Factopolis

The Truth

The US does have a high statutory rate (up to 35%), but significant deductions and exemptions mean companies actually end up paying a much lower rate; the effective tax rate is about average. Furthermore, while the statutory rate is relatively high, it is not the highest in the developed world; that distinction goes to the United Arab Emirates with rates up to 55%.

Details

Business, Corporate, and Pass-Thru

You may notice that some statements of this claim say “business” while others say “corporate”. As far as we can tell, everyone who makes this claim is referring to C corporations, so technically both terms are really a bit too general. “Corporate” would seem to encompass S corporations as well as C corporations, and “business” would include not only S corporations but also sole proprietorships, partnerships, and limited liability companies.

This isn’t a minor technicality; businesses other than C corporations represent a major part of the U.S. economy. According to The Tax Foundation:

The United States currently has a large number of pass-through businesses, or businesses that pay their taxes through the individual income tax code rather than through the corporate code. These sole proprietorships, S corporations, and partnerships make up the vast majority of businesses and more than 60 percent of net business income in America. In addition, pass-through businesses account for more than half of the private sector workforce and 37 percent of total private sector payroll. Pass-through businesses are represented in all industries in the United States.

While promoting President Trump’s proposed tax cuts in an interview with CNBC Secretary of the Treasury Steven Mnuchin said (starting at 7:13 in the video):

Let me just comment: I think on the business side–and I mention this is business, so this isn’t just the corporate tax rate this is also–we want to create relief for pass-thrus, which are a major part of the economy.

The rate this claim refers to, 35%, applies only to C corporations.

Statutory vs. Effective

Perhaps the most misleading aspect of this claim is that it refers to the statutory rate, which is the tax rate before any deductions or exemptions have been applied. The rate after these deductions and exemptions have been applied (i.e., what the companies actually pay) is called the effective tax rate.

It’s true that the United States’ top statutory corporate tax rate for non-pass-thru businesses is high, though it’s not the highest in the world. However, that’s not what companies actually pay. According to a 2014 Congressional Research Service report, the situation is quite different if you look at the effective rate:

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.

When the Institute on Taxation and Economic Policy looked at the effective tax rates paid by the 258 Fortune 500 companies which were profitable for every year from 2008-2015, they found that the effective tax rate was 21.2% (13.8% less than the 35% statutory rate). Moreover, 18 (roughly 8%) of those companies didn’t pay any federal income taxes whatsoever over the entire 8 year period, and 48 (18.6%) averaged under 10%.

It is also worth noting that this statement is often made in the context of getting companies to invest in America, especially those investments which bring jobs. Going back to that CRS report mentioned earlier, the very next sentence mentions which rate is relevant in such cases:

The statutory rate differential is relevant for international profit shifting; effective rates are more relevant for firms’ investment levels.

A 2017 CBO report which compared tax rates of G20 countries found that, while the US did have the highest top statutory corporate tax rate (39.1%; they included state taxes) among the G20 in 2012, the effective tax rate (18.6%) fell below three other countries: Argentina (22.6%), Japan (21.7%), and the United Kingdom (18.7%).

Using the statutory rate is a bit like going to the store and looking at the manufacturer’s suggested retail price instead of what the store is actually charging.

Highest in the Developed World?

According to the accounting firm PwC, which tracks the top statutory rate of 155 nations, the United Arab Emirates has a significantly higher rate (55%) than the United States.

The people who make this claim are generally using “developed” as a stand-in for the 35 member countries of the Organisation for Economic Co-operation and Development (OECD), a group of highly developed countries, and it’s true that America’s top statutory rate for C corporations is the highest in that group.

However, according to the UN’s 2016 Human Development Report, the United Arab Emirates had a Human Development Index (HDI) score of 0.840 in 2015, the 42nd highest in the world. That’s higher than 4 OECD member countries: Hungary (0.836, ranked 43rd), Latvia (0.830, ranked 44th), Turkey (0.767, ranked 71st), and Mexico (0.762, ranked 77th).

The U.A.E.’s HDI is well within the top classification of “very high human development”, which includes countries with a score of 0.800 and above. It seems to us that this list is a much more reasonable definition of “developed” than the somewhat arbitrary OECD membership.

Topics

Claimants

  • Paul Ryan
  • John Shimkus
  • Donald Trump × 6
  • Ted Cruz × 2
  • Sarah Huckabee Sanders
  • John Barrasso
  • John Thune × 2
  • Tom Graves
  • Sean Duffy
  • Kevin Brady

Statements

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Page last modified 2017-10-31. View history.