posted on 12 March 2017
from the Congressional Budget Office
In the United States, the top federal statutory corporate income tax rate (the rate set by law that applies to the highest corporate income tax bracket) has been 35 percent since 1993. Most corporate income is taxed at that rate. With state taxes added in, the top statutory rate is even higher; on average, that combined rate was 39.1 percent in 2012, among the highest in the world (see table below).
The statutory corporate tax rate is one of many features of the tax system that influence corporate behavior. Companies are likely also to consider other provisions of the tax system - including tax preferences, surtaxes, and noncorporate taxes - that affect the amount of taxes they owe. Among the alternative measures of tax rates that account for some of those provisions are the average and effective marginal corporate tax rates.
The average corporate tax rate is a measure of the total amount of corporate taxes that a company pays as a share of its income. CBO estimates that the U.S. average corporate tax rate for foreign-owned companies incorporated in the United States in 2012 was 29 percent - about 10 percentage points below the top U.S. statutory corporate tax rate.
The effective marginal corporate tax rate (in this document, the effective corporate tax rate), is a measure of a corporation’s tax burden on returns from a marginal investment (one that is expected to earn just enough, after taxes, to attract investors). CBO estimates that the effective corporate tax rate was 19 percent in the United States in 2012. That rate, the fourth highest among the Group of 20 (G20) countries, was about 20 percentage points below the top U.S. statutory corporate tax rate.
This chart book is an update and expansion of CBO’s 2005 report that examined statutory and effective corporate tax rates for the United States and member countries of the Organisation for Economic Co-operation and Development and the Group of 7 between 1982 and 2003. This report focuses mainly on the 2012 tax rates in countries that are members of the G20. CBO expanded the analysis to include average tax rates, which were estimated on the basis of information reported for income and taxes paid by corporations in a given year. For both this report and the 2005 report, effective corporate tax rates were derived from simulations based on certain features of the various countries’ tax systems.
The first section of the report reviews statutory corporate tax rates in the United States and elsewhere. The second covers average corporate tax rates. The third examines effective corporate tax rates and the factors that affect them. Appendix A details CBO’s analytical methods, and Appendix B describes some alternative approaches to test the sensitivity of CBO’s estimates of effective corporate tax rates.
How Do Different Tax Rates Affect Business Decisions?
All three types of corporate tax rates affect a company’s decisions, but each influences a different choice. Because of their broader scope, average and effective corporate tax rates are better indicators of a company’s incentives to invest in a particular country than is the statutory corporate tax rate. The average corporate tax rate reflects a country’s corporate tax rate schedule, the system’s tax preferences for business investments, any surtaxes, and possibilities for tax avoidance or evasion. Companies consider the average corporate tax rate when deciding whether to undertake a large or long-term investment in a particular country. The effective corporate tax rate, which is a measure of the tax on a marginal investment, is more informative for decisions about whether to expand ongoing projects in those countries in which a company already operates. In contrast, businesses focus on the narrower statutory corporate tax rate when they develop legal and accounting strategies to shift income earned in high-tax countries to low-tax jurisdictions - especially low-tax jurisdictions in which those businesses do not plan to invest and from which they thus expect no benefits from tax preferences for business investments.
Is the U.S. Statutory Corporate Tax Rate Comparable to Rates of Other Countries?
The top statutory corporate tax rate in the United States in 2012 was 10 percentage points higher than the average (weighted by gross domestic product, or GDP) of the top rates in the other G20 countries, CBO estimates. In 2003, Japan, Germany, and the United States had the highest statutory corporate tax rates among G20 countries; by 2012, reductions in Japan’s and Germany’s top rates had dropped them to second and ninth place, respectively, boosting the United States to the top of the list. The United States also had the highest rate among the 15 countries with GDP above $1 trillion in 2012, according to one survey of 129 jurisdictions.
In countries outside the G20, tax rates varied more widely in 2012. On the one hand, the United Arab Emirates taxed corporate income at rates up to 55 percent. On the other hand, some jurisdictions had rates so low (and in some cases collected no corporate income taxes at all) that they were considered tax havens, attracting companies to relocate income from other countries with higher corporate income tax rates.
How Do Average Corporate Tax Rates Differ by the Country of Incorporation?
A U.S.-owned foreign company is one that is incorporated outside the United States and has more than half of its shares (a controlling interest) owned by a single U.S. taxpayer. About 49,000 U.S.-owned companies were incorporated in G20 countries in 2012. CBO estimates that those companies faced average corporate tax rates in 2012 that were nearly always lower than the top statutory corporate tax rate in the country of incorporation. Two exceptions were Argentina and Indonesia, which had the G20 countries’ highest average corporate tax rates for U.S.-owned foreign companies. Average corporate tax rates in the G20 for those businesses ranged from a high of 37 percent in Argentina to a low of 10 percent in the United Kingdom - the G20 country with the greatest number of U.S.-owned foreign companies in 2012.
