The voices of Tax Policy Center's researchers and staff
The Wall Street Journal editorial page ran one of its favorite tables the other day, purporting to show how uncompetitive the U.S. corporate tax regime is with the rest of the developed world. The chart shows that, at nearly 40%, combined state and federal statutory rates here are far higher than the average of the countries in the OECD.
Marginal rates are important, but they are only part of the story. What really matters to many CFOs are average effective tax rates—what they pay after deductions, credits and the like. And there, the story is much more mixed. According to the CBO, tax rates on equity financing of equipment are still relatively high in the U.S. but for debt, they are among the lowest in the developed world. And, overall, for the past quarter century, the levy has generated revenues of only about 2% of GDP.
But the Journal’s bumper sticker message seems to be catching on. Not only has John McCain promised to cut the top corporate rate from 35% to 25% but, now, Barack Obama is hinting that he too might trim rates in exchange for closing loopholes.
That is a deal I would make in a minute. It makes a lot of sense to keep the Code as far away from investment decisions as possible, so, for example, companies don’t do debt financing merely because the tax payoff is bigger. But I am not sure the supposed beneficiaries of these rate cuts agree.
I had lunch with a long-time business lobbyist (iced tea, no martinis) the day the Journal editorial ran and his response to this offer was, in effect, “Thanks, but no thanks.” The members of his trade association are very happy with their credits and deductions—complex as they may be—and are not remotely interested in swapping them for lower rates.
This reminded me of a discussion I moderated a couple of years ago. The topic was tax reform and my fellow panelists, mostly tax vps at major multinational corporations, had spent the better part of 40 minutes griping about how complicated the Internal Revenue Code is. So I asked how many would be willing to give up their R&D credits, interest deductions, and the like in exchange for a simplified, lower rate structure. There was silence and nervous laughter, but not a single taker.
As my lobbyist friend said the other day, U.S. corporations have spent a lot of money to get a system they can live with, and they are not eager to change it. If McCain or Obama really do try to lower rates and broaden the corporate base, it may not be liberal Democrats who do them in, but instead, those very business execs who so love to quote the Journal’s editorial page.
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