Advocates of cutting corporate tax rates frequently make their
argument based on the higher statutory rate in the United States as
compared with the rest of the world; they argue that cutting
corporate taxes would induce large investment flows into the United
States, which would create jobs or expand the taxable income base
enough to raise revenue. President Barack Obama has supported a
rate cut if the revenue loss can be offset with corporate base
broadening. Others have urged on one hand, a revenue raising
reform, and, on the other, setting deficit concerns aside. Is the
U.S. tax rate higher than the rest of the world, and what does that
difference imply for tax policy? The answer depends, in part, on
which tax rates are being compared. Although the U.S. statutory tax
rate is higher, the average effective rate is about the same, and
the marginal rate on new investment is only slightly higher. The
statutory rate differential is relevant for international profit
shifting; effective rates are more relevant for firms' investment
levels. The 13.7 percentage point differential in statutory rates
(a 39.2% rate for the United States compared with 25.5% in other
countries), narrows to about 9 percentage points when tax rates in
the rest of the world are weighted to reflect the size of
countries' economies. (The OECD rates fell by slightly over1/2 of a
percentage point between 2010 and 2012) Regardless of tax
differentials, could a U.S. rate cut lead to significant economic
gains and revenue feedbacks? Because of the factors that constrain
capital flows, estimates for a rate cut from 35% to 25% suggest a
modest positive effect on wages and output: an eventual one-time
increase of less than two-tenths of 1% of output. Most of this
output gain is not an increase in national income because returns
to capital imported from abroad belong to foreigners and the
returns to U.S. investment abroad that comes back to the United
States are already owned by U.S. firms. The revenue cost of such a
rate cut is estimated at between $1.2 trillion and $1.5 trillion
over the next 10 years. Revenue feedback effects from increased
investment inflows are estimated to reduce those revenue costs by
5%-6%. Reductions in profit shifting could have larger effects, but
even if profit shifting disappeared entirely, it would not likely
offset revenue losses. It seems unlikely that a rate cut to 25%
would significantly reduce profit shifting given these transactions
are relatively costless and largely constrained by laws,
enforcement, and court decisions. Both output gains and revenue
offsets would be reduced if other countries responded to a U.S.
rate cut by reducing their own taxes. Evidence suggests that the
U.S. rate cut in the Tax Reform Act of 1986 triggered rate cuts in
other countries. It is difficult, although not impossible, to
design a reform to lower the corporate tax rate by 10 percentage
points that is revenue neutral in the long run. Standard tax
expenditures do not appear adequate for this purpose. Eliminating
one of the largest provisions, accelerated depreciation, gains much
more revenue in the short run than in the long run, and a long-run
revenue-neutral change would increase the cost of capital. Other
revisions, such as restricting foreign tax credits and interest
deductibility or increasing shareholder level taxes, may be
required. This publication focuses on the global issues relating to
tax rate differentials between the United States and other
countries. It provides tax rate comparisons; discusses policy
implications, including the effect of a corporate rate cut on
revenue, output, and national welfare; and discusses the outlook
for and consequences of a revenue neutral corporate tax reform.
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