, by (name redacted), for a more general
discussion of corporate tax issues. In general, the corporate tax contributes revenue and progressivity to the tax system
as well as protecting the individual income tax base by preventing or limiting the use of the corporation as a tax shelter.
It imposes costs in distortions in the allocation of capital between the corporate and noncorporate sector, the use of debt
versus equity finance, and savings behavior. Although the tax creates a savings distortion, it probably has a limited
effect on the size of the domestic capital stock, because of income and substitution effects.
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Types of Tax Rates
Three basic types of tax rates are reported: the statutory rate, the effective rate, and the marginal
effective rate. The statutory rate is the rate in the tax statute; in the case of the United States, it is
the top marginal corporate tax rate of 35%. The effective rate is determined by the ratio of taxes
paid divided by profits. The effective rate captures the tax benefits that reduce the taxable income
base relative to financial profits. The marginal tax rate is calculated from a projected investment
project: it estimates the share of the pre-tax return that is paid in taxes.
Each type of tax rate has its advantages and disadvantages, and is useful for considering certain
types of behavior. For example, the statutory rate would potentially affect firms’ attempts to shift
profits by altering the source of borrowing or transferring assets or products at prices that are not
arm’s length.5 Even the statutory rate, however, needs some adjustments for this purpose. For
example, most multinational firms in the United States are eligible for the production activities
deduction, which reduces the U.S. statutory tax rate by 9%, from 35% to 31.85%.
The effective tax rate is taxes paid divided by profits. The effective tax rate captures some of the
tax benefits and subsidies, reducing the tax paid per dollar of profit. This measure can make a
country with a high statutory rate but narrow base more comparable to a country with a low tax
rate and broad base. It is probably more suited to assessing the true relative burdens on
investment than the statutory tax rate. However, these types of tax rates may not capture timing
effects (such as accelerated depreciation) very well and generally depend on accounting measures
of profit that may vary across countries.
The marginal effective tax rate is, in theory, the appropriate measure for determining the effects
of tax rate differentials on investment. However, in some cases marginal tax rates do not include
all of the components of investment; frequently, they are restricted to investment in fixed assets or
fixed assets and inventory. This report estimates an overall marginal effective tax rate that
includes inventories and intangibles as well as buildings and equipment. Marginal tax rates also
depend on estimates of economic depreciation, expected inflation, and rates of return.
Also briefly discussed is a measure referred to as the effective average tax rate. The implications
of this tax rate, which combines statutory and marginal effective rates, are not clear.
Types of Taxes Included
Most tax measures reflect the effect of both national and sub-national corporate income taxes. Of
the 31 Organisation for Economic Co-operation and Development (OECD) countries, 8 countries
(Canada, Germany, Japan, South Korea, Luxembourg, Portugal, Switzerland, and the United
States) have sub-national corporate taxes. In some cases, these sub-national taxes are more
significant than those in the United States. In the case of the United States, these corporate
income taxes imposed by the state increase the statutory rate (without the production activities
deduction) to 39.2%. With the production activities deduction, the combined rate is 36.3%.6
5
An arm’s length price is the price that would occur for sales or asset transfers between unrelated firms.
The combined rate without the production activities deduction is 0.392 which implies a state tax rate of 0.0646
(solving the equation 0.35+x(1-.0.35) = 0.392). With the production activities deduction the U.S. rate is 0.3185 and the
combined rate is .3185+.0646*(1-.3185) = 0.363, or 36.3%.
6
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Countries can also have other taxes that impose a burden on capital. In the United States, these
taxes are imposed by the states and localities, and they include property taxes, franchise taxes,
and retail sales taxes that apply to capital goods. These taxes are much more difficult to measure
and are generally not included in comparative tax rate measures, although one study (discussed
below) includes franchise, and transfer and sales taxes, but not property or wealth taxes.
Simple (Unweighted) versus Weighted Averages of Tax Rates
Another issue that affects the comparisons between U.S. and worldwide tax rates is whether tax
rates are simple (unweighted) averages or whether they are weighted in some fashion to indicate
their relative importance. If tax rates are not weighted, then a small economy, such as Iceland, can
have the same effect on the average of international rates as a large economy, such as Germany or
Japan. In general, smaller countries tend to have lower tax rates and thus unweighted averages are
lower than weighted averages in most cases. In the results presented in this report, both weighted
and unweighted averages are reported, but weighted averages are more relevant to making
comparisons of measures of the tax burden on capital deployed around the world.
Tax Rate Comparisons: United States Compared with OECD and
Large Economies
Table 1 reports the three measures of effective tax rates, with marginal rates restricted to
equipment and structures separately, for the United States and the OECD excluding the United
States. The statutory rate is reported with and without the production activities deduction.
Table 1. Corporate Tax Rates, United States and Rest of the OECD
United States
OECD Excluding
United States, GDP
Weighted Average
OECD Excluding
United States,
Unweighted Average
Statutory (2010)
39.2
29.6
25.5
Statutory (2010) with Production
Activities Deduction
36.3
29.6
25.5
Effective (2008)
27.1
27.7
23.3
Marginal Effective Equipment (2010)
23.6
21.2
17.3
Marginal Effective Equipment (2005)
23.0
21.1
18.7
Marginal Effective Buildings (2005)
29.0
26.4
23.4
Tax Rate Measure and Year
Source: Statutory tax rates and gross domestic product (GDP), Organisation for Economic Co-operation and
Development (OECD), http://www.oecd.org/dataoecd/26/56/33717459.xls and http://stats.oecd.org/Index.aspx?
DatasetCode=SNA_TABLE1. Effective tax rate from Price WaterhouseCoopers, Global Effective Tax Rate
Comparisons—Methodology and Results. Marginal tax rates, 2005, Institute for Fiscal Studies, http://www.ifs.org.uk/
publications/3210. Marginal tax rates 2010, Arparna Mathur and Kevin Hassett, Report Card on Effective Corporate
Tax Rates, American Enterprise Institute, http://www.aei.org/outlook/101024. PriceWaterhouseCoopers reports
similar effective tax rate data in their study Global Effective Tax Rates, April 14, 2011, at
http://businessroundtable.org/uploads/studies-reports/downloads/Effective_Tax_Rate_Study.pdf.
The overall statutory rates in the OECD are slightly lower for 2013, with the rate in the OECD
excluding the United States falling a little over a half to one percentage point. The U.S. rate is
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estimated at 39.1%, whereas the OECD weighted average is 28.4% and the unweighted average is
25.1%.7 The weighted rate was influenced by rate reductions in Japan and the United Kingdom.
The marginal tax rates do not reflect the effect of the production activities deduction that likely
applies to most multinational corporations and would decrease these tax rates by 2-3 percentage
points as of 2010. (The deduction was 3% in 2005-2006 and 6% for 2007-2009.) Thus while the
difference between the statutory rate and the simple average—a difference of 13.7 percentage
points—is frequently reported, a difference of about half that much—or 6.6 percentage points—
occurs when the adjusted statutory rate of 36.2% is compared with the weighted average of
29.6%. The effective tax rate (which would automatically capture the production activities
deduction and other provisions) is about the same. The marginal effective rate rates are also about
the same when adjusted. Thus the tax rate most relevant for the purpose of incentives to invest is
similar for the United States and the rest of the OECD with respect to equipment and structures
investment.
The marginal tax rates do not reflect the temporary bonus depreciation in effect for 2008-2010 in
the United States, which allowed 50% of the cost of equipment to be deducted. A provision
allowing 100% of the cost to be deducted is in place for 2011. Because these are temporary
provisions, it seems appropriate to exclude them. Whether these measures are captured in the
effective tax rate depends on the treatment of deferred taxes, but measures from different years
appear similar.
The OECD excludes some large countries, such as China and Brazil. Table 2 provides the
statutory and effective tax rate comparisons for the 15 largest countries, which account for threequarters of world gross domestic product (GDP). The results are similar to those in Table 1 with
the weighted average about 1 percentage point higher. With the production activities deduction
the rates differ by 5.6 percentage points. The effective rate is the same.
Table 2. Corporate Tax Rates in the 15 Largest Countries
United States
Remaining 14 Large
Countries, GDP
Weighted Average
Remaining 14 Large
Countries,
Unweighted Average
Statutory (2010)
39.2
30.7
29.8
Statutory (2010) Including
Production Activities Deduction
36.3
30.7
29.8
Effective (2008)
27.1
27.2
25.3
Tax Rate Measure and Year
Source: Statutory tax rates are at http://www.worldwide-tax.com/#partthree; effective tax rates are from same
source as Table 1. GDP is from the World Bank http://siteresources.worldbank.org/DATASTATISTICS/
Resources/GDP.pdf.
Tax rates have declined slightly, to a weighted average of 30 and an unweighted average of 29.2.8
7
Calculated from OECD data. Corporate rates at http://www.oecd.org/ctp/taxpolicyanalysis/
oecdtaxdatabase.htm#C_CorporateCaptial; GDP at http://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE1.
8
Tax rates are at http://www.kpmg.com/Global/en/services/Tax/tax-tools-and-resources/Pages/corporate-tax-ratestable.aspx.
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Table 3, Table 4, and Table 5 provide results for effective tax rates from other studies. Table 3
reports the Markle and Shackleford study that estimates the effective tax rate of domestic firms in
different countries. Because a smaller number of countries are examined, Table 3 compares the
U.S. rate with that of the six large countries.
Table 3. Effective Corporate Tax Rates, United States Compared with Six Countries
Tax Rate Measure
Effective (2005-2009)
United States
Six Large Countries,
GDP Weighted
Average
Six Large Countries,
Unweighted Average
23.0
25.1
22.3
Source: Kevin S. Markle and Douglas A. Shackelford, “Cross-Country Comparisons of Corporate Income
Taxes,” National Tax Journal, vol. 3, September 2012, pp. 423-528.
Note: The six countries are Canada, France, Germany, India, Japan, and United Kingdom.
Table 4 and Table 5 report the Swenson and Lee study that estimated effective rates for firms
headquartered in various countries for 2006 and 2007. The tables report for 2006 pre-dated the
start of the recession and do not include years with bonus depreciation. Both results confirm the
findings of other studies: effective tax rates in the United States and in other countries are similar.
