Do U.S. companies pay less income tax than their foreign competitors? (The answer is no.)
By Cathy Schultz, Vice President, Tax and Fiscal Policy, Business Roundtable
As you may have seen, there’s a new Reuters piece circulating claiming that “U.S. companies pay less income tax than their overseas competitors and would likely continue to do so under a tax hike proposed by President Joe Biden.” This is not true. Here are four reasons why:
1. The piece begins with — and its argument heavily relies on — the claim that the “U.S. tax code is unusually generous.” However, when one compares tax systems of other countries, the United States is the only one with a global minimum tax and has a corporate rate in the middle of the pack among our competitors. If the U.S. rate were increased to even 25 percent, we would be tied for the second highest rate in the world.
Today, within the OECD, including state and federal taxes, 13 countries have a higher corporate tax rate than the United States, and 24 countries have a lower corporate tax rate.
2. Second, the article references effective tax rates. Reuters examined “52 of the largest U.S.-based multinational firms” and compared them “to the rates paid by these companies’ main overseas competitors,” claiming that U.S. companies paid an average effective tax rate 8 percent lower than that paid by 200 foreign competitors.
Unless Mr. Bergin reviewed confidential IRS tax forms, he extrapolated tax data from financial statements. While careful analysis of effective tax rates from financial statements can be informative, an accurate comparison of how taxes affect the competitiveness of any two companies requires an apples-to-apples comparison. One would want to compare companies with the same profitability, global footprint, and types of activities, for example, including the amount of R&D each company performs. Financial statement effective tax rates for a single company can vary from year to year due to prior year losses, changes in expectations of future profitability, and mergers and acquisitions. Solely comparing a single number in financial statements for a single year — a pandemic year — is an incomplete picture.
3. Third, the piece argues that U.S. taxation of the foreign earnings of U.S. companies is more advantageous than the tax rules applicable to “their rivals in Japan, Germany, or France.” It appears that Mr. Bergin believes (despite being provided detailed descriptions of foreign tax law to the contrary) that other countries have foreign minimum tax-like rules that apply to companies headquartered in their country, and these rules are somehow tougher than the U.S. GILTI and controlled foreign corporation rules. The premise is of course laughable. If foreign countries already had widely applicable foreign minimum taxes, the Biden Administration would not currently be pressuring the G7, G20, OECD, and the 139 countries of the Inclusive Framework to adopt such taxes. No country has a tax regime that is as onerous as the U.S. GILTI regime. This is well known, and was also acknowledged by Secretary Yellen during her recent confirmation hearing.
4. Finally, the piece claims that “U.S. tax breaks to encourage research and other activities generate bigger savings than similar breaks in other nations.” This is also misleading. According to the OECD, U.S. tax incentives for R&D rank 27th lowest of 37 OECD countries, behind all other G7 countries. If U.S. companies achieve a greater tax benefit, it is only because U.S. companies spend nearly 50 percent more on R&D than do EU companies, relative to the size of our economies.
Credits for investment in R&D position America to remain the global leader in innovation — realized most recently in our unprecedented development of multiple COVID-19 vaccines. Leadership in innovation is one of the most important factors for American workers, their communities, and the U.S. economy.
Reuters justified its findings by citing that its “analysis was reviewed by four academics with experience in measuring corporate tax payments.” We would welcome the opportunity to share more information on where they are misguided, similar to all of the detailed information we provided to Mr. Bergin that was disregarded.
The Biden proposals would increase corporate taxes seven times more than the net tax cut that corporations received from tax reform in 2017, all to the detriment of American jobs and workers especially during a time of critical economic recovery.
Even with no change in law, corporate income tax payments relative to corporate income are estimated by the Congressional Budget Office to increase by roughly 20 percent over the next 10 years. Combined, this suggests that the Biden proposals would increase corporate income taxes relative to corporate income by roughly 87 percent over the next 10 years.
The Bottom Line: As cited in the piece, we stand by our assertion that an increase in the corporate tax rate and additional international tax changes would make the United States uncompetitive as a place to do business and make U.S. companies uncompetitive globally. We urge the Biden Administration and Congress to forgo these proposals.