MYTH: Corporate profits are at record highs, while corporate taxes are at record lows. Critics of corporate tax reform argue that while the U.S. has a 35 percent corporate tax rate on paper, few corporations actually pay that, due to a proliferation of loopholes, deductions, and the use of tax havens.
FACT: Tax payments from businesses and corporations track changes in business profitability, which is determined in large part by the health of the overall economy. Corporate and business taxes were low in 2009 because America had plunged into the Great Recession. The losses caused by the recession carried forward to subsequent years, reducing corporate and business tax payments in those years as well. In addition, to counter the recession and encourage businesses to invest and hire, Congress and the Administration enacted substantial tax incentives (e.g., bonus depreciation) aimed at boosting hiring and economic activity. The tax incentives also temporarily reduced corporate and business tax payments. At the same time, additional pension funding contributions bolstered employee pension plans but reduced taxable income.
A number of other factors need to be taken into account in assessing the level of corporate tax payments and the taxes paid by U.S. companies relative to their overseas competitors:
- Corporations and businesses weren’t the only groups to contribute lower tax revenues during the recession – federal income taxes from individuals plunged as well.
- In the years since the recession, corporate income taxes increased 75 percent, yielding the fifth highest amount in history by 2012. For the first seven months of the current fiscal year, corporate income taxes are up 22 percent over the same period in 2012.
- In addition to the U.S. having the highest statutory rate in the industrialized world, numerous studies, including a 2011 report from the Tax Foundation, a 2012 report from the World Bank, and a number of academic studies, show that U.S. companies have among the highest effective tax rates of any advanced economy in the world – and there is wide agreement on both sides of the aisle that we should reduce these rates. Democrats and Republicans agree that in order to boost our economy, create jobs and make American businesses more competitive, the right step is to lower the corporate tax to a rate similar to our foreign competitors.
- The high combined tax burden on corporate income in the U.S. – consisting of the corporate income tax and the individual income tax on dividend distributions – results in many businesses now starting up as partnerships, S corporations, and sole proprietorships, which pay tax under the individual income tax but not the corporate income tax. As a result of the growth of these so-called “pass-through entities,” the percentage of business income earned by corporations has declined from 78 percent in 1980 to 40 percent in 2010 (the most recent year for which data are available). Consequently, much business income is now taxed directly under the individual income tax system rather than under the corporate income tax. Instead of being a signal of a low corporate tax burden, corporate tax collections are lower than they might otherwise be because people are increasingly conducting their businesses as partnerships, S corporations and sole proprietorships due to the high corporate tax burden they would face if they operated as a business subject to the corporate income tax.
- The high corporate tax has been noted by President Obama who said during his reelection campaign that America’s tax code “hits companies that choose to stay in America with one of the highest tax rates in the world.” Former President Bill Clinton has said “We’ve got an uncompetitive rate… we should cut the rate to 25 percent.”
FACT: It is a gross overstatement to say that many of the biggest corporations pay no taxes. U.S. corporations paid over $1 trillion in income taxes to the U.S. Treasury between 2008 and 2012 and more than $200 billion in state and local income taxes. Tax returns filed in 2009 (the latest for which detail is available) show that the 1500 largest corporations – representing fewer than 1/10th of 1 percent of all corporate tax returns – paid nearly two-thirds of all federal corporate income tax in that year. Yes, corporate income tax collections declined during the recession, but that is because income also declined. Critics focus on taxes during a severe recession, which resulted in huge losses that shrunk business profits, and therefore business and corporate income taxes, during those years. Critics fail to acknowledge that current tax payments in those years were skewed by temporary tax incentives (e.g., bonus depreciation) that Congress and the Administration enacted to boost economic activity during a recession and additional pension funding undertaken to bolster employee pension plans.
It would be a huge mistake to make tax policy decisions based on a period in the midst of the worst U.S. recession in 80 years. But we do agree there’s a need to reform the corporate tax system to give confidence to the American people that corporations pay what they should, eliminate special tax breaks and preferences, and put an end to using the tax code to pick winners and losers.
MYTH: A territorial tax system will lead to American jobs being sent overseas and allow big companies to avoid paying taxes. Critics say that corporate America is now promoting a pure “territorial” corporate tax system, under which the profits made by U.S. companies would never be taxed. They argue that this kind of system will lead American companies to move their operations and jobs overseas and sell their products back to America, without paying any U.S. taxes.
FACT: Our member companies support the U.S. adopting a modern hybrid international tax system that takes the best ideas from the international tax systems across the globe and combines them with truly American reforms that protect our workers, protect our tax base, and help American businesses compete in the global marketplace.
