It's a rock-solid fact that the U.S. corporate statutory tax rate is the highest among developed nations and is significantly higher than the average. According to 2014 data from the OECD, the combined federal and state statutory corporate tax rate for the United States is 39.1 percent. The average of the other 33 members of the OECD is 24.8 percent — 14.3 percentage points lower than the U.S. rate. Weighted by country GDP, the average for these 33 countries is 28.3 percent — 10.8 percentage points lower than the U.S. rate.
There is, however, an unsettled debate over whether and by how much the U.S. corporate effective tax rate is higher than effective tax rates outside the United States. Effective tax rates seek to measure how much businesses really pay after all deductions and credits are considered. The Business Roundtable, for example, argues that the average effective corporate rate in the U.S. is significantly higher than it is abroad. In contrast, a Congressional Research Service report concludes that the U.S. effective corporate tax rate is not much different than the average foreign effective tax rate.
So, who is right? To answer this question, I reviewed five studies making international comparisons of corporate effective tax rates. The results are summarized in the table below. (Cites and links to the five studies can be found in the list below.)
There are many mind-numbing details that explain the divergent results across these studies. But perhaps the most important difference in the results is the easiest to explain. Some calculations of average foreign effective tax rates use simple averages where all foreign countries are counted equally. Others use weighted averages in which large countries are counted more than smaller ones (according to the size of their economies or the size of their business sectors). In general, whether we are talking about statutory or corporate effective rates, large counties have higher rates than smaller countries.
So, using unweighted averages (like those shown in line 2 of the table) -- which treat countries like Latvia and Morocco as equals to Germany and Japan -- leads to results that inappropriately enlarge the difference between U.S. and foreign corporate effective tax rates (line 2A). A more representative picture of foreign corporate effective tax rates can be found in the weighted average shown in line 3. The excess of the U.S. effective rate and foreign effective rates (shown in line 3A) is much smaller -- and in two cases, negative -- when weighted averages are used.
The bottom line: The conclusion reached by the CRS report is more accurate than that of the Business Roundtable. On average, the foreign effective tax rate is not much lower than the U.S. domestic tax rate.
This does not mean that the United States should give up on efforts to reform its corporate tax. Nor does it mean that it should rule out cutting its corporate tax burden. As most any economist will tell you, the corporate tax is our most economically damaging tax. But some studies that report U.S. multinationals are facing higher corporate tax burdens than foreign multinationals exaggerate the difference.
Reuven S. Avi-Yonah and Yaron Lahav, "The Effective Tax Rates of the Largest U.S. and EU Multinationals," Tax Law Review, Vol. 65, 2012, p. 375.
Duanjie Chen and Jack Mintz, "The U.S. Corporate Effective Tax Rate: Myth and Fact," Tax Foundation Special Report No. 214, Feb. 2014.
Kevin A. Hassett and Aparna Mathur, "Report Card on Effective Tax Rates: United States Gets an F," American Enterprise Institute, Feb. 2011.
Kevin S. Markle and Douglas A. Shackelford, "Cross-Country Comparisons of Corporate Income Taxes," National Tax Journal, Vol. 65, Sept. 2012, p. 493.
PricewaterhouseCoopers LLP, "Global Effective Tax Rates," Apr. 14, 2011.