Table 4. Effective Tax Rates, United States and OECD
Tax Rate Measure
Effective (2006)
United States
OECD Excluding
United States, GDP
Weighted Average
OECD Excluding
United States,
Unweighted Average
29.5
28.4
23.7
Source: Charles Swenson and Namryoung Lee, “The Jury Is In: U.S. Companies are Overtaxed Relative to Their
International Competitors,” AICPA, July 17, 2008, at http://www.cpa2biz.com/Content/media/
PRODUCER_CONTENT/Newsletters/Articles_2008/Tax/juryin.jsp. Rate table at https://media.cpa2biz.com/
newsletter/2008/Tax/july/juryin_table.htm.
Table 5. Effective Tax Rates in the 15 Largest Countries
Tax Rate Measure
Effective (2006)
United States
Remaining 14 Large
Countries, GDP
Weighted Average
Remaining 14 Large
Countries, Unweighted
Average
29.5
28.7
27.3
Source: Charles Swenson and Namryoung Lee, “The Jury Is In: U.S. Companies are Overtaxed Relative to Their
International Competitors, AICPA, July 17, 2008, at http://www.cpa2biz.com/Content/media/
PRODUCER_CONTENT/Newsletters/Articles_2008/Tax/juryin.jsp. Rate table at https://media.cpa2biz.com/
newsletter/2008/Tax/july/juryin_table.htm.
Table 6 returns to the estimates of marginal effective tax rates, and expands the marginal rate
analysis to reflect the other categories of assets, inventories, and intangibles. It provides a
weighted average of these tax rates, using data on capital stock shares from the United States but
applying the same shares to other countries. Note that intangibles are generally taxed at negative
tax rates both in the United States and abroad. Expenditures on research, advertising, and human
capital investment are generally deducted when incurred, which leads to a zero effective tax rate,
and most countries (including the United States) have additional subsidies or credits for research
expenditures.
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Table 6. Marginal Effective Tax Rates, United States and Weighted OECD
U.S. Without
Production
Activities
Deduction
U.S. With
Production
Activities
Deduction
OECD Excluding
United States,
OECD, GDP
Weighted
OECD Excluding
United States,
GDP Weighted,
Adjusted by
Statutory Rate
Changes
Equipment
23.0
21.2
21.1
18.9
Structures
29.0
26.7
26.4
23.6
Inventories
39.2
36.2
29.6
29.6
Intangibles
-4.7
-4.7
-9.7
-9.7
Total
22.2
20.2
18.3
16.4
Source: Tax rates on equipment and structures from Table 1, Inventories taxed at statutory rates. Tax rates
on intangibles, Department of Finance, Canada, Tax Expenditures and Evaluations 2009 : Part 2, An International
Comparison of Tax Assistance for Investment in Research and Development, http://www.fin.gc.ca/taxexp-depfisc/2009/
taxexp0902-eng.asp. Weights are 24.2% equipment, 39.6% structures, 9.7% inventories, and 26.5% intangibles.
For intangibles, 49% arise from R&D, which is taxed at rates of -10.1% in the U.S, -22.2% in the weighted OECD
average, and -54.2% in the simple OECD average. The remaining intangibles arising from human capital
investment and advertising are taxed at a 0 rate. Data on corporate equipment, structures, and inventories for
2003 from Flow of Funds Accounts 1995-2004, p. 96, http://www.federalreserve.gov/Releases/Z1/Current/
annuals/a1995-2004.pdf. Estimates of intangibles from Carol Corrado, Charles Hulten, and Daniel Sichel,
Intangible Capital and Economic Growth, Finance and Economic Discussion Series, Division of Research and
Statistics Federal Reserve Board, 2006-4, http://www.federalreserve.gov/releases/z1/20050921/z1.pdf.
As Table 6 indicates, the overall marginal effective tax rates for the United States accounting for
the production activities deduction and for the OECD countries weighted by GDP are similar,
20% and 18%. The differences are larger if the OECD rate is adjusted by average statutory rate
changes that have occurred in these OECD countries since 2005, although base broadening could
offset that reduction.9 Marginal tax rates are also significantly lower than the statutory rates: the
U.S. rate is about half the statutory rate and the weighted OECD rate is about 60% of the statutory
rate.
The next measure is another marginal tax rate measure (Chen and Mintz). This measure has a
number of differences from those in Table 1 and Table 4. It includes equipment, structures,
inventories, and land, but not intangibles. It also includes the effects of transfer taxes that fall on
capital and debt finance. In the United States, these taxes are primarily state and local retail sales
taxes that apply to capital goods purchases or inputs into construction and are quite large. It also
includes franchise taxes. It does not, however, include wealth, capital stock, or property taxes.
The measure also allows for debt finance and uses capital stock weights for Canada.
Table 7 reports these estimates for the OECD. Based on comments made in a previous analysis,
indicating the size of these additional state and local taxes, the table reports a number with these
additional taxes subtracted out to allow more comparability to other results. As compared with the
numbers in Table 6, the discrepancy in the weighted OECD and the United States is larger. If the
adjusted rates in Table 6 are recomputed to exclude intangibles, they would be 28.7% for the
9
Rate changes between 2005 and 2010 largely reflect the reduction in the German tax rate, although the U.K. rate also
fell. However, these measures do not reflect changes in the base, which apparently provided some offsetting revenue.
See Simon Kennedy, “Tax Cut War Widens in Europe,” New York Times, May 28, 2997, http://www.nytimes.com/
2007/05/28/business/worldbusiness/28iht-tax.4.5899993.html?_r=1.
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United States and 23% for the OECD (weighted). This differential of 5.7 points shrinks to 3.8
points when intangibles are included. The only other differential is that these rates should be
lowered to reflect the effects of debt finance. Normally, higher statutory tax rates result in a larger
negative tax rate on debt, so the United States rate should fall more for this reason (although this
effect can vary with inflation).
The differential between the United State and the OECD as reported in the original study is 16.2
percentage points (34.6% minus 18.4%). Out of that differential, 5.2 points are due to using an
unweighted average, 5.0 points are due to including transfer taxes, 1.9 points are due to excluding
intangibles, and the remaining 4.1 points are similar to the difference found in Table 6.
Table 7. Marginal Tax Rates Including Transfer and Franchise Taxes,
United States Compared with the OECD
United States
OECD Excluding
United States, GDP
Weighted Average
OECD Excluding
United States,
Unweighted Average
Average Marginal Tax Rate 2010
34.6
23.6
18.4
Average Marginal Tax Rate
Correcting for Additional Taxes
27.6
21.6
16.4
Tax Rate Measure
Source: Duanjie Chen and Jack Mintz, “New Estimates of Effective Corporate Tax Rates on Business
Investment,” CATO Institute, Tax and Budget Bulletin, no. 64 , February 2011, http://www.cato.org/pubs/tbb/
tbb_64.pdf. Indications that transfer taxes added 7 points for the United States and 2 points for other countries
on average is from the previous year’s tax rates, “U.S. Effective Corporate Tax Rate on New Investments:
Highest in the OECD,” May 2010.
An updated study for 2012 shows similar relationships. The United States tax rate was 35.6%, the
OECD excluding the United States was 24.0% weighted and 19.6% unweighted.10
Table 8 reports the comparative rates for the 15 largest countries. These rates are closer together,
and quite close when adjusted for transfer taxes.
Table 8. Marginal Effective Tax Rates Including Transfer Taxes, 15 Largest Countries
United States
Remaining Large 14
Countries, GDP
Weighted Average
Remaining Large 14
Countries Excluding
U.S. – Unweighted
Average
Average Marginal Tax Rate 2010
34.6
26.3
27.0
Average Marginal Tax Rate
Correcting for Additional State and
Local Taxes
27.6
24.3
25.0
Tax Rate Measure
Source: Duanjie Chen and Jack Mintz, “New Estimates of Effective Corporate Tax Rates on Business
Investment,” CATO Institute, Tax and Budget Bulletin, no. 64 , February 2011, http://www.cato.org/pubs/tbb/
tbb_64.pdf. Indications that transfer taxes added 7 points for the United States and 2 points for other countries
10
Calculated from data in Duanjie Chen and Jack Mintz, “Corporate Tax Competitiveness Rankings for 2012,” CATO
Institute, Tax and Budget Bulletin, no. 65, September 2012, http://www.cato.org/sites/cato.org/files/pubs/pdf/
tbb_65.pdf.
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on average is from the previous year’s tax rates, “U.S. Effective Corporate Tax Rate on New Investments:
Highest in the OECD,” May 2010.
The Chen and Mintz study makes an important point, namely that other taxes outside of the
corporate tax can affect the relative burden of tax in a way that could affect investment. (These
types of taxes would not be relevant for profit shifting.) The main reservation about this finding is
that the inclusion of these other capital taxes is partial. The other main capital tax in the United
States is the property tax, which probably adds another 3 percentage points to the rate, but other
countries also have property taxes as well as wealth taxes.11
Table 9 reports a fourth type of tax rate measure, which is named by its developers the “effective
average tax rate.” Estimates using this method differentiate between a normal (or riskless) return,
which is taxed at an effective rate that reflects the various tax benefits such as accelerated
depreciation, and the excess return, which is taxed at the statutory rate. Thus, it is a mix of
marginal tax rates and statutory tax rates. This measure is reported because it is available and
cited by some researchers. Some evidence suggests that it is a better predictor of location than
other measures.12 It shows U.S. taxes to be significantly higher than OECD rates, but the
implications of such a measure for economic behavior are not clear.
Economists sometimes, when examining investment subsidies, differentiate between the normal
and excess return. The normal return’s tax burden is affected by items such as accelerated
depreciation and investment subsidies, whereas the excess profit is subject to the statutory rate. In
these views, however, it is the tax on normal return that would, in any case, affect economic
behavior. The excess return is generally seen as bearing little or no tax burden because the
reduction in expected return due to tax is offset by the reduction in variance of after tax return
(i.e., the tax reduces gains and losses).
One reason that a combination of statutory and effective marginal rates might have an effect on
location is that firms may locate some physical activity in a country to facilitate profit shifting
associated with setting up subsidiaries to exploit developed intangibles.13
11
According to Jennifer Gravelle, “Empirical Essays on the Causes and Consequences of Tax Policy: A Look at
Families, Labor, and Property” (Ph.D. diss., George Washington University, January 2008), the effective property tax
rate, which applies almost solely to buildings, is 1.59%. Multiplying this rate by the share of buildings in the capital
stock (39.6%) and by one minus the tax rate of 36.2%, because these taxes are deductible, results in an overall rate of
0.4%. Assuming a pre-tax equity return of 12%, it adds about 3 percentage points to the rate. For information on
property and wealth taxes in the European Union, which can be quite significant in some countries, see the documents
at http://ec.europa.eu/taxation_customs/taxation/gen_info/economic_analysis/tax_structures/index_en.htm.
