Two recent reports deserve attention from anyone who has a job, wants a job, or gives people jobs.
“The High Burden of State and Federal Capital Gains Tax Rates” shows the United States has the sixth-highest effective capital gains tax rate in the Organisation for Economic Co-Operation and Development. “The U.S. Corporate Effective Tax Rate: Myth and the Fact” shows the U.S. has the highest effective corporate tax rate in the OECD. OECD countries include Australia, Canada, France, Germany, Japan, Korea, United Kingdom—34 industrialized countries in all. Both reports are from the nonpartisan Tax Foundation.
“The tax burden on capital—the stuff that businesses invest in such as buildings and machinery—is very heavy in the United Stated compared to our major trading partners,” says Kyle Pomerlau, a Tax Foundation economist and one of the study authors. He says these high tax rates reduce investment, lower productivity, depress wages, and slow economic growth.
Many Americans complain about jobs moving overseas. One reason for this is high taxes.
“What we see in other countries is they’ve lowered their tax rates, but the amount of tax they collect hasn’t declined because businesses are more comfortable keeping their income and investments in those countries rather than shipping it abroad because their tax treatment is more favorable,” says Pomerlau. “Europe, for the most part, has learned heavily taxing capital is a bad thing.”
Pomerlau notes the average top marginal tax rate on capital gains in the U.S. is 28.7 percent (federal and state taxes combined) compared with an average of 18 percent in the OECD as a whole. Nine OECD countries do not tax capital gains at all.
On the corporate tax side, Tax Foundation Chief Economist William McBride recently noted for RealClearMarkets.com the Government Accountability Office and the Congressional Budget Office have both been significantly underestimating the real effective tax rate—the GAO by failing to account for foreign taxes U.S. multinationals pay, and the CBO by “using an inflated measure that includes S corporations even though they are not subject to corporate tax. That is, they divided C corporation tax collections by the combined profits of C and S corporations. But S corporations are pass-through entities, meaning profits are passed through to owners who report the income on their individual tax returns. S corporations have grown to be about 30 percent of the profit measure used by CBO.
“Excluding the S corporation data means the real C corporation effective tax rate is about 50 percent higher than CBO’s estimate,” McBride says.
Faced with this critique, the GAO recently revised its estimate of the effective corporate tax rate to 23 percent, up from 13 percent. This shows the United States has one of the highest marginal effective tax rates in the industrialized world.
This is the only industrialized nation that tries to tax corporate income earned anywhere in the world. If a U.S. multinational company earns income overseas and pays taxes on it there, the U.S. demands another tax if the company brings money earned overseas into this country. The rest of the world uses a “territorial system” in which income is taxed only in the country where it is earned. Audit Analytics estimates American multinationals are holding $2 trillion in corporate profits overseas instead of bringing the money to the United States, because of this strange tax rule. That, of course, hurts employment and overall economic growth.
The United States has an urgent need to do two things about its tax system: lower taxes on capital gains and corporate income, and stop trying to tax money earned in other countries.
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute.