As President Trump pushes for a reduction of the corporate tax rate, the Congressional Budget Office recently released a report showing that the U.S. rate is among the highest in the world.
The Tax Foundation said that discourages investment and encourages profit sharing.
The CBO report noted the United States’ top federal statutory corporate income tax rate is 35 percent, and has been so since 1993. When including state taxes, the top rate is 39.1 percent, making America’s rate higher than any other G20 country. Japan is the closest at 37 percent.
America fared better — if only slightly — when examining average and marginal corporate tax rates. The average corporate tax rate, a measure of the total amount of corporate taxes a company pays as a share of its income, was 29 percent in the U.S., ranking the nation third. The effective marginal corporate tax rate, a measure of a corporation’s tax burden on returns from marginal investments, was an estimated 19 percent, or fourth highest among the G20.
Kyle Pomerleau, director of federal projects at the Tax Foundation, said these high rates are a reason why many think the U.S. should reform its corporate income tax. He noted that multi-national companies can shift profits out of the U.S. to reduce their tax burdens.
“If the next dollar of profits is taxed at the statutory rate, companies have an incentive to locate their profits in countries with lower statutory tax rates,” he said.
Pomerleau pointed out, too, that companies are more willing to pursue investments in countries with lower marginal tax rates, which usually mean those nations allow more deductions for new investments.
“The lower the marginal tax rate on new investment, the lower the pre-tax returns on those investments need to be to satisfy investors on an after-tax basis,” he said.
AT&T, for one, told analysts the company would make more investments in the U.S. if Trump successfully lobbied for the tax cut.
“We know at AT&T that if you saw tax rates move [lower] to 20 percent to 25 percent, we know what we would do — we would step up our investment levels,” Randall Stephenson, the company’s chief executive, said of a cut in the statutory rate.
But, like many politicians, Trump is finding his campaign promises — he vowed to reduce the rate to 15 percent several times during his presidential run — no easy feat. Insiders told the New York Times the target had been increased to 20 percent, but even that now seems unlikely, as a plan proposed by House Speaker Paul Ryan to drop the figure to that number hinged on the repeal of Obamacare.
The Times pointed out a tax package that would include a cut in the corporate rate is likely to be as high as 28 percent — a number pushed by former President Obama the last few years of his presidency. That’s because it would take a rate that high to be deficit neutral after 10 years, as pointed out by Grover Norquist, president of Americans for Tax Reform. A bill with a deficit neutral status would allow the Senate to pass it with a simple majority because the legislation would be considered as budget reconciliation.