12
Michael Devereux and Rachel Griffith, “Taxes and the Location of Production: Evidence from a Panel of US
Multinationals,” Journal of Public Economics, vol. 68, June 1998, pp. 335-367.
13
For example, newspaper reports have indicated that Google and Forest Labs set up sales and production facilities in
Ireland as part of a measure that ultimately caused profits to be realized in Bermuda. See Jesse Drucker, “Google 2.4%
Rate Shows How $60 Billion Lost to Tax Loopholes,” Bloomberg, October 21, 2010, at http://www.bloomberg.com/
news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html and Jesse Drucker,
“U.S. Companies Dodge $60 Billion in Taxes in Global Odyssey,” Bloomberg, May 13, 2010, at
http://www.bloomberg.com/news/2010-05-13/american-companies-dodge-60-billion-in-taxes-even-tea-party-wouldcondemn.htm.
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Table 9. “Effective Average Tax Rate,” United States and OECD
Tax Rate Measure
United States
Most OECD Excluding
United States, GDP
Weighted Average
Effective Average (2009)
37.4
29.8
Most OECD Excluding
United States,
Unweighted Average
24.3
Source: Michael P. Devereux, Christina Elschner, Dieter Endres, and Christoph Spengel, “Effective Tax Rates
Using the Devereux-Griffith Methodlogy,” ZEW Center for European Economic Research, October 2009,
http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/etr_company_tax.pdf.
This research was focused on the European Union and selected additional countries; it excludes Australia, Chile,
Iceland, New Zealand, Mexico, and Korea.
Summing Up
This comparison suggests some important precautions in comparing tax rates. First, it is
important when forming a composite rate for the rest of the world to weight the tax rates by
output or some other measure of economic importance. Because small countries tend to have
lower rates than large ones, comparing rates using simple averages across countries exaggerates
the differential between the United States and tax burdens elsewhere in the world. Second,
weighted statutory tax rates differ but effective tax rates do not. Marginal effective tax rates have
small differences. Third, in comparing the differences in statutory rates, the effect of the
production activities deduction narrows the differential by close to half. Finally, although the role
of subnational taxes outside of the corporate tax appears to be important for investment decisions,
a full comparison has yet to be made. This analysis suggests that reform of state and local sales
taxes could contribute to a more efficient system.
Economic Effects of a U.S. Rate Cut
The previous analysis has shown that U.S. statutory corporate tax rates are about 10 percentage
points higher than a weighted average of the OECD or the large countries that account for most of
output (7 percentage points when including the production activities deduction). Effective tax
rates are about the same, and marginal effective tax rates are only slightly larger in the United
States. The effects of including other capital taxes have not yet been explored on a comprehensive
basis, although U.S. retail sales taxes on capital goods and franchise taxes are estimated to create
an additional 5 percentage point differential.
This section explores the effects of a U.S. rate cut on the United States. The first subsection
examines the effects on revenue, output, and national income for a corporate rate cut in isolation,
only looking at capital flows. The second subsection discusses potential implications for profit
shifting. The third subsection considers the possibility that other countries would react to a U.S.
rate cut by cutting their rates as well. Finally, discussions of outlook for and consequences of a
revenue neutral corporate tax reform are presented.
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Effects on Revenue, Output, and National Welfare, Assuming No
Tax Rate Changes by Other Countries or Offsetting Base
Broadening in the United States
This section examines the effects of a corporate rate cut from 35% to 25% on revenues and
international capital flows, and their effects on the U.S. economy (including feedback effects on
revenues and effects on national welfare). It focuses on issues specific to global economy
considerations of the corporate tax, not the traditional corporate tax issues that would also occur
in a closed economy.
Revenues
The Congressional Budget Office (CBO) projected a 10-year corporate revenue of $4,360 billion
from FY2013 to FY20221.14 If this number were multiplied by 10/35 to estimate the revenue loss,
the result would be $1,245 billion per year, on average.15 The loss, however, is likely to be larger
because net tax liability is the tax rate times taxable income, minus credits. Rate changes would
not normally affect credits, and, if not, the revenue loss would be projected based on tax liability
before credits. According to Internal Revenue Service (IRS) data, corporate tax before credits is
134% of corporate tax after credits.16
One of the major credits, the foreign tax credit, would be affected, in some cases, by a rate cut.
The foreign tax credit is limited to the U.S. tax because of foreign source income, so as the U.S.
rate falls, the limit on credits also falls. In some cases, the credit would not be affected, or not
affected proportionally, because the foreign tax credits are less than the limit and a change in the
limit would not necessarily change foreign tax credits. (These firms are termed excess limit
firms.) In other cases, firms have creditable taxes above the limit; with credits equal to the limit, a
reduction in the limit would reduce foreign tax credits proportionally. (These firms are termed
excess credit firms.)
Tax liability after the foreign tax credit but before other credits (general business credits and the
alternative minimum tax credit) is 105.7% of tax liability after all credits. If foreign tax credits are
reduced proportionally, the average loss is almost $132 billion. If foreign tax credits are not
affected at all, the average loss per year is $168 billion.17
These estimates suggest that over the 10-year period, $1.3 trillion to $1.7 trillion would be lost in
revenues due to the proposed rate cut. This number does not include any behavioral feedback
effects, which could reduce the cost, but also does not include debt service or crowding out of
private capital, which would increase the cost.
14
See Congressional Budget Office, The Budget and Economic Outlook, Fiscal Years 2013-FY2022, January 2013,
p. 85, at http://www.cbo.gov/sites/default/files/cbofiles/attachments/01-31-2012_Outlook.pdf.
15
For a roughly flat tax rate, the percentage reduction in revenues would be the same as the percentage reduction in
rate, so multiplying by the ratio of the percentage point reduction, 10 percentage points, to the original rate, 35,
provides an estimate of the revenue loss.
16
Internal Revenue Service, Statistics of Income, Corporate Income Tax Returns for 2007, http://www.irs.gov/taxstats/
article/0,,id=170726,00.html.
17
The lower number multiplies $125 billion by 1.057 and the higher number multiplies $125 billion by 1.34.
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Estimates implied by this calculation are larger than projections based on a percentage point rate
increase contained in CBO’s Budget Options which, applying the percentage loss to the new
baseline suggests revenue losses of about $1,113 trillion.18 Some part of the discrepancy may
reflect the fact that liabilities lag collections and that the first full year does not apply because
estimates are based on fiscal years. In addition, to the extent that firms have unused foreign
credits, a rate increase would raise less than reduction of the same size would cost. Other
behavioral effects may occur as well.
Regardless of the precise estimate, a revenue loss in excess of $1 trillion and in excess of $100
billion a year would be expected over the next 10 years.
Effects on U.S. Output and Wages
What about the effects on the U.S. economy? The discussion sometimes focuses on job creation.
Job creation is an important issue for the government to address during cyclical downturns.
Standard economic theory suggests such policies should be temporary; in contrast, advocates of
corporate rate cuts are proposing permanent cuts. In any case, temporary or permanent corporate
rate cuts are unlikely to be very effective stimulus policies.19
Economic theory suggests that there is no reason to view general job creation as a long-run
objective of government policies. The economy can generate the jobs needed by the natural
process of growth and market adjustment. In 1961 and 1991, the unemployment rate was the
same, 6.7%. Employment, however, rose from 66 million to 117 million. Employment tends to
grow steadily; the unemployment rate fluctuates. Long-term jobs policies, according to economic
theory, therefore, should not be aimed at increasing jobs, although they can be designed to reduce
structural or frictional unemployment (such as improving the skills of disadvantaged workers).20
Rather, the capital flows induced by a corporate rate cut generally have effects on the level of
output and on wage levels, rather than the number of workers. Despite the claimed effects of
cutting the corporate tax on encouraging the flow of foreign-owned capital into the country from
abroad (inbound capital) or discouraging the flow of U.S. capital to other countries (outbound
capital), there are many forces that constrain the movement of capital. As capital flows into a
country, its greater abundance coupled with a fixed amount of labor drives the wage rate up and
the rate of return down, so that the pre-tax return to capital falls. If the economy is large enough
to affect the rest of the world’s returns, the proportional flow of capital is lessened further,
18
See Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, p. 173 at
http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12085/03-10-reducingthedeficit.pdf. The estimate for
2012-2021 was $100.6 billion while the baseline was $3.923 billion.
19
Corporate rate cuts are not likely to be effective as a short-run stimulus. Several CRS Reports discuss the
effectiveness of alternative tax provisions. See CRS Report R40104, Economic Stimulus: Issues and Policies, by (name
redacted), (name redacted), and (name redacted); CRS Report RS21136,
Government Spending or Tax
Reduction: Which Might Add More Stimulus to the Economy?, by (name redacted); CRS Report R41034,
Business
Investment and Employment Tax Incentives to Stimulate the Economy, by (name redacted) and (name redacted);
CRS Report RS21126, Tax Cuts and Economic Stimulus: How Effective Are the Alternatives?, by (name redacted); and
CRS Report R41006, Unemployment: Issues and Policies, by (name redacted), (name redacted), and (name
redacted).
20
If labor supply were responsive to wage increases, increased wages induced by capital flows could increase the size
of the labor force, but evidence suggests that labor supply is relatively inelastic. See CRS Report RL31949, Issues in
Dynamic Revenue Estimating, by (name redacted), for a review of labor supply elasticity research.
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because shift of capital from abroad (with no change in taxes) raises the after tax return abroad
and draws some of the capital back. Capital flows are further reduced if there are significant noncorporate sectors (because a rate cut would draw capital from the unincorporated sectors of the
economy as well as from abroad). Finally, the flow of capital would be further limited if capital is
not perfectly mobile or products are not perfect substitutes.
