A recent survey conducted by the National Dairy Council reveals that an alarming number of Americans think chocolate milk comes from brown cows. That has nothing, yet everything, to do with the coming tax reform effort on Capitol Hill.
The typical U.S. citizen is rightfully concerned about how much tax they pay, but their interest in the details of the tax code extends only so far. Broach the intricacies of transfer pricing and most people’s eyes immediately glaze over. This presents a challenge to proponents of tax reform legislation.
Here’s another obstacle: Many of us have heard that the U.S. statutory corporate tax rate (35 percent) is the highest in the industrialized world. That statement is factually accurate. Yet it often fails to fuel enthusiasm for a corporate rate cut. Even those with a cursory knowledge of our tax system understand that a company’s effective rate often bears scant resemblance to the statutory rate. What’s a tax reformer to do?
One means of rallying support is to spin a fable of woe. If the masses can be convinced that they’re grossly overtaxed relative to everyone else in the world, the case for tax reform becomes easier – or at least the case for tax cuts. An example of this happened last month when President Trump spoke in Cedar Rapids, Iowa. As part of his pitch for tax reform, Trump claimed the United States was the highest-taxed country in the world.
The relevant excerpt appears below. A video of the full speech is available here. The discussion of taxes occurs near the 18-minute mark.
We are working really hard on massive tax cuts. It would be, if I get it the way I want it, the largest tax cut in the history of the United States of America. Because right now we are one of the highest-taxed nations in the world. Really, on a large-scale basis, we are the highest-taxed nation in the world. And we are going to get it down really low. OK, I don’t say the lowest, because there are a couple that are really down there, but that doesn’t mean you want to be there. But we’re going to have one of the lowest taxes from the highest tax. And we’re working hard on it, and I think it’s going to happen. [Emphasis added.]
Before I explain why Trump’s statement is erroneous, I should emphasize two points. First, this is a nonpartisan blog. We cover tax policy, not politics. I respond to Trump’s comments only when they’re relevant to taxation — for example, when he claimed that countries with value-added taxes are engaging in unfair trade practices.
Second, I agree that tax reform can be a positive influence on our economy. There’s a rational case to be made for revenue-neutral tax reform. The guiding principle is to broaden the tax base while lowering marginal tax rates. And yes, that extends to lowering the statutory rate for corporations. This view is shared by many Democrats and Republicans. Even President Obama was onboard with a corporate rate cut. On several occasions he proposed reducing the corporate rate to 28 percent, with steeper discounts for the manufacturing sector and foreign profits.
You get the idea. The congressional debate should be less about whether to cut the corporate rate, and more about how far to lower it – and also how to safeguard against profit shifting. That said, the effort should not be premised on the false pretense that Americans are the highest-taxed people in the world. A nation’s statutory corporate rate should never be conflated with its overall tax burden. The former is no gauge of the latter.
There are recognized methods to quantify how heavily a nation is taxed. The most common is the ratio of tax to gross domestic product. It examines a country’s total tax revenue in relative proportion to the size of its economy. So, how heavily taxed are we? There’s a handy chart that answers this question. It’s based on OECD data as compiled by the Urban-Brookings Tax Policy Center. The revenue data includes individual income taxes, corporate income taxes, payroll taxes, and consumption taxes – such as retail sales taxes imposed at the state and local level. The chart lists the OECD countries in descending order, from higher tax burdens (Denmark) to lower (Mexico). In reality, the United States is among the least-taxed nations within the OECD.
Prefer a different yardstick? We can do that. An alternate measurement would examine taxes paid per capita. Economist Greg Mankiw attempted that a few years ago. His conclusions are slightly different, suggesting that the United States should be ranked closer to the middle of the pack among peer nations. You can read Mankiw’s commentary here. Just to be clear, middle of the pack is still a long way from the top of the list.
Trump is not the first politician to say America is the highest-taxed nation in the world. I doubt he’ll be the last, for the simple reason that he’s saying what many people want to hear. Collectively, there’s something strangely comforting about being informed of one’s own mistreatment. Veracity is apparently beside the point.
True, tax reform should be guided by objective considerations. Subjective perceptions should have nothing to do with the process or the substance, except that would be a naïve outlook. We’re talking here about an inherently political calculus. If you’re an elected official trying to cobble together a viable tax bill in the House or the Senate, then voters’ perceptions – however imprecise – likely speak louder than the best OECD statistics. And along those same lines, if you’re a merchant trying to sell your inventory of chocolate milk, you probably don’t care one bit where the public thinks it comes from.