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Corporate Tax Competitiveness Rankings for 2012, Cato Tax & Budget Bulletin No. 65

Corporate Tax Competitiveness Rankings for 2012, Cato Tax & Budget Bulletin No. 65

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 No. 65 • September 2012
Corporate Tax Competitiveness Rankings for 2012
by Duanjie Chen and Jack Mintz, School of Public Policy, University of CalgaryCorporate income tax reform is receiving seriousconsideration in Washington. The Obama administrationhas suggested reducing the federal corporate tax rate from35 percent to 28 percent while broadening the tax base.Presidential candidate Mitt Romney has said that he wouldcut the corporate tax rate to 25 percent if elected.The urgency of tax reform increased when Japanrecently enacted a reduction to its corporate tax rate. Thatleft the United States in the uncompetitive position of having the highest statutory tax rate in the world, with acombined federal-state rate of about 40 percent.This bulletin presents new estimates of marginaleffective tax rates (METRs) on corporate investment for90 countries. These tax rates take into account statutoryrates plus tax-base items that affect taxes paid on newinvestment, such as deductions for capital depreciation,inventory costs, and interest expenses. We ignoretemporary incentives because they do not supportsustained capital investment, but instead shift investmentfrom the future to the present year.We find that the U.S. effective tax rate on newcorporate investment is 35.6 percent in 2012, which isalmost twice the average rate for the 90 countries studied,and it is also the highest rate among the major industrialnations. These results underscore the need for U.S.policymakers to tackle corporate tax reform.
Effective Tax Rates for 2012
Figure 1 summarizes our corporate tax ratecalculations. The U.S. METR is 35.6 percent in 2012, oralmost twice the 90-country average of 18.2 percent. Theaverage rate for the 34 Organization for EconomicCooperation and Development (OECD) nations is just 19.4percent. While the U.S. corporate tax rate has remainedhigh, the global trend for both statutory and effectivecorporate tax rates has been downward.Despite large budget deficits in many countries and the
Figure 1. Marginal Effective Tax Rateson Corporate Investment
22.221.536.219.418.235.6010203040United StatesAverage of 34OECD CountresAverage of 90Countries20052012
      P    e    r    c    e    n     t
 popularity of anti-corporate sentiments, few countries haveraised their corporate tax rates in recent years, and manycountries have reduced them. Countries have recognizedthat corporate tax rate cuts help spur growth and thatrevenue losses will be minimal because lower rates helpattract profits from abroad through transfer pricing andfinancial restructuring.
1
 Table 1 on the next page shows METR calculations for90 countries, including separate figures for the servicesand manufacturing sectors. The United States has thefourth highest effective tax rate on corporate investment inthe world after Argentina, Chad, and Uzbekistan.The United States has a high METR, a high statutorytax rate, and numerous special preferences in its corporatetax system. This noncompetitive and nonneutral taxstructure is harmful to growth, and it results in relativelylow government revenues because the high rates inducebusinesses to shift their investments and profits abroad.
 
 
Table 1. Marginal Effective Tax Rateson Corporate Investment for 90 Countries, 2012
CountryMarginal Effective Tax RateRank onOverall ManufacturingServicesOverall RateArgentina43.247.841.51Chad36.440.535.52Uzbekistan35.739.234.43
United States35.633.937.24
France35.136.834.85India33.528.134.96Colombia33.435.832.97Brazil31.634.030.88Japan30.430.630.49Venezuela30.230.830.010Korea29.932.228.911Russia29.532.028.912Costa Rica28.235.326.113U.K.26.725.326.914Spain26.325.426.415Australia26.227.925.916Austria26.025.926.017Pakistan25.829.124.718Lesotho24.813.228.219Philippines24.726.124.220Germany24.626.723.921Norway24.523.324.622Sierra Leone23.717.924.023Italy23.225.222.724Portugal23.020.923.425Peru23.029.821.326Bolivia22.229.820.327Tunisia21.824.121.328New Zealand21.722.521.529Saudi Arabia21.018.221.730Iran20.628.019.031Indonesia20.423.818.632Sweden19.918.520.233Canada19.913.822.434Tanzania19.415.120.135Kazakhstan19.024.118.136Denmark18.920.818.537Georgia 18.921.318.438Jamaica18.615.918.939Finland18.520.417.940China 18.521.515.841Rwanda18.227.017.142Malaysia17.819.516.843Switzerland17.817.017.944Mexico17.519.017.145Netherlands17.316.217.646
 