A study by Gravelle and Smetters used a general equilibrium model to capture the effects of
imposing a 35% tax, allowing for four sectors in the U.S. economy and a mirror foreign
economy.21 The estimated change in the capital stock, assuming the conditions most conducive to
capital inflows, was 4.5%. (This scenario assumes that individuals and firms view investments in
different locations as perfect substitutes and consumers view foreign and domestic products as
perfect substitutes; these are referred to as the portfolio and product substitution elasticities and
are set, effectively, at infinity.)22 This effect implies a 4.7% increase from eliminating the tax
(4.5/(1-4.5)). To convert a percentage change in the capital stock to a percentage change in
output, multiply by the capital share of income, which was 0.29, to get a 1.36% increase in
output. Because a partial change is proposed, multiply by 10/35 to obtain an estimated percentage
change in output of 0.39%. With constant factor shares, which are assumed in this model, wages
will also increase by this percentage.23
A similar magnitude of effects can be obtained by examining revenue reductions and incidence
estimates for this same perfectly mobile case. CBO projects the corporate tax at 2% of GDP.24
This revenue is as a percentage of gross output (which includes output that replaces capital and
thus is not a part of an income concept). To convert it to a percentage of net of depreciation
output (which is 82% of gross output25), divide by 0.82, for corporate revenues that are 2.27% of
domestically generated income. To capture the effect of reducing the tax by 10 percentage points,
multiply by 10/35, to obtain a tax cut of 0.65% of income. Incidence studies indicate that about
73% of the burden of the corporate tax falls on labor under this perfectly mobile assumption,26 so
21
(name redacted) and Kent A. Smetters, “Does the Open Economy Assumption Really Mean That Labor Bears the
Burden of a Capital Income Tax?” Advances in Economic Analysis and Policy, vol. 6, iss. 1, 2006, pp. 1-40. Results of
simulations are on p. 25.
22
An elasticity is the percentage change in quantity divided by percentage change in price and a substitution elasticity
is the percentage change in the ratio of two quantities divided by the percentage change in the ratios of their prices. For
the portfolio elasticity the ratio is between domestic and foreign assets relating to their relative after tax returns, while
for the product substitution elasticity it is the ratio of the domestic and imported traded good as it relates to the relative
prices. Other elasticities also appear in the model, which are generally set at 1; these include substitution between
factors of production and products produced by the different sectors.
23
This correlation requires a Cobb-Douglas production function, which has a unitary factor substitution elasticity.
24
Congressional Budget Office, The Budget and Economic Outlook, Fiscal Years 2012-FY2021, January 2011, p. 87.
http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.
25
Economic Report of the President, February 2010, p. 360, data are for 2006, the year before the recession began.
26
This finding was reported by William Randolph, International Burdens of the Corporate Income Tax, Congressional
Budget Office, Working Paper 2006-09, August 2006, http://www.cbo.gov/ftpdocs/75xx/doc7503/2006-09.pdf as well
as by (name redacted) and Kent A. Smetters, “Does the Open Economy Assumption Really Mean That Labor Bears
the Burden of a Capital Income Tax?” Advances in Economic Analysis and Policy, vol. 6, iss. 1, pp. 1-40. An earlier
general equilibrium study found 84% of the burden fell on labor under these circumstances: John Mutti and Harry
Grubert, “The Taxation of Capital Income in an Open Economy: The Importance of Resident-Nonresident Tax
Treatment,” Journal of Public Economics 27 (August 1985): 291-309. Their study assumes a production function with
a much lower elasticity, so that the change in wage rate would be much larger than the change in overall output. This
type of function allows a smaller percentage change in the capital stock to have a larger effect on labor income.
Although their effects on wages are larger, their effects on capital inflows and total output are smaller. Another study
sometimes mentioned is Arnold C. Harberger. Harberger’s paper, “Corporate Tax Incidence: Reflections on What is
(continued...)
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this number is multiplied by 0.73 to obtain an increase in labor income of 0.47% of total income.
Based on national income accounts, the share of labor income is 76%,27 so dividing 0.47 by 0.76
yields a 0.62% increase in output and in wages.
Both estimates suggest a relatively small effect on output, of around 0.5%, but this estimate is too
large. Perfect product substitution is not possible in a multi-good economy.28 Moreover, empirical
evidence suggests elasticities that are smaller. Gravelle and Smetters propose as a more
reasonable case a model with portfolio and product substitution elasticities of 3. This assumption
yields a 1.6% change in the capital stock. Following the methodology outlined above, the effect
on output and wages is 0.13%, rather than 0.4%. These elasticities reduce the share of the burden
borne by labor to 21% and, again, following the same methodology would cause an output and
wage effect of about 0.18% rather than 0.62%.29
Two other aspects might make these effects even lower or perhaps reverse the sign. First, the
effect of debt capital is not incorporated into any of these models. Because about a third of the
capital stock is financed by debt, the magnitude of the first set of estimates (using capital stock
estimates) should be reduced by about one-third to account for the presence of debt. This would
be the expected outcome if returns to debt-financed investment were taxed at a zero rate, as
would be the case if there were no inflation and no accelerated depreciation. However, since both
of these conditions exist in the U.S. tax code, debt is subsidized at the corporate level because
inflation is generally positive and the effective marginal tax rate is below the statutory rate.
Lowering the statutory rate reduces these subsidies and discourages debt. This effect may be
desirable for issues such as the debt-equity distortion, but can actually discourage capital inflows,
as suggested in one study.30
(...continued)
Known, Unknown, and Unknowable,” in John W. Diamond and George R. Zodrow, eds., Fundamental Tax Reform:
Issues, Choices, and Implications (Cambridge, Mass.: MIT Press, 2008). That paper reports 130% of the tax falling on
labor income, but the analysis is not really a model of the U.S. economy calibrated to observed values, but an
illustration. The illustration assumes a much higher capital intensity in the corporate traded sector relative to the
economy as whole than evidence suggests. For a discussion of these four models and their underlying differences, see
Jennifer Gravelle, Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis, Congressional
Budget Office, Working Paper 2010-03, May 2010, http://www.cbo.gov/ftpdocs/115xx/doc11519/05-2010Working_Paper-Corp_Tax_Incidence-Review_of_Gen_Eq_Estimates.pdf.
27
Economic Report of the President, February 2010, p. 362, data are for 2006, the year before the recession began. The
share is calculated as the sum of compensation of employees plus 75% of proprietor’s income, divided by the sum of
compensation of employees, proprietor’s income, corporate profits, rental income and interest income.
28
In economics parlance, the result would be a corner solution where a country produces only one, or a few traded
goods.
29
The only other study that examines lower elasticities is that of John Mutti and Harry Grubert, “The Taxation of
Capital Income in an Open Economy: The Importance of Resident-Nonresident Tax Treatment,” Journal of Public
Economics 27 (August 1985): 291-309. Their study still finds a large share of the burden falling on labor, but assumes a
very low factor substitution elasticity that dominates the outcome and also makes it not possible to generalize about
output effects from their incidence results. For a discussion of the role of the factor substitution elasticity as well as a
review of the literature on elasticities, see Jennifer Gravelle, Corporate Tax Incidence: Review of General Equilibrium
Estimates and Analysis, Congressional Budget Office, Working Paper 2010-03, May 2010, http://www.cbo.gov/
ftpdocs/115xx/doc11519/05-2010-Working_Paper-Corp_Tax_Incidence-Review_of_Gen_Eq_Estimates.pdf. This
paper finds the portfolio and product substitution elasticities of 3 to be consistent with the evidence but suggests that
the factor substitution elasticity should be somewhat lower, leading to a share of the tax falling on labor of around 40%
but a smaller capital flow and a smaller total change in output.
30
Harry Grubert and John Mutti, “International Aspects of Corporate Tax Integration: The Role of Debt and Equity
Flows,” National Tax Journal, vol. 47, March, 1994, pp. 111–133.
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Second, the estimates of capital stock assume that the United States has a territorial tax (i.e., the
only tax due is on domestic profits). Although a relatively small share of foreign source income is
taxed, the U.S. system is not fully territorial, but rather defers the tax until income is repatriated
(except for branch income and some passive income that is easily shifted).31 Under the U.S.
system, the tax on income that is repatriated or currently taxed can be partially or fully offset by
credits for foreign taxes paid. Most foreign source income is not taxed either because it is not
repatriated or because credits are used to offset the tax; in addition to credits for tax paid in a
country, unused credits from countries with higher taxes than the United States can be used to
offset tax on income repatriated from low tax countries (called cross crediting).32
Effects on National Income and National Welfare
Even though output (or domestically generated income) increases by small amounts, that output
gain does not represent a gain in U.S.-worldwide income. The gains that labor experiences are
offset by the losses in the pre-tax return by the existing domestic capital, reducing the benefits of
these firms. For example, in the case where labor income increases by 21% of the tax, existing
capital, which absent capital flows would have had income increase by 100% of the tax cut, now
has that increase offset roughly by 21% of the tax due to the lower pretax return. Although both
labor and capital have higher after tax income, there is a transfer between the government and
individuals, which must be offset by other tax increases or reduced spending either now or in the
future.
Although there will be some gains in national welfare, they are likely to be only a small fraction
of the revenue change. They would arise from income that transfers from foreigners to U.S.
persons.33 For thinking about this effect, consider separately inbound capital (capital owned by
foreigners and invested in the United States) and outbound capital (capital owned by U.S. persons
and invested abroad). The increase in inbound capital generates returns, but those returns are the
income of the foreign investors. Thus, the only gain for the United States is the change in taxes,
and the lower pre-tax rate of return on inbound investment. For outbound capital, the returns
already belong to U.S. firms, and the gain is from moving capital back into the United States
where taxes formerly paid to foreign governments are paid to the United States.
A recent study examined these effects, using data on foreign and domestic tax rates from a 2008
GAO study and estimates of inbound and outbound capital from the National Income and Product
Accounts and found modest effects.34 The estimated output effects in this study were larger than
31
If dividends are eventually to be taxed, then there is no obvious benefit to deferral because the income will either be
taxed currently or taxed with interest in the future (and the present value of the tax will be the same). However, some
income can be indefinitely deferred in the steady state to allow for growth, firms have developed techniques for
repatriating without paying tax, and firms can use excess foreign tax credits from high tax countries to shield income
from tax.
32
The residual tax rate on foreign subsidiaries of U.S. parents is 4%. See U.S. Government Accountability Office, U.S.
Multinational Corporations: Effective Tax Rates are Correlated With Where Income is Reported, GAO-08-950, 2008.
