The alarm has sounded about the dire global implications of the U.S. decrease in corporate income tax rates that began with the start of 2018, raising the specter of the ‘beggar thy neighbor’ trade wars during the Depression when countries slapped on high tariffs to protect their home turfs. Just days after the enactment of the new U.S. tax law, European leaders suggested they may challenge Washington’s move in the World Trade Organization; China announced it would slash its corporate income tax on foreign investment to zero retroactive to January 2017; and Russia proposed to eliminate fully its already low tax on capital repatriated from abroad.
These all make for good headlines, but they rest on a false zero-sum game notion that as a government lowers its corporate tax rates, the response will be sizeable inbound investment flows to the detriment of other jurisdictions. More important is that decreases in corporate income tax rates or even proactive investment incentives while certainly making a contemplated commercial venture more attractive, they rarely are the most decisive factor driving a ‘go/no-go’ investment decision.
President Trump made no bones about the fact both during and after the 2016 campaign that the key plank of his economic policy program after he entered the Oval Office would be to lower the U.S. corporate tax rate. In part he was egged on because among the globe’s advanced economies—the 35 members of the Organization for Economic Cooperation and Development (OECD)—the U.S. had the highest top corporate income tax rate—39%, which is the total of federal and state and local taxes. The OECD average in 2017 was approximately 25%. Moreover, over the course of 2017, seven of the OECD countries reduced their corporate tax rates by an average of 2.7%, with Hungary and Italy registering the largest decreases, from 19% to 9%, and 31% to 28%, respectively.
But don’t let these data fool you. These are statutory corporate tax rates; not the rates many companies in the U.S. actually pay to the Internal Revenue Service (IRS). Businesses' total tax liabilities are diminished significantly by a slew of deductions and credits. Thus, their effectivetax rates are much lower.
Internationally comparable data on effective corporate tax rates for 2017 are not available for all of the OECD countries. The most recent systematic data are for 2012 and only for the G20 countries, many, but not all, of whom are in the OECD. These data show that the top effective corporate rate for the U.S. was about 19%. While this above the average G20 effective corporate tax rate, it is almost identical to the rate in the UK and somewhat below Japan’s rate. By way of comparison, the U.S. corporate income tax rate today is considerably lower than it was in the late 1960s when it stood at approximately 53%.
To say that the substantive quality—indeed the quantity—of the debate over business taxes in the U.S. during 2017 was disappointing would be an understatement. It did not serve the country well in helping the citizenry understand the reality of tax policy toward business in the U.S. The sound bites and rhetoric coming from the White House and Capitol Hill often cast taxes on business income as instruments of government punishment. They are not.
The accurate, dispassionate view is that setting of business income tax policy requires striking a balance between raising revenue to help defray legitimate government expenses to maintain a domestic environment in which businesses can be launched and thrive (such as the national infrastructure network) and maintaining, indeed sharpening, the competitiveness of U.S. corporations in world commerce.
The key is to strike a proper and consistent balance. But balance in one country will unlikely be the same for another due to cross-national differences in political philosophy; the role of sub-central governmental units in provision of public services; culture; population size; geographic scale and other characteristics.