Table 1 continued
CountryMarginal Effective Tax RateRank onOverall ManufacturingServicesOverall RateZambia17.224.216.147Belgium17.116.317.248Luxembourg17.118.117.049Ecuador16.821.616.050Hungary16.617.515.751Israel15.013.215.352Uganda14.79.615.253Bangladesh14.612.915.154Poland14.513.814.755Iceland14.211.614.656Botswana14.28.314.657South Africa14.115.613.758Ghana14.014.314.059Fiji13.917.613.160Nigeria13.520.412.861Ethiopia13.427.012.262Morocco13.417.912.463Madagascar13.117.712.064Slovak Rep.12.816.511.465Czech Rep.12.712.912.766Vietnam12.619.69.167Thailand12.114.910.168Trinidad12.03.616.869Slovenia11.912.111.870Estonia11.411.411.471Greece11.310.611.472Ireland11.210.611.473Taiwan11.113.310.074Jordan9.511.59.175Egypt9.412.68.476Singapore9.37.010.177Croatia9.111.78.578Kenya9.0-24.015.479Kuwait8.79.88.580Romania8.611.07.781Mauritius7.98.87.782Chile6.77.36.683Qatar5.89.15.284Latvia 5.87.45.585Turkey5.75.05.986Ukraine5.611.43.687Bulgaria5.05.34.988Hong Kong 3.93.53.989Serbia-4.0-11.2-2.290
Average for90 Countries18.218.917.9
 
 
Canadian Reforms
U.S. policymakers should examine the recentcorporate tax reforms in Canada, which is America’slargest trading partner. Since 2000 these have included:
 
Cutting the federal statutory tax rate from 29.12percent to 15 percent and cutting the averageprovincial tax rate from 13.3 percent to 11.1 percent.
 
Eliminating most federal and provincial capital taxes,which were levies on a measure of business assets.
 
Removing sales taxes on capital goods in mostprovinces as a result of harmonizing provincial salestaxes with the federal Goods and Services Tax (a formof value-added tax).
 
Adopting generally more neutral capital costallowances for the corporate income tax.
 
Scaling back some of the special preferences under thecorporate income tax.The reforms since 2000 have created a much morecompetitive and neutral corporate tax system. The METRon corporate investment has been cut substantially, whichhas spurred greater investment and growth. In addition,multinational corporations seem to be shifting more profitsinto Canada because of the lower tax rates.
2
 The cut in corporate tax rates does not seem to havelost Canadian governments much, if any, revenues. Figure2 shows that the combined federal-provincial tax rate fellfrom 42.4 percent in 2000 to 29.4 percent in 2010. (Therate has fallen further since then). Despite this 31 percentcut and the 2009 recession, tax revenues as a share of grossdomestic product (GDP) have remainedroughly constantdue to rising corporate taxable income.
3
 
A Growing Consensus on Corporate Tax Reform
New findings from academic research point strongly tothe advantages of corporate tax rate cuts. One finding isthat when considering the efficiency characteristics of different taxes, corporate income taxes are the mostdistortionary, and hence the most harmful for economicgrowth.
4
Reductions in corporate tax rates can help boostdomestic investment and spur inflows of foreigninvestment.
5
 Another finding is that corporate tax rate cuts in high-rate countries will probably not cause substantial revenuelosses. Instead, in a global economy, aligning a nation’scorporate tax rate with the international average rate orless helps protect the tax base. Keeping the corporate ratecompetitive reduces profit shifting by multinational
Figure 2. Canadian Corporate Tax Rates and Revenues
42.440.538.034.434.233.931.431.029.427.63.73.33.13.33.63.43.83.53.53.435.926.134.03.3
010203040502000200220042006200820102012
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Corporate tax rateCorporate tax revenues, percent of GDP
 
companies to low-tax jurisdictions.
6
As many countriesreduce their rates over time, all countries gain as theefficiency of tax systems and the global economy areincreased.A third message from recent studies is that corporatetax rate reductions should be accompanied by basebroadening. Broader tax bases can raise a particularamount of revenue to support lower tax rates. The purposeof base broadening should be to enhance tax neutrality,which allows businesses to make efficient decisions thatreduce the misallocation of resources and minimize thecosts of tax planning and administration. Countries shouldavoid special tax breaks for particular industries orbusiness activities.Thus, countries should broaden their tax bases toimprove neutrality while reducing rates. But if the rate isstill above international norms, a further pure rate cut is inorder regardless of “revenue neutrality.” One reason is thatrevenue neutrality is often measured on a static basis,without fully accounting for the positive dynamic effectsof tax rate cuts. For example, reducing the U.S. corporatetax rate would spur capital investment and the shifting of profits into the United States, which in turn would generateeconomic growth and additional tax collections.In sum, a consensus is emerging among corporate taxexperts that tax reforms should aim at achieving longer-term efficiency and economic growth rather than just beingguided by a short-term revenue target.
 
Conclusions
Growing numbers of tax experts and policymakersrecognize that the U.S. corporate tax system is a majorbarrier to economic growth. The aim of corporate tax

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