28 OECD member countries and all other G-8 countries – some of our closest and largest trading partners – have adopted modern international tax systems with territorial features. If territorial tax systems resulted in additional jobs and income being shipped overseas, this system would quickly be falling out of favor with our trading partners. But in fact, the opposite is true: the number of OECD member countries with territorial tax systems has more than doubled since 2000, and today over 80 percent of OECD member countries base their tax structures on territorial systems. Most recently in 2009 both the UK and Japan adopted territorial systems.
- Not only is there no evidence that territorial systems have led to a loss in jobs, the evidence suggests that territorial tax systems promote economic growth in countries that adopt them by retaining and attracting the headquarters operations of global corporations and providing for the free flow of capital back to their domestic economies. Since the UK adopted a territorial system, it has attracted high-paying jobs, including from large U.S. companies that have moved their headquarter operations to the UK. It is estimated that over 40 U.S. and foreign companies currently are looking to relocate their headquarters to the UK.
- Adopting a modern hybrid international tax system that combines features of territorial tax systems like those of our trading partners would allow U.S. companies to compete more effectively on a global basis, which in turn would increase jobs from both greater U.S. exports and expanded headquarter activities. U.S. companies with foreign operations account for approximately half of all U.S. exports, with $615 billion in goods exported in 2010. It is estimated that each 10 percent increase in sales by an American company’s foreign subsidiaries results in a 6.5 percent increase in U.S. exports from the American parent company to its foreign subsidiaries.
- A territorial tax system like those adopted by our trading partners would increase U.S. jobs by allowing U.S. companies to bring home up to $2 trillion of foreign accumulated earnings – a combination of funds which have been reinvested to expand foreign operations and cash and cash equivalents – that currently are trapped abroad, as well as their future foreign earnings. The billions of dollars of repatriated foreign earnings would support additional U.S. investment and consumption, bolstering U.S. growth and jobs in both the short- and long-run. Repatriated earnings would fund increased investment, acquisitions, and R&D. Repatriated earnings distributed to shareholders would allow them to make other investments and purchases that benefited the U.S. economy and increase pension fund and retiree assets.
- Advisory commissions appointed by both President Bush and President Obama have included recommendations to adopt a modern hybrid international tax system, including the co-chairs of the National Commission on Fiscal Responsibility and Reform (Simpson and Bowles); President Obama’s Export Council; President Obama’s Council on Jobs and Competitiveness; and President Bush’s Advisory Panel on Federal Tax Reform.
- A modern hybrid international tax system can be designed to promote domestic manufacturing and innovation, remove constraints on the free flow of capital to allow American companies to invest their foreign earnings at home, and balance protecting the U.S. tax base with allowing American companies to compete on a level playing field in global markets. In addition, a modern hybrid international tax system could include rules similar to those adopted by our trading partners that impose immediate home country tax on certain passive and mobile income of foreign subsidiaries.
- A modern hybrid international system would not result in a zero tax rate on foreign income. U.S. companies with foreign operations would continue to pay taxes to the foreign countries where the income is earned. Just as foreign companies doing business in the U.S. pay taxes to the U.S. government, U.S. companies operating in foreign countries pay taxes to the foreign countries where the income is earned. In addition, under a 95 percent exemption system – such as that included in Ways and Means Chairman Dave Camp’s international discussion draft and in use in several OECD countries such as Belgium, France, Germany, Italy, and Japan – 5 percent of foreign dividends would be fully subject to U.S. corporate tax without any reduction for foreign tax credits.
- A reduction in the 35% U.S. corporate tax rate – as part of comprehensive reform including a modern hybrid international tax system – would also encourage companies to invest, hire, and earn income in the United States by narrowing the difference between the tax U.S. companies pay on their U.S. and foreign operations.
MYTH: Corporate tax reform should raise more revenue. Critics argue that corporate taxes used to make up about one-third of federal revenue; now they make up less than 9 percent. The U.S. used to raise about 5 percent of GDP in corporate tax revenue; now it raises below 2 percent.
FACT: U.S. corporations currently pay the highest tax rate in the world; raising additional revenue from corporate tax reform isn’t the answer. It would only harm our economy and job growth. That’s why many policymakers from both parties have called for revenue-neutral corporate tax reform that will reduce the tax rate and eliminate tax breaks and preferences so everyone plays by the same set of rules. A lower rate will help with growth, job creation, and our ability to compete globally. President Obama said during his reelection campaign that America’s tax code “hits companies that choose to stay in America with one of the highest tax rates in the world.” Former President Bill Clinton has said “We’ve got an uncompetitive rate… we should cut the rate to 25 percent.”