33
To the extent that taxes in the United States are higher than elsewhere, there could be efficiency gains as well,
although Gravelle and Smetters find these to be small. They find an efficiency gain of 3% of revenue for eliminating
the tax entirely. Because the excess burden rises with the square of the tax rate, about half the gain, 1.5% of revenue,
would occur with the first 10 percentage points. However, this gain accrues to the world (and the United States would
presumably get only a share equal to its share of world GDP, or about one-half of a percent of revenue) and is
measured assuming there are no other taxes. Given other countries have similar tax rates, the effect could disappear
entirely or be negative. But in any case, it is small enough to be disregarded.
34
(name redacted), “International Tax Policy: Are We Heading in the Right Direction?,” December 2010, Forthcoming
(continued...)
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those calculated above because the study used a partial equilibrium framework with a simplified
single sector model designed to distinguish between outbound and inbound capital flows. The
purpose, however, was to consider the general magnitude of welfare effects. The estimates found
that there was a slight loss (3% of the additional output) for inbound capital because the reduction
in the tax rate on existing capital inflows was less than fully offset by taxes on induced capital
flows and the small reduction in pre-tax returns. For outbound capital, the main source of
increased capital, there was a gain of 12% of output because taxes on this capital were paid to the
United States rather than foreign governments. Overall, only about 9% of the output increase was
a benefit to the United States which, for the magnitude of effects calculated, is less than twohundredth of 1% of output and less than 3% of revenue.
These findings are quite consistent with optimal tax theories. For inbound capital, the optimal tax
rate should be 1/(1+e) where e is the elasticity of the flow of inbound capital.35 Because the study
used an estimated effective tax rate of 25% and the optimal tax rate is 25% when e is 3, a
negligible effect on welfare would be expected. For outbound capital, the optimality rule is to tax
foreign source income net of foreign taxes for a small country, with a slightly higher rate on
outbound capital returns for a large country.36 Because current tax rules impose taxes much
smaller than this rate and cause too much capital to be allocated abroad, cutting the U.S. tax rate
improves welfare. However, the effects are small compared with either the U.S. economy or
revenue.37
Revenue Feedback Effects
A final issue is the magnitude of revenue feedbacks from the output increase. Recall that the
corporate tax cut discussed is about 0.65% of net output.
This increase in output is taxed with a mix of both labor and capital taxes. The marginal tax rate
on labor income is estimated by CBO at 28.4% and the capital income tax rate is estimated at
11.5%.38 The 11.5% is further reduced by 2 percentage points to account for the reduction in the
corporate rate, to 9.5%. The overall marginal tax rate is 23.7%. Multiplying the 0.13% and the
0.18% increases in output by 23.7% yields an offset of 4.7% to 6.6%. (If infinite elasticities were
(...continued)
in the Proceedings of the National Tax Association.
35
This result is derived by maximizing the benefit to inbound capital K: F(K) –r(1-t)K with respect to t, the U.S. tax
rate, where F(K) is a production function and recognizing that r and K are functions of t and r is the marginal product of
capital.
36
This optimality rule maximizes the benefit to outbound capital, K, with respect to the foreign tax rate (F(K) +r(1-tf)K,
where tf is the foreign tax rate.
37
As mentioned earlier, this study focuses on the income effects of international capital flows. Reductions in the
corporate tax rate could produce welfare gains, largely through reduction in the debt-equity distortion and changes in
the composition of consumption, effects that would occur in a closed economy. In CRS Report RL34229, Corporate
Tax Reform: Issues for Congress, by (name redacted), these costs are estimated at about 10% to 15% of the corporate
tax. Based on revenues of 2% of GDP and the rule of thumb that the excess burden rises with the square of the tax rate,
the gain would be 0.1% to 0.15% of output from 10 percentage point rate reduction. These welfare tradeoffs do not rely
on global economy considerations, and would largely not be experienced by an increase in income, but rather a
decrease in risk and a more optimal composition of consumption.
38
The rates are for 2009, which better reflect current tax rates. See Congressional Budget Office, Analysis of the
President’s Budget, March 2010, Tables 2.2 and 2.3, at http://www.cbo.gov/ftpdocs/112xx/doc11280/03-24-APB.pdf.
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assumed and the output effects of 0.4% and 0.62% were considered the feedback effects would be
from 14% to 23% of revenue.)
There are three reasons this feedback effect is probably too large (aside from the reservations
about output effects due to debt finance discussed above). First, this tax on labor income does not
account for the expectation that increases in labor income might be partially received through tax
exempt employee fringe benefits or partially spent on tax favored purchases (such as charitable
contributions). Second, absent other changes the share of individual taxes collected as payroll
taxes would eventually lead to increased outlays for Social Security. Finally, the transition to the
new capital stock will not be immediate.
In all the scenarios, these revenue offsets from behavioral changes would likely be smaller than
the increase in revenue due to debt service, which is estimated at 25% on average over the 10year period. In addition, if the increase in the debt displaces the capital stock, output would be
reduced by 2021 enough to reduce revenues by 15% to 23% of the static cost. If revenues are not
offset, and the increased debt crowds out the U.S. capital stock, output would be reduced about,
0.4% by 2021, an effect more than twice as large as the effects estimated from international
capital inflows.39
Profit Shifting and Revenue Effects
Another aspect of behavior that is of concern for revenue is the possibility of profit shifting. It is
more difficult to judge this effect. Because the evidence discussed above suggests that the
revenue offset from corporate rate changes due to investment flows is likely in the neighborhood
of 5%, real output effects do not appear large enough to make a corporate rate cut pay for itself in
increased revenues, as some advocates claim.
Before examining profit shifting directly, consider the evidence cited to support the argument that
there is a significant revenue shift. First, proponents point to studies that indicate a “Laffer curve”
with a revenue maximizing tax rate of around 30%, using cross country panel data. These four
studies were reviewed in a CRS report that found, due to both interpretation of the studies by
proponents and statistical problems, these studies did not appear to support a gain in revenue from
a cut in the U.S. tax rate.40
Proponents also make the general argument that the United States collects a smaller share of
revenue relative to GDP than other countries, even though its rate is higher. For example, Hassett
points out that the U.S. corporate revenue is 2% of GDP whereas the revenue of most other
39
This calculation uses the 2021 GDP of $24 trillion projected by 2021 and assumes capital is 3.5 times output, for a
total capital stock of $84 trillion. The cumulative revenue loss of $1.2 trillion is 1.4% of this capital stock, and
multiplied by 0.3 would reduce output by 0.42%. Multiplied by the tax rates of 0.237 and divided by the static loss of
0.65% indicates an increase in the revenue loss of 15%. Using the $1.5 trillion estimate, the calculation yields an
additional revenue loss of 20% and adding debt service net of the feedback effects from capital inflows yields 23%.
Projected GDP is from CBO data at http://www.cbo.gov/ftpdocs/120xx/doc12039/Year-by-YearForecast_110125.xls.
40
See CRS Report RL34229, Corporate Tax Reform: Issues for Congress, by (name redacted). All of the studies were
had methodological deficiencies due to lack of country fixed effects. One study did not find statistically significant
effects in any case. The most sophisticated study actually found a much higher rate of 57% for a country like the United
States. That study and another study were re-estimated using fixed effects and the statistical significant disappeared.
This final study had an extremely short panel.
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countries is 3%, and that the share has grown in some countries as rates have decreased.41 Two
factors other than profit shifting affect corporate revenues and their changes as a percent of GDP,
the size of the base and the share of business income (and income in general) that is corporate
source. Data shown earlier indicates that although the statutory rate is higher in the United States,
the effective rate is not. Revenues patterns over time will reflect a combination of rate changes
and base changes, and some countries financed some or all of their recent rate reductions with
base broadening.42 In addition, the size of the corporate sector will be affected by the ability of
firms to operate in noncorporate form. A 2007 study by the U.S. Department of Treasury indicates
that the U.S. rules allowing large firms to operate in noncorporate form are more generous than
those of other countries. It also documented that the share of business income received by
corporations in the United States had declined from 80% to 50% as more generous limits of the
number of shareholders small corporations could have to elect taxation as unincorporated
businesses were adopted and special forms of business such a limited liability corporations, taxed
as partnerships, grew.43 A recent OECD study indicated that corporate tax revenues, in addition to
offsetting base changes, were increased by incentives to operate firms in corporate form and
additional compliance measures.44
It is possible to consider the effect of profit shifting by examining direct estimates of the cost of
profit shifting. These estimates of profit shifting suggest that they amount to 14% to 20% of total
corporate tax revenue, which would not be enough to offset the revenue loss even if profit
shifting disappeared entirely.45 How much of a reduction in profit shifting might reasonably be
expected? Because the profit shifting clearly occurs to the very low tax rate countries,46 even a cut
to 25% would leave a large benefit to profit shifting (it would lead to a combined federal and state
rate of 29.8%, and 27.7% for eligible firms if the production activities deduction were retained).
Recent discussions of a plan referred to as the double-Irish, Dutch sandwich showed two
companies that, having moved profits to Ireland (with a 12.5% rate), took further steps to shift
profits to Bermuda (with a 0% rate).47 Because the cost in most cases is small, most firms would
41
See Kevin Hassett, “Laffer Curve Pays Billions If Obama Just Asks,” Bloomberg Business Week, February, 13, 2011,
http://www.businessweek.com/news/2011-02-13/laffer-curve-pays-billions-if-obama-just-asks-kevin-hassett.html.
42
See Steven Matthews, “Tax Reform: An International Perspective,” Power Point presentation at the American
Enterprise Institute, February 25, 2011, http://www.aei.org/docLib/MatthewsTaxReform.pdf.
43
United States Department of the Treasury, “Treasury Tax Conference on Business Taxation and Global
Competitiveness: Background Paper,” July 30, 2007, at http://www.ustreas.gov/press/releases/hp500.htm.
44
OECD, Tax Policy Reform and Economic Growth, OECD Publishing, 2010, http://dx.doi.org/10.1787/
9789264091085-en.