In this report, CBO compares average corporate tax rates for U.S.-owned foreign companies with the rates faced by foreign-owned companies incorporated in the United States. Those businesses have more than half of their shares owned by a single foreign taxpayer. If it were possible to calculate, the best measure for comparing new investments in a foreign country with those in the United States would be the average tax rate faced by the U.S.-located affiliates of U.S.-owned foreign companies. That rate, however, cannot be calculated with available information. Instead, the average tax rate faced by foreign-owned companies incorporated in the United States is used as an approximation because both types of companies operate outside of their domestic markets. In 2012, the average tax rate faced by foreign-owned U.S. companies was higher than the average rates that U.S.-owned companies faced in all but two other G20 countries.
Average corporate tax rates were lower in 2012 than they were in 2004 in the United States and eight other G20 countries, CBO estimates. Top statutory corporate tax rates fell in most G20 countries between those two years, but other changes in the tax system and the economy also affected average corporate tax rates.
How Do Effective Corporate Tax Rates Differ From Top Statutory Corporate Tax Rates?
Two key features of national tax systems cause effective corporate tax rates to differ - both in magnitude and direction - from top statutory corporate tax rates: the treatment of depreciation (the loss in value attributable to wear and tear of an asset) and the sources of financing for investments. CBO estimates that, at 18.6 percent, the U.S. effective corporate tax rate in 2012 was more than 20 percentage points lower than the top statutory rate. Other tax preferences that are part of the U.S. tax code but that are not included in this analysis would lower that rate even more.
The U.S. tax code provides companies with deductions for depreciation (known as cost recovery allowances) that are more generous for equipment than for buildings, although the opposite is true for most other G20 countries. As a result, the U.S. effective corporate rate on investments in equipment was only the 10th highest among G20 countries in 2012, but the effective corporate rate on investments in buildings was 2nd highest among the G20 countries.
Because companies in most countries can deduct interest payments - but not payments of dividends to shareholders or the capital gains they earn - from taxable income, effective corporate tax rates on debt-financed investments are lower than are those for equity-financed investments. That difference is greater when there is a high statutory corporate tax rate because the high rate increases the value of the interest deduction. The value of that deduction, in combination with the depreciation schedule, caused the U.S. effective corporate tax rate for debt-financed investments in equipment to be the second lowest among G20 countries in 2012. The U.S. effective corporate tax rate is ranked near the middle for comparable equity-financed investments. Italy is unique among the G20 countries in that since 2012, its tax system has provided an allowance for corporate equity that permits companies to take a deduction for equity that is similar to the deduction for interest payments. That feature is the chief reason that Italy’s overall corporate effective tax rate was estimated to be negative in 2012.
CBO estimates that the U.S. effective corporate tax rate overall was essentially unchanged between 2003 and 2012. In 2003, the U.S. rate ranked fifth among those of the G20 countries, and it followed Japan’s, Argentina’s, Canada’s, and Germany’s. In 2012, the U.S. rate ranked fourth, and it followed Argentina’s, Japan’s, and the United Kingdom’s. In Italy, largely because of the adoption of the allowance for corporate equity, the effective corporate tax rate declined by 36 percentage points from 2003 to 2012. By that year, Italy’s rate, at - 23 percent, was by far the lowest among G20 countries and constituted a net government subsidy for corporations’ marginal investments.
The estimates of effective corporate tax rates presented in this report reflect differences among the G20 countries only in statutory corporate tax rates and depreciation allowances for buildings and equipment. However, countries also differ in their tax treatment of other sources of income or expenditures (for example, investments in research and experimentation) and in their economic conditions (such as their inflation rates). Appendix B includes estimates that incorporate additional differences among the G20 countries. Accounting for those differences results in estimates for the United States that range from 13 percent (accounting for the tax treatment of investments in research and experimentation) to 19 percent (using the actual U.S. inflation rate in 2012).
How Much Have Tax Rates Changed Since 2012?
The necessary data are not available to estimate average corporate tax rates for a year more recent than 2012. It is possible, however, to examine how statutory and effective corporate tax rates have changed since 2012. Four G20 countries modified their corporate income tax systems after 2012, generally resulting in lower effective tax rates. Japan, South Africa, and the United Kingdom reduced their top statutory corporate tax rates. As of 2015, Japan’s top statutory corporate tax rate was 32.1 percent - 5 percentage points lower than its top rate in 2012. As a result, CBO’s estimates of Japan’s effective corporate tax rate fell from 21.7 percent in 2012 to 18 percent in 2015. South Africa’s top statutory corporate tax rate fell from 34.6 percent in 2012 to 28 percent in 2015, and its estimated effective corporate tax rate fell from 9.0 percent in 2012 to 6.2 percent in 2015. The United Kingdom reduced its top statutory corporate tax rate from 24 percent in 2012 to 20 percent in 2015 but also slightly tightened the tax treatment of depreciation for equipment. On net, those changes led to a reduction in the estimates of effective corporate tax rates from 18.7 percent in 2012 to 15.7 percent in 2015. An increase in a surcharge caused India’s top statutory corporate tax rate to rise from 32.5 percent in 2012 to 34.6 percent in 2015. That change led to an increase in the estimates of the effective corporate tax rates from 13.6 percent in 2012 to 15 percent in 2015.
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