- The high combined tax burden on corporate income in the U.S. – consisting of the corporate income tax and the individual income tax on dividend distributions – results in many businesses now starting up as partnerships, S corporations, and sole proprietorships, which pay tax under the individual income tax but not the corporate income tax. As a result of the growth of these so-called “pass-through entities,” the percentage of business income earned by corporations has declined from 78 percent in 1980 to 40 percent in 2010 (the most recent year for which data are available). Thus, it is hardly surprising that the share of corporate profits in GDP is now lower than it was before 1980. The remarkable fact is that in the most recent two quarters, federal corporate income taxes as a share of the economy were on a par with the 40 year average, i.e., 1.9 percent of GDP. In fact, in 2006 and 2007, before the recession, corporate taxes as a share of GDP were the highest in more than 25 years.
- Both Democrats and Republicans have agreed that corporate tax reform should be revenue neutral – that it should be done in a balanced way by ending special tax breaks and preferences and lowering the rate so that American workers and businesses can compete. And it shouldn’t cost American taxpayers a dime.
- The best way to reduce our deficit is through economic growth – and that is something on which both Democrats and Republicans have long agreed. Many OECD countries that reduced their corporate tax rates did not experience a loss in corporate tax revenues as corporate activity rose in response. Properly designed tax reform will increase economic growth – that’s how we reduce our deficit, and that’s how America succeeds in the 21st century.
FACT: American companies operate in foreign markets primarily to serve foreign customers. Over 90 percent of the sales by the foreign affiliates of American companies are to foreign customers, not to the U.S. Marketing U.S. products to foreign consumers frequently requires local operations and customized products to meet foreign needs, tastes, and preferences. Further, some products must be made close to the consumer because shipping costs would make it uneconomical to export from the United States. Examples include bulky products like diapers, fresh and packaged foods; heavy products containing liquids such as laundry detergent or beverages; and low-value, high-volume products such as bulk chemicals. And in many countries, especially in emerging markets, countries require U.S. companies to have a local presence as a condition to selling into their markets. Importantly, even when American companies have local foreign operations, their foreign sales benefit the U.S. economy by pulling through exports from the United States.
- U.S. companies with foreign operations account for approximately half of all U.S. exports, with $615 billion in goods exported in 2010, resulting in increased jobs in these American companies and in their U.S. suppliers. It is estimated that each 10 percent increase in sales by the foreign subsidiaries of an American company results in a 6.5 percent increase in U.S. exports to those foreign subsidiaries.
- While some high profile exceptions exist, most American companies operating in foreign countries also don’t avoid taxes – they pay substantial foreign income taxes, as shown in IRS data.
- A modernized international tax system would allow U.S. companies to be more competitive in foreign markets and allow them to bring their foreign earnings back for investment in the U.S. economy – both of which would increase U.S. jobs. A lower U.S. corporate tax rate would attract investment to the United States and would reduce the likelihood that high U.S. tax rates discouraged U.S. investment.
MYTH: Businesses can make everything in the U.S. and successfully compete globally. Critics argue that U.S. companies should undertake all of their production in the U.S. and export their products to foreign consumers.
FACT: American companies do export a substantial volume of goods and services each year, and American companies with foreign operations account for nearly half of all U.S. exports – $615 billion of goods in 2010. But to be successful in foreign markets frequently requires local operations to tailor U.S. products to local needs, tastes, and preferences. Further, some products would be uneconomical to transport from the U.S. and would be noncompetitive in foreign markets due to the extra shipping costs. Examples include bulky products like diapers, fresh and packaged foods; heavy products containing liquids such as laundry detergent or beverages; and low-value, high-volume products such as bulk chemicals. And, of course, businesses providing services to local customers – which include businesses constructing, installing, maintaining, and repairing exported products; retailers; restaurants; hotels; banks; and insurance – must be present in the local market to provide their services to foreign customers. In many cases, especially in emerging markets, countries require U.S. companies to have a local presence as a condition to selling into their markets. Importantly, the success of American companies in foreign markets through their foreign affiliates strengthens the U.S. economy.
- Increased sales by the foreign affiliates of American companies lead to more U.S. jobs by pulling through exports of other U.S. goods and services. It is estimated that each 10 percent increase in foreign sales by a company’s foreign affiliates is associated with a 6.5 percent increase in U.S. exports by the company to its foreign affiliates.
- Studies show increases in U.S. employment, U.S. compensation, U.S. investment, and U.S. research spending from increased foreign activity.
- If American companies did not operate in these foreign markets – comprising 95 percent of the world’s consumers – foreign companies would corner these markets at the cost of U.S. jobs and they would become even bigger competitors for the U.S. market, making the U.S. economy weaker – not stronger.