Facts and Myths about the U.S. Corporate Tax Rate

February 13, 2014

Despite White House claims to the contrary, the U.S. marginal effective tax rate is the highest among developed countries, say Jack Mintz and Duanjie Chen of the Tax Foundation.

There are two ways to look at the effective corporate tax rate. One way is to measure the marginal effective tax rate (METR) on new investments, while the other looks at the average effective tax rate (AETR).

The METR is a measure of the tax impact on capital investment as a portion of the cost of capital.

  • Since 2007, the United States has had the highest METR in the Organization for Economic Cooperation and Development.
  • The METR on corporate investment is a whopping 35.3 percent, and the tax varies depending upon the industry.
  • The communications industry has a METR of 39.3 percent, while the transportation industry has the lowest METR, at 26.7 percent.

The White House, however, recently issued a report saying that Canada's METR was 33 percent, higher than a purported U.S. rate of 29 percent. How?

  • All taxes that affect corporate income should, in theory, be included in calculating the METR -- not only income taxes, but property taxes and sales taxes, among others. But because taxes vary across countries, it is very difficult to come up with a way to treat the various taxes consistently. As a result, Mintz and Chen do not include property taxes in their model.
  • The U.S. model, however, does include the property tax across countries, but it is inconsistent and does not take important distinctions into account. This results in an understating of U.S. taxes and an overstating of Canadian taxes.
  • Moreover, the Mintz and Chen model includes the effective sales tax rate on capital goods, while the U.S. model does not. By excluding the effective sales tax rate, the U.S. METR looks much lower.
  • By failing to account for the sales tax -- and by including the property tax -- the White House report shows the United States with a lower METR than Canada.

The average effective tax rate (AETR) is the tax paid divided by the tax base. This figure changes from year to year, because complexities in the tax code leads to variations in the base.

The corporate income tax rate in the United States is so high that it leads to inefficiency in taxation, because businesses plan extensively to avoid the tax, shrinking the tax base. Instead, the American tax system should be reformed and replaced with a lower tax rate and a larger tax base.

Source: Jack Mintz and Duanjie Chen, "The U.S. Corporate Effective Tax Rate: Myth and the Fact," Tax Foundation, February 6, 2014.

 

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