By: Richard C. Longworth September 10, 2014
American corporate leaders love to complain about the nation’s high corporate tax rate, one of the highest in the world. This rate, they say, is stifling business investment and encouraging U.S. corporations to move their headquarters to other countries.
It sounds logical. But it may not be true. A scholarly look at global tax payments, coupled with an on-the-ground look at the effect of taxes on business investment, suggests that these corporate leaders not only are crying wolf but may be blowing smoke.
Corporate leaders have been beating the drum for corporate tax reform, by which they mean corporate tax cuts. The U.S. rate is 35 percent, which is one of the highest in the developed world — Japan’s is highest at 38 percent — and above the average 24 percent for the 34 advanced countries that make up the Organization for Economic Cooperation and Development. The rate in France is 33 percent, in Germany 30 percent, in Britain only 21 percent.
Many of these differences aren’t huge, but corporate leaders do have a point that our nominal tax rate is higher than that of most of our global rivals. The trouble is that these rates really are nominal, which the dictionary defines as “acting or being something in name only, but not in reality.”
NOT MUCH OF A BURDEN
The reality is very different, as a new paper by University of Southern California law professor Edward D. Kleinbard says: The big American corporations — the global corporations that are threatening to pick up and move — actually make out like bandits at tax time.
As any sophisticated corporation knows, various tax loopholes keep that nominal rate nominal. One of the biggest, Mr. Kleinbard says, is the practice of keeping much of their income overseas and out of reach of the IRS. Altogether, he said, American corporations paid an effective tax rate of 12.6 percent in 2010, the last year for which figures are available.
Mr. Kleinbard said it isn’t the tax rates themselves that are tempting American-based companies to move their headquarters, if not their operations, to relatively low-tax venues such as Switzerland or Ireland. Instead, he said, they want to be able to use that money parked abroad without having to pay taxes on it. He estimates this hoard at $2 trillion: Taxed at 35 percent, this would bring in $700 billion — more than the total U.S. government deficit.
This discrepancy between appearance and reality is an old story in Illinois, where major corporations such as Caterpillar Inc. regularly threaten to move to other states unless the state trims its 9.5 percent corporate tax. In fact, the state’s biggest corporations pay an average 3 percent in taxes and some pay nothing at all.
Does any of it make any difference to corporate investment decisions, or any difference at all except for lowering corporate taxes and putting more of the burden on individual taxpayers?
The evidence is slim. Officially, the most “business tax-friendly” states, according to the Tax Foundation, are Wyoming, South Dakota and Nevada. None of these is exactly overwhelmed by corporate investment. Big, global corporations want to be in big cities, which have the best business services, the biggest airports, the best broadband and the most amenities. All these benefits cost money: In the end, corporations will pay what they have to pay to be where the action is.
A recent story by Crain’s underlines this. Major real estate investors are paying record prices to buy property in Chicago and Illinois. That’s the same Chicago and Illinois that are staggering under huge public deficits, including unmet pension obligations, that seem certain to bring on property tax and other tax increases, sooner rather than later.
These investors know this, and are buying into the city and state anyway. Why? Because they need to be here. More…