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%.
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.
- Paul Ryan
- John Shimkus
- Donald Trump × 6
- Ted Cruz × 2
- Sarah Huckabee Sanders
- John Barrasso
- John Thune × 2
- Tom Graves
- Sean Duffy
- Kevin Brady
Do you know the United States has the highest corporate tax rate of any developed country in the world? You look at countries all over Europe; Ireland, you look at The United Kingdom, you look at France. They’re cutting their tax rate, and what’s happening is jobs are fleeing to those countries. Capital goes where it gets the right tax rate.
In fact, when it comes to business tax, we are now dead last among developed nations. We pay the highest tax of any nation in the world. Our rate is the least competitive rate there is.Donald Trump, President of the United States of America
Remarks to National Association of Manufacturers on
The overall tax burden in the United States is among the lowest in the developed world.
Our #TaxReform framework turns the page on a complicated & broken tax system. It’s simpler, flatter & fairer than the current tax code. It will put more money in the pockets of hard-working Americans. It also promotes economic growth & private-sector job creation by slashing the corporate tax rate – currently the highest in the developed world – and ensuring fair treatment for small businesses. Congress needs to get the final product to the president’s desk as quickly as possible.
America has the highest business tax rate in anywhere in the developed world. We’re the highest-taxed nation in the developed world, and I think in the undeveloped world too. But you know, I have to be very accurate with these people because they’ll start claiming all sorts of things. So we’ll just keep it in the developed world, Mike. Okay?
But we’re the highest-taxed nation in the developed world, and we want to become one of the lowest, and that’s what we’ll be doing. And we’ll be announcing those numbers tomorrow. We want to go over them with the committee, but they are set.
And the jobs will start pouring in from all over the world coming back to our country. They’ve left our country, so many of the jobs, and they’ll be coming back in because we have a non-competitive tax structure right now, and we’re going to go super-competitive.Donald Trump, President of the United States of America
Remarks Before Meeting With House Ways & Means Committee Members on
America has the highest tax rate in the industrialized world. Let’s Make America Competitive Again! #MAGA https://fairandsimple.gop/?utm_source=repseanduffyDeleted on Sep 15, 2017
Today we have the highest business tax rate anywhere in the developed world – 60 percent higher on average than our major foreign competitors. It is a crushing tax on every product Made in America, and it encourages American businesses to ship jobs and factories overseas…
In the last two decades, our nation has lost a third of its manufacturing jobs, and our business tax is one of the highest in the world. It actually is, of developed countries, the single highest tax anywhere in the world.
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