45
For reviews of profit shifting, see CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by
(name redacted). The estimates used include those of Ch ristian and Schultz of $30 billion compared with corporate
revenues of $151 billion in 2001, those of Sullivan of $26 billion compared with revenues of $187 billion, and those of
Clausing and Avi-Yonah of $60 billion compared with revenues of $370 billion. Corporate revenue numbers are from
CBO, http://www.cbo.gov/ftpdocs/120xx/doc12039/HistoricalTables[1].pdf. Because the rate cut reduces revenues by
31% to 38%, the offset is less than 100% even if all profit shifting ended. A more recent estimate by Clausing indicates
a loss of 20% to 30% depending on the method used. See Kimberly A. Clausing, “The Revenue Effects of
Multinational Firm Income Shifting,” Tax Notes, March 28, 20011, pp. 1581-1586.
46
See, for example, Government Accountability Office, U.S. Multinational Corporations: Effective Tax Rates are
Correlated With Where Income is Reported, GAO-08-950, August 2008. Other evidence is discussed in CRS Report
R40623, Tax Havens: International Tax Avoidance and Evasion, by (name redacted).
47
See Jesse Drucker, “Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes,” Bloomberg, October 21,
2010, at http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-taxloopholes.html and Jesse Drucker, “U.S. Companies Dodge $60 Billion in Taxes in Global Odyssey,” Bloomberg, May
13, 2010, at http://www.bloomberg.com/news/2010-05-13/american-companies-dodge-60-billion-in-taxes-even-teaparty-would-condemn.htm.
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probably continue to shift profits to the limit currently allowed by law as interpreted by the
courts, and probably considerably less than proportionally to the tax rate change.
As discussed below, reforms to the tax treatment of foreign source income, by eliminating
deferral and by restricting the foreign tax credit, or by focusing on limiting profit shifting
techniques, might reduce the ability or benefits of profit-shifting and raise revenues.
Other Countries’ Reactions to a U.S. Rate Reduction
An important policy issue for the United States is whether other countries might react to a U.S.
rate reduction. Evidence shows that the initial cut in corporate tax rates around the world may
have been triggered by the cut in the U.S. corporate tax rate from 48% to 35% from 1986 to 1988
as a result of the Tax Reform Act of 1986. Figure 1 shows the statutory tax rates, beginning in
1981, for the United States and for the remainder of the OECD. The U.S. combined state and
federal tax rate was about 50% and fell to just below 40% over those two years. Except for a
slight rise in 1993, the tax rate has remained constant ever since. Two OECD numbers are
provided: the unweighted numbers varying with the admission of new OECD members as well as
tax rates and the GDP weighted tax rates of the OECD nations (outside the United States) in
1981. (Tax rates are shown in the Appendix, and they also indicate that the weighted average
holding member country constant is about a percentage point higher.)
The tax rates for 2012 are similar to those for 2010: the unweighted average fell slightly from
25.5 to 24.9, but the weighted average was slightly higher, 29.8 compared to 29.6. The U.S. rate
fell from 39.2% to 39.1%.48
While the simple (unweighted) average, which includes new entrants to the OECD, suggests a
relatively continuous decline in rates, the weighted average indicates a more discrete pattern of
tax cuts. As indicated by the graph, tax rates on average were close together before 1987 but rates
of other countries began dropping in the next few years. For the weighted OECD average, the
first drop followed the U.S. tax cut, but subsequently, rates were relatively constant over the next
several years (and still slightly above U.S. rates). Tax rates then fell again, but stabilized around
2002 and were relatively unchanged until 2007, when Germany began cutting its tax rate. The fall
beginning in the late 1990s may have been associated with the lower tax rates of the emerging
former eastern bloc countries.
If one country cuts its tax rate, it attracts capital from other countries, which benefits labor and
possibly overall national welfare, at the expense of other countries, as discussed above. However,
if all countries cut their tax rates, none will gain capital but all will lose revenue. The observation
of rate cuts in the rest of the world in the wake of the U.S. tax cut is not proof that countries will
cut their rates again if the United States does, but it does provide some support for that
expectation.
48
Calculated from OECD data. Corporate rates at http://www.oecd.org/ctp/taxpolicyanalysis/
oecdtaxdatabase.htm#C_CorporateCaptial; GDP at http://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE1.
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Figure 1. Statutory Tax Rates, United States and OECD (Excluding United States),
1981-2010
60
50
40
U.S.
Unweighted OECD
Weighted OECD
30
20
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
0
1981
10
Source: CRS calculations based on tax rate data and GDP from the Organisation for Economic Co-operation
and Development.
Notes: The weighted OECD measure provides for a constant set of initial countries, although this measure is
only slightly different from that which covers all OECD countries with information available at any time. The
unweighted measure includes the OECD countries in that year.
It is also possible that a smaller rate cut that does not move the United States to rates below those
of other large countries would be less likely to trigger a response. For 2010, statutory tax rates for
the next two largest countries in the remaining OECD, Japan and Germany, were 39.54% and
30.18% respectively, although Japan is proposing a 5 percentage point rate cut. The United
Kingdom and France are respectively 28% and 34.4%, although the United Kingdom is planning
further cuts to 24%. If the United States cut its federal rate to 25% its rate would be 29.8%; with
the production activities deduction it would be 27.7%. A rate cut to 30% would result in a 34.5%
rate (32% with the production activities deduction).49 That rate would be similar to the rates in
France, Japan, and Germany.
49
Calculations are made by dividing revenues by an estimate of corporate taxes adjusting for the credits, so the revenue
base of $3,293 billion for FY2012-FY2021 is increased to $4,728 billion. This number divides corporate revenues by
the ratio of $112 billion to $135 billion per year, which relates the estimate of the rate cut without considering the
effects of credits to the midpoint between allowing foreign tax credits and not allowing them (recall those estimates
were $120 billion and $150 billion on average).
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Revenue-Neutral Rate Reduction and Corporate Reform
If revenue concerns require offsetting corporate base broadening, what changes might be made
and what are the consequences for international capital flows and profit shifting? This section
discusses base broadening options, focusing on the largest corporate tax expenditures. The base
broadening provisions are listed in Table 10, along with the reduction in the corporate rate the
revenue change would allow for. Note that while each proposal is stated in terms of the rate
reduction its revision would permit, the rate reductions for several provisions taken together are
slightly smaller than the sum of their individual rate reductions because the progressively lower
rates make base broadening less valuable.
Table 10. Rate Reduction Permitted by Certain Options, 2016
Possible Change in Provision
Percentage Point
Reduction in
Corporate Tax Rate
Accelerated Depreciation for Equipment (steady state)
3.0
Accelerated Deprecation for Equipment (steady state, corporate revenue gain only)
2.2
Production Activities Deduction
0.7
Taxation of Foreign Source Income
—End Deferral
3.1
—End Deferral Plus Per Country Foreign Tax Credit Limit
4.0
—President Obama’s Proposals
0.9
—Territorial Tax with Deduction Allocation
0.5
LIFO and Lower of Cost or Market Inventory Accounting
0.3
Deferral of Gain on non-Dealer Installment Sales
0.4
Deferral of Gain on Like-Kind Exchanges
0.4
Expensing of Research and Experimental Expenditures
0.4
Low Income Housing Credit
0.4
Subsidies for Fossil Fuels
0.1
Graduated Rates for Corporations
0.2
Insurance Subsidies
0.1
Credit Union Exemption
0.1
Eliminate all Corporate Tax Expenditures
7.9
Eliminate Corporate Tax Expenditures Except for International Provisions
5.5
Disallow Deduction for Inflation Portion of Interest
1.1
Shifting Into Corporate Forma
2.3
Rolling Back 2003 Rates for Dividends and Capital Gainsb
4.0
Source: CRS calculations, see CRS Report R41743, International Corporate Tax Rate Comparisons and Policy
Implications, by (name redacted), for a further discussion including estimation of the last two provisions in Table
15. The new tax rate is calculated by dividing the current rate (35%) by (1+the revenue gain divided by corporate
tax revenue). Corporate tax revenue projections are from Congressional Budget Office (CBO), The Budget and
Economic Outlook: Fiscal Years 2013 to 2023, February 5, 2013, at http://www.cbo.gov/publication/43907. The
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corporate base was increased by 20% to account for revenue prior to tax credits. Data on most tax
expenditures are from Joint Committee on Taxation, Estimates of Federal Tax Expenditures For Fiscal Years
2012-2017, JCS-1-13. February 1, 2013, at https://www.jct.gov/publications.html?func=startdown&id=4503. The
title passage rule estimate Estimates of accelerated depreciation cannot be taken from the tax expenditure
estimates because they are affected by bonus depreciation. These estimates are from a Joint Committee on
Taxation memorandum from Thomas Barthold, Revenue Estimates, October 27, 2011, updated and multiplied by
2/3 to adjust from the budget horizon to the steady state as indicated by James B. Mackie III and John Kitchen
“Slowing Depreciation in Corporate Tax Reform,” Tax Notes, April 29, 2013, pp. 511-521. Estimates for deferral
plus foreign tax credit limit and for the interest deduction were from Joint Committee on Taxation, 2010b
Estimates of the Revenue Effect of S. 3018, The Bipartisan Simplification Act of 2010, November 2, 2010, at
http://wyden.senate.gov/imo/media/doc/Score.pdf. Estimates for President Obama’s proposals were from U.S.
Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals,
April, 2013, http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf .
Estimates for the territorial tax were adapted from estimates in CBO, Reducing the Deficit: Spending and
Revenue Options, March 10, 2011, p. 187, at http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/
doc12085/03-10-reducingthedeficit.pdf.
Notes: These provisions are all estimated beginning at a 35% corporate rate and the sum would be larger than
the combined effect. If evaluated at the lower rate the reduction would fall proportionally for most base
broadening provisions, so the reduction would be 86% as large (.30/.35) if evaluated at a 30% rate. Note that
these tax expenditures do not include temporary provisions, the most important of which are the research
credit and the deferral of active financing income.
a.
Assumes income distributed as in the early 1980s, a starting corporate rate of 30% and an individual rate of
30%. See text of CRS Report R41743, International Corporate Tax Rate Comparisons and Policy Implications, for
other calculations.
b.
Assumes a lower realization elasticity consistent with more recent evidence. With elasticity currently in use
by the Treasury Department, the reduction would be 2.3 percentage points.
Accelerated Depreciation
Of the items listed among corporate tax expenditures, the single largest provision outside of
deferral, is accelerated depreciation for equipment which, abstracting from the effect of
temporary bonus depreciation, would allow a rate reduction of about 2 percentage points.50 This
measure is based on an alternative depreciation system. (Much more revenue would be raised in
the short run, but revenue neutrality based on a 10-year budget window would lead to a long-run
loss, because slowing depreciation leads to much larger revenue gains in the short run compared
with the long run.) Equipment, in particular, is taxed at rates well below the statutory rate, at least
at current inflation rates. Nevertheless, the desirability of restricting depreciation is unclear. A
revenue neutral revision that cuts the rate in exchange for higher taxation of new investment
would raise the marginal effective tax rate, because the rate reduction would apply to the return to
existing capital. Moreover, estimates suggest that the value of depreciation under the alternative
system would be too small and would tax investments at effective rates in excess of the statutory
rates.51 This provision would also raise revenues on unincorporated businesses, equivalent to
about 30% of the corporate loss, which would permit a larger corporate rate reduction, by 3.3
percentage points.
50
Estimates of depreciation as a percentage of revenues are from (name redacted), “Practical Tax Reform for a More
Efficient System, Virginia Tax Review,” vol. 30, fall 2010, pp. 389-406.
51
See (name redacted), “Reducing Depreciation Allowances to Finance a Lower Corporate Tax Rate,” National Tax
Journal, vol. 64, December 2011, pp. 1039-1053; “Practical Tax Reform for a More Efficient System, Virginia Tax
Review,” vol. 30, fall 2010 , pp. 389-406;. Statement Before the Senate Committee on Finance, Tax Reform Options:
Incentives for Capital Investment and Manufacturing, March 6, 2012, at http://www.finance.senate.gov/imo/media/doc/
Testimony%20of%20Jane%20Gravelle.pdf.
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In addition, there is some accelerated depreciation for buildings, primarily rental housing, but the
revenue losses are largely for unincorporated businesses.
The Senate Finance Committee has released discussion drafts on cost recovery and accounting
that relate to corporate taxation as well as a draft on international corporate tax issues.52 These
proposals have not been scored. The cost recovery provisions would introduce a new depreciation
system that would slow depreciation and approximate the present value of economic depreciation.
Assets would be added to general pools rather than each vintage of investments being depreciated
separately. Real property would be depreciated over 43 years. Research and development
expenses would be deducted in equal increments over five years, as would half of advertising
expenditures (the remainder would continue to be deducted when incurred). Oil extraction
expenses would be recovered over five years and percentage depletion would be repealed. LIFO
and lower of cost of market inventory would be repealed (see discussion of LIFO below).
Production Activities Deduction
One of the larger tax expenditures outside of deferral is the production activities deduction, which
allows a deduction of 9% of taxable income for domestic production for certain industries,
primarily manufacturing, electricity and natural gas production, and construction. This provision
would allow a corporate tax rate reduction of 0.7 percentage points. This provision has been
criticized as distorting the tax treatment of different industries by granting differential tax rates. In
addition, it creates administrative and compliance problems in both distinguishing domestic
content and identifying eligible activities. About a quarter of the cost benefits unincorporated
businesses and these revenues are included in the above estimate; without those revenues the
reduction would be under a percentage point.53
The only reservation about this deduction is that it is more likely to apply to multinationals
because of the industry restrictions and a revenue neutral substitution could raise the true
statutory rate. For example, a 0.7 percentage point reduction in the federal rate would allow, after
interacting with state taxes, a reduction from 39.2% to 38.5%, whereas firms with the production
activities deduction have a rate of 36.3%. One option would be to tailor the provision more
closely to the characteristics of multinationals, including disallowing the deduction for
unincorporated businesses and further restricting the eligible activities (e.g., disallow electricity
production as a qualified activity), and use those revenues to cut the rate, while retaining the
deduction. If restricted to corporate manufacturing most than half of revenues would be
recouped.54
52
Senate Finance Committee, Baucus Works to Overhaul Outdated Tax Code, November 21 at
http://www.finance.senate.gov/newsroom/chairman/release/?id=536eefeb-2ae2-453f-af9b-946c305d5c93.
53
See CRS Report R41988, The Section 199 Production Activities Deduction: Background and Analysis, by (name red
acted). Statement Before the Senate Committee on Finance, Tax Reform Options: Incentives for Capital Investment
and Manufacturing, March 6, 2012, at http://www.finance.senate.gov/imo/media/doc/
Testimony%20of%20Jane%20Gravelle.pdf.
54
(name redacted) Statement Before the Senate Committee on Finance, Tax Reform Options: Incentives for Capital
Investment and Manufacturing, March 6, 2012, at http://www.finance.senate.gov/imo/media/doc/
Testimony%20of%20Jane%20Gravelle.pdf.
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Tax Treatment of Foreign Source Income
The largest tax expenditure is the deferral of tax on foreign source income, which would permit a
corporate tax rate reduction of 3.1 percentage points. This move toward worldwide tax would
also, independently, increase the amount of capital in the United States by discouraging outbound
capital and would reduce the benefit of profit shifting mechanisms, perhaps significantly. A larger
reduction would be possible, by about 4 percentage points or more if the foreign tax credit were
limited to offsetting tax only on income earned in that country as was proposed in S. 3018, 111th
Congress.55 This change would eliminate most cross-crediting and raise more revenue; it would
also be projected to gain a similar amount in welfare gain to the rate cut itself.56
Other revenue raising alternatives affecting taxation of foreign source income have been
proposed. President Obama has proposed a set of revisions that is estimated to raise $157 billion
over 10 years: the major proposals are disallowing interest and certain other deductions of the
parent company to the extent income abroad is not taxed currently ($37 billion), limiting foreign
tax credits that can offset income to the same share as the share of income repatriated ($66
billion), a provision to tax excess returns of intangibles ($26 billion), and limiting foreign tax
credits for certain extractive companies ($10 billion). These provisions would allow a rate cut of
about a percentage point.57 An alternative would be to move to an actual territorial tax that
exempts all active income earned abroad but disallows part of overhead expenses of parent
companies, which is estimated to raise $76 billion58 and allow a rate cut of 0.5 percentage points.
There are many other revisions to the treatment of foreign source income that would raise varying
amounts of revenue.59
House Ways and Means Chairman Camp has proposed a territorial tax (revenue neutral) that
would preclude any revenue gains from the tax treatment of foreign source income.60 The Senate
Finance Committee has released d a discussion draft on international corporate tax issue. All
foreign source income would be subject to tax (equivalent to repealing deferral) but some income
would be taxed at a lower rate than the statutory rate (i.e., a minimum tax would be imposed).61
This proposal has not been scored but could raise revenue, depending on the minimum tax rate.
55
Estimate from Joint Committee on Taxation scoring of S. 3018, 111th Congress, at http://www.wyden.senate.gov/
download/joint-committee-on-taxation-estimated-score-of-the-bipartisan-tax-fairness-and-simplification-act-of-2010.
This estimate could be larger, since it was prepared before JCT increased the revenue effect of deferral.
56
For revenue estimates and analysis of this provisions, see (name redacted), “International Tax Policy: Are We
Heading in the Right Direction?,” December 2010, Forthcoming in the Proceedings of the National Tax Association.
This provision should raise about $60 billion of revenue a year, much more than eliminating deferral alone. Note that
further measures might need to be taken to prevent corporations from inverting (moving their headquarters abroad),
although current rules are already in place that appear to have been effective in preventing these inversions.
57
U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals,
April, 2013, http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf.
58
Estimates by the Joint Committee on Taxation as reported in Congressional Budget Office, Reducing the Deficit:
Spending and Revenue Options, March 10, 2011, http://www.cbo.gov/ftpdocs/120xx/doc12085/03-10ReducingTheDeficit.pdf.
59
See CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by (name redacted), for a
discussion. Other options include eliminating deferral and limiting tax credits for tax haven or low tax countries,
requiring a share of foreign income to be repatriated, and formula apportionment.
60
See CRS Report R42624, Moving to a Territorial Income Tax: Options and Challenges, by (name redacted).
61
Senate Finance Committee, Baucus Unveils Proposals for International Tax Reform, November 19, 2013, at
http://www.finance.senate.gov/newsroom/chairman/release/?id=f946a9f3-d296-42ad-bae4-bcf451b34b14.
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Revenue offsets that increase the taxation of foreign source income can be significant and
reinforce the capital flow and welfare effects of a rate cut in a global economy. Whether revenue
increases from the treatment of foreign source income can be used as revenue offsets is unclear.
Most proponents of rate reductions are also strong opponents of increasing the tax on foreign
source income, and indeed favor lowering that tax burden, perhaps by moving to a territorial
system without cost allocation, which would likely lose a small amount of revenue.62 Such a
change would reduce capital investment in the United States, although probably slightly, and
offset the capital flow and welfare gains of a rate cut.
The estimate in Table 10 does not include the effect of deferral of active financing income, which
is a temporary provision but has been extended for many years. It would increase the cost of
deferral by about 10%.
LIFO Inventory Accounting
Another option is the repeal of LIFO (last in, first out) accounting, which allows firms to treat
goods sold as the latest acquired; eliminating this provision would raise $97.5 billion over 10
years63 and allow a 0.8 percentage point reduction in the corporate rate. Most firms do not use
LIFO because they must conform tax and book methods.64 There is, however, a justification for
LIFO, in that, on average, it eliminates the tax on inflationary gains.65
Other Tax Expenditures and Base Broadening Provisions66
There are several remaining tax expenditures but most are either small or would be questionable
as offsets for a variety of reasons.67 If every corporate tax expenditure were repealed, including
those mentioned previously, the corporate rate could be cut by 7.9 percentage points, to 27.1%,
assuming no behavioral responses.68 (In the category addressing the treatment of foreign source
income, only the deferral provision is a tax expenditure.) Larger cuts could occur if the repeal of
benefits for unincorporated businesses were used to cut corporate rates. Without revenue from the
repeal of deferral, the rate would fall by approximately 5.5 percentage points, or to 29.5%
62
See “Obama Backs Corporate Tax Cut If Won’t Raise Deficit,” Bloomberg, January 25, 2011,
http://www.newsmax.com/Newsfront/ALLTOP-BB-BNALL-BNSTAFF/2011/01/25/id/383906.
63
Ibid.
64
Ibid.
65
This proposal would also repeal another method, the lower of cost or market, which is more difficult to justify.
