The Congressional Budget Office (CBO) updated its report comparing the corporate income tax rates of the U.S. and other G20 countries.
The report examines not only the statutory top rates, of which the U.S. has the highest, but also provides information on the average and effective corporate tax rates, including insight as to how certain corporate decision-making is influenced by each.
Current U.S. corporate rates
The U.S. federal income tax rate on an ordinary corporation is:
• 15% on the first $50,000 of its taxable income,
• 25% on amounts exceeding $50,000 and up to $75,000,
• 34% on amounts exceeding $75,000 and up to $10 million, and
• 35% on any amount exceeding $10 million.
These graduated rates are phased out as follows:
1. If a corporation has taxable income exceeding $100,000, the tax is increased by 5% of the excess, or $11,750, whichever is less.
2. If a corporation has taxable income exceeding $15 million, the tax is further increased by an amount equal to the lesser of 3% of the excess, or $100,000.
With state taxes added in, the average top statutory rate for 2012 (the most recent year for which complete data was available) was 39.1%. This rate was 10 percentage points higher than the average of the top rates in the other G20 countries, the CBO estimates.
While Japan, Germany and the U.S. had the highest statutory corporate tax rates among G20 countries in 2003, by 2012 Japan and Germany had reduced their top rates, leaving the U.S. at the top of the list. Tax rates varied more widely among non-G20 countries in 2012, ranging from 55% (United Arab Emirates) to “tax haven” jurisdictions that, in some cases, collect no corporate income taxes at all.
Measures of corporate tax rates
As explained by the CBO, the statutory corporate tax rate influences corporate behavior, as does tax preferences, surtaxes and noncorporate taxes. There are several alternative measures of tax rates that account for the effect of some of those factors, such as average and effective marginal corporate tax rates.
The average corporate tax rate is a measure of the total amount of corporate taxes that a company pays as a share of its income. It reflects a country’s corporate tax rate schedule, the system’s tax preferences for business investments, any surtaxes, and possibilities for tax avoidance or evasion. The report states that companies consider the average corporate tax rate when deciding whether to undertake a large or long-term investment in a particular country.
The effective marginal corporate tax rate is a measure of a corporation’s tax burden on returns from a marginal investment (that is, one that is expected to earn just enough, after taxes, to attract investors). According to the CBO, the effective corporate tax rate is more informative for business decisions about whether to expand ongoing projects in countries where a company already operates.
The CBO says that statutory corporate tax rates, on the other hand, are more often the focus when a business is developing legal and accounting strategies to shift income earned in high-tax countries to low-tