A reader writes:
In response to arguments about our relatively high corporate tax rate, you make the claim that "many companies do not pay anywhere near 35 percent." I have two things to say about your claim. First, it is absolutely correct. Second, it is absolutely irrelevant to this discussion. As economists always say, incentives exist at the margin. The decision about where to locate the next corporate investment does not depend on the "average effective tax rate" (which is essentially total taxes divided by total income, and which is the metric you are looking at). It depends on the marginal tax rate that will apply to profits from that next investment. And the statutory rate is a much better approximation of the marginal tax burden on additional investment than the average effective rate because the latter is mostly measuring the rate on investments already made. CFOs look very closely at statutory rates around the world when planning capital investments. They do not look at their companies' overall average rate.
With that in mind, the United States has the second-highest statutory tax rate in the developed world, after Japan.
But Japan has announced plans to cut its rate (delayed by the earthquake/tsunami), and thus the United States will soon have the dubious distinction of the highest corporate tax rate. And with recent economic literature finding that most of the burden of the corporate rate is borne by workers (through fewer jobs and lower wages), it is becoming increasingly clear that maintaining such a high statutory rate is economically destructive.
What your "average effective tax rate" measure does tell us, though, is that we have an opportunity to lower the statutory rate significantly without increasing the deficit if we are willing to go after all the tax breaks that allow companies to have such a low average rate. A high statutory rate and low average rates is a great argument for tax reform that conservatives and liberals should be able to agree on. Conservatives get lower rates and liberals get to close corporate loopholes.
That is my preferred solution as readers well know by now. But I don't think it's enough to equalize the sheer power of so many new members of the global economy in the developing world offering the same goods and same labor for a fraction of the costs. Another writes:
Your reader writes: "Do some research as to why Microsoft has such a large presence in Ireland." Microsoft pays virtually no income tax in the US or Ireland. There is another tax, higher than 35%, that they pay in the US and nowhere else: health care benefits. In Ireland, as in Canada and most other countries, health care is decoupled from employment, as it should be. Adding an employee in the US costs a premium of something like half his or her salary. That's a hefty penalty – and a huge savings in countries like Ireland, even if wages were otherwise the same.
Another:
As you correctly noted, many companies don't pay the 35% rate. But even if they did, I think there needs to be a closer examination of why, as one of your readers put it, "the 35% tax incentivizes multinational companies to operate from low tax countries."
Much of this debate focuses on competition – corporate taxes must be low in order for American companies to compete. That is a sweeping generalization that ignores the fact that many American companies could afford to pay the 35% tax while still being competitive and profitable. The problem is, they wouldn't be as profitable. And that is where corporate patriotism evaporates. Many of these companies would rather relocate, not necessarily to be more competitive, but to increase their profits.
The Dish 