66
Table 15 does not include an item for the title passage rule (inventory source sales rule) that allows a reduction of tax
on foreign source income for firms with excess foreign tax credits. Indications are that this estimate has been reduced
significantly, based on data in the most recent CBO options study, See Congressional Budget Office,(2011) Reducing
the Deficit: Spending and Revenue Options, http://www.cbo.gov/ftpdocs/120xx/doc12085/03-10ReducingTheDeficit.pdf.
67
Most of these are discussed in (name redacted), “Practical Tax Reform for a More Efficient System, Virginia Tax
Review,” vol. 30, fall 2010, pp. 389-406.
68
Based on sums for FY2012-FY2014, reported in U.S. Committee on the Budget, Tax Expenditures: Compendium of
Background Material on Individual Provisions, December 2010, compared with revenue projections as adjusted, for
the same years. See http://www.gpo.gov/fdsys/pkg/CPRT-111SPRT62799/pdf/CPRT-111SPRT62799.pdf. Using these
years avoids the effects of bonus depreciation.
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The Joint Committee on Taxation estimates a rate of 28% for repeal of corporate preferences
excluding deferral, but this estimate allows for higher gains from depreciation and expensing of
research and development during the budget horizon. (They note this rate would not be revenue
neutral in the long run).
The incentives for research and development are popular provisions that have some economic
justification, and, in the case of expensing, would be extremely difficult to administer. Only the
expensing provision is reflected in Table 10, but the research credit, which is temporary (and
which the President proposes to make permanent, is actually larger. Special provisions for
insurance companies are almost the size of the title passage rule, and would be an option as would
the relatively smaller provisions for fossil fuels. The President’s budget proposals would restrict
insurance company provisions for a $14 billion gain (0.1 percentage point) and benefits for fossil
fuels for a $43.6 billion gain (0.3 percentage points).69 Provisions such as tax-exempt bonds or
the low-income housing credit are, however, designed to benefit others (state and local
governments or low-income tenants) and if the corporate benefit were removed, these activities
would largely migrate to the unincorporated sector. Lower rates for small corporations would
allow a 0.3 percentage point reduction. Taxing income of credit unions would allow less than 0.1
percentage points. There are a number of energy subsidies that are directed at conservation whose
repeal is not generally considered, as is the case for corporate charitable deductions.
In addition, there are also some tax reform possibilities that are not in the tax expenditure budget.
For example, a tax reform bill introduced by then-Chairman of the Ways and Means Committee
Rangel in the 110th Congress (H.R. 3970) included a provision extending the write period for
acquired intangibles that raised $20 billion over 10 years.70
Limits on Interest Deductions
Restricting the deduction of interest would permit a significant reduction in rates. Although the
benefits vary with expected inflation, disallowing the deduction for the inflation portion of
interest is estimated to allow a reduction of the tax rate in the neighborhood of 2.5 percentage
points and, in a closed economy, would be an efficient reform.71 It might also reduce the use of
debt as a method of profit shifting (by borrowing in high tax countries).
There is, however, a reservation about this change when considering international capital flows: a
revenue neutral change could decrease the net inflow of capital if debt is more mobile than equity.
Shifts Between Individual and Corporate Taxes: Restrictions on Using the
Non-Corporate Form, and Shifting Tax Burdens to the Shareholder Level
According to a Treasury study, the share of business income that is in corporate form has declined
from 80% to 50% since the early 1980s, primarily through the increase in the number of
shareholders for small corporations that are allowed to elect partnership treatment (Subchapter S
69
General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals, U.S. Department of Treasury,
February 2011.
70
See CRS Report RL34229, Corporate Tax Reform: Issues for Congress, by (name redacted), for a list of provisions
in H.R. 3970.
71
See CRS Report RL34229, Corporate Tax Reform: Issues for Congress, by (name redacted).
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International Corporate Tax Rate Comparisons and Policy Implications
corporations) and the growth in new organizational forms such as limited liability corporations
that are taxed as partnerships.72 Using the tax rates currently in effect, if all business owners
moving to this form are in the top 35% tax bracket, and if dividends and capital gains are
distributed and realized based on economy wide averages as well as being subject to the current
15% rate, returning to the early 1980s share would allow a rate cut of 3 percentage points without
altering overall individual and corporate revenue.73 Note, however, that the contribution to rate
reduction declines rapidly as the corporate rate is cut. For example, a base broadening provision,
such as those discussed above, that allowed a 3 percentage point rate cut starting at a 35% rate
would allow a 2.6 percentage point reduction applying to a 30% rate and a 2.3 percentage point
reduction starting at a 25% rate. The effect of moving operations to corporate form depends on
the differential between the individual and corporate tax, and would reduce the rate by 1.3
percentage points starting at a 30% corporate rate, and actually raise the corporate rate if starting
at a 25% rate.
This potential rate reduction is larger, however, if the individual rate is lower. According to
estimates, the average tax rate for all partnership and Subchapter S income is 30%.74 In that case,
the percentage point reductions are 5, 2.3, and 1.5, respectively, beginning at a 35%, 30%, and
25% corporate tax rate. Because these shifts into the noncorporate sector are driven by new forms
of large companies, it is likely that the tax rate is higher than average for partnership and
Subchapter S income (many partnerships, for example, are no different from proprietorships
except they have two owners instead of one), but probably lower than the top rate.
In a global economy, it is better to allow tax cuts within the corporate sector at the corporate
rather than the individual level. One option is rolling back the 2003 cuts in dividends and capital
gains, which would allow a rate cut of about 2.5 percentage points, and perhaps as much as 4
percentage points.75 These increases in rates are scheduled to occur after 2012 when the Bush tax
cuts expire, however, and whether they can be counted as revenue raisers depends on scoring
options.
The last two options interact, however. The more taxes are collected at the individual level by
raising taxes on dividends and capital gains, the larger a rate reduction from shifting income into
the corporate sectors. If dividends were taxed at full rates and capital gains at 20%, then at a 30%
72
United States Department of the Treasury, “Treasury Tax Conference on Business Taxation and Global
Competitiveness: Background Paper,” July 30, 2007, at http://www.ustreas.gov/press/releases/hp500.htm.
73
To be revenue neutral, the new corporate tax plus the tax on after tax earnings of shareholders, which is t(B+dB)
+ts(1-t)dB, where t is the corporate tax, ts is the tax at the shareholder level, B is the base and dB is the change in the
base, must be equal to the current corporate tax less the individual tax on the change in base. The calculations assume
that four-seventh of the corporate steady state return is paid in dividends, that half of capital gains is realized and that
none of the earnings are in tax exempt forms such as IRAs, 401(k)s or pension funds.
74
Weighted marginal tax rate based on data by the Tax Policy Center, Table T10-0211,
http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2787.
75
Based on estimates provided in the FY2011 budget proposals, indicating a revenue gain of $344.4 billion, $233.3
billion for dividends and $111.1 billion for capital gains. See “General Explanations of the Administration’s Fiscal
2011 Revenue Proposals,” February 2010, at http://www.treasury.gov/resource-center/tax-olicy/Documents/
greenbk10.pdf. Because these changes do not affect the corporate base and interact with the corporate rate change, the
estimate is the percentage of revenue times the tax rate. This estimate was for a year earlier, so was increased by 5% to
reflect economic growth. These estimates assume a large realizations elasticity, and would be considerably higher if
that elasticity were reduced to levels consistent with recent empirical research. Based on data in CRS Report R41364,
Capital Gains Tax Options: Behavioral Responses and Revenues, by (name redacted), Table 2, the capital gains
revenue would increase from $13.9 billion in 2019 to $33.1 billion, if lower elasticties are used. That implies the
$111.1 billion would be higher and would permit a reduction of 3.6 percentage points.
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International Corporate Tax Rate Comparisons and Policy Implications
individual tax rate and a 35% corporate rate, the reduction is 6.5 percentage points. These effects
depend as well, of course, on how the individual tax rate on ordinary income develops, which is
currently scheduled to rise.
Summing Up
This section has identified enough provisions to allow the corporate tax rate to be reduced to 25%
without losing revenue over the long run (i.e., that do not depend on large short-run gains, such as
those from reducing accelerated depreciation), but that would require going beyond corporate tax
expenditures (which would account for only 5 percentage points) to business preferences
associated with unincorporated businesses, foreign tax credit restrictions, or more fundamental
reforms.
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Appendix. Statutory Tax Rates, 1981-2010
Table A-1. Statutory Tax Rates in the United States and the Rest of the
OECD Countries, 1981-2020
Year
United States
OECD Unweighted
OECD Weighted
OECD Weighted
Fixed Countries
1981
49.7
47.8
49.6
49.6
1982
49.7
48.4
50.1
50.2
1983
49.8
48.3
50.5
50.6
1984
49.8
48.2
50.2
50.2
1985
49.8
48.6
50.0
50.0
1986
49.8
47.7
49.0
49.1
1987
44.2
47.3
48.7
48.8
1988
38.6
45.0
47.4
47.5
1989
38.7
43.4
46.2
46.2
1990
38.7
44.3
43.2
44.3
1991
38.9
39.7
44.1
42.2
1992
38.9
38.0
43.8
43.9
1993
39.8
37.6
43.1
43.2
1994
39.7
37.1
42.4
42.6
1995
39.6
36.6
43.1
43.5
1996
39.5
36.6
43.1
43.5
1997
39.5
36.6
43.3
43.8
1998
39.4
35.5
40.8
41.1
1999
39.4
34.6
38.8
39.1
2000
39.3
33.4
37.6
38.6
2001
39.3
32.2
35.5
36.1
2002
39.3
31.0
35
35.8
2003
39.3
30.7
34.6
35.5
2004
39.3
29.4
33.8
34.7
2005
39.3
28.3
33.1
34.3
2006
39.3
27.7
32.5
34.1
2007
39.3
27.2
32.0
35.8
2008
39.3
25.8
29.8
31.2
2009
39.1
25.6
29.6
31.2
2010
39.2
25.5
29.6
31.2
Source: Statutory tax rates and GDP, Organisation for Economic Co-operation and Development (OECD),
http://www.oecd.org/dataoecd/26/56/33717459.xls and http://stats.oecd.org/Index.aspx?DatasetCode=
SNA_TABLE1.
Note: The table provides the data incorporated into Figure 1; the OECD weighted line in that figure uses fixed
countries.
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Author Contact Information
(name redacted)
Senior Specialist in Economic Policy
[redacted]@crs.loc.gov, 7-....
Congressional Research Service
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