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No April Fools’ Joke, U.S. Now World’s Highest Corporate Taxer

James Pethokoukis

If only it were an April Fools’ Day prank. With Japan officially cutting its corporate tax rate as of today, America now has the highest rate among advanced economies. Even its effective tax rate is way above average despite the likes of General Electric spending billions to game the labyrinthine code. A smarter approach would be to substitute a business consumption tax.

Now the United States might cling to second place if Japan cancels the rate reduction to help pay for the tsunami and earthquake devastation. After factoring in state taxes, America’s top rate of 40 percent would still exceed the average of 26 percent for the rest of the OECD.

Headline rates, of course, are like sticker prices on new cars. The real numbers are lower, thanks in part to the $40 billion companies spend annually to comply with, and often sidestep, the maximum levy. GE, for example, has taken heat for consistently paying less than what the U.S. tax code would imply it should.

But even taking into account the efforts of attorneys and lobbyists, the average effective U.S. rate in 2010 was 29 percent against 21 percent for international counterparts, according to the  American Enterprise Institute. And before the recession, corporate tax revenue as a share of U.S. GDP was at its highest since the 1970s.

Politicians of all stripes have been talking about lowering corporate taxes and eliminating loopholes to pay for a sharp rate reduction.  A sharply lower rate —  Canada’s will be just 15 percent in January 2012 — would boost worker wages, investment, productivity, jobs and growth. Such reforms, though a big improvement, would still leave in place a flawed and unwieldy structure.

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9 comments

  1. checklist

    50 years of liberal domination hasn’t. Made for a pro biz culture, and not just on the tax side

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  2. ottnott

    Those poor, overburdened corporations:
    http://www.ritholtz.com/blog/2010/08/tax-base-as-of-gdp/

    Right, I shouldn’t ignore the rate relative to our trading partners. After all, if our corporate tax rates are too high, Walmart and CVS will move all their stores to Ireland:
    http://image.minyanville.com/assets/FCK_Jan2011/Image/tax.png

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  3. Woodshedder

    Ottnot, those charts you posted from Ritholtz’s blog are useless. Do you even know why?

    Secondly, your second link shows that some companies have different tax rates. So what?

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  4. ottnott

    So what?

    The so what is that tax rates relative to other countries (the major point of the item you posted, in case you have forgotten) only matter for companies that can relocate to other countries.

    The link showed that the companies paying the highest rates were ones that need to locate their operations in the US.

    For the charts from Ritholtz’s blog, you probably have in mind the increasing number of businesses that choose to operate as pass-through entities rather than as C corporations.

    Without that change, the chart that Ritholtz posted would have shown a flatter trendline for corporate taxes as a percent of GDP. Those poor, overburdened corporations.

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    • Woodshedder

      Ottnot, you’ve said it exactly: “…tax rates relative to other countries (the major point of the item you posted, in case you have forgotten) only matter for companies that can relocate to other countries.”

      You are forcing companies to locate out of the US to remain competitive against similar companies in other countries.

      However, your chart is not sourced, nor is it labeled as to what those percentages actually represent, so I have no idea what it purports to demonstrate.

      Ritholz’s charts do not account for the amount of gov’t spending that it took to achieve the GDP. Therefore, they are meaningless.

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  5. Sikander

    Take a look at the actual revenue from those taxes not simply the rate. Once you factor in all of the loopholes you don’t see corporations paying the advertised rate. It has become a matter of who has the most creative tax attorneys and the best lobbyists to push for favorable loopholes. Another example of how distorted the tax regime has become and how that distortion is able to confuse the dialogue. Simplify the code dramatically and then lower the rate. The tax base will broaden and revenue will increase, and it will be fairer.

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  6. The Idiot

    We’re #1! We’re #1! In yo face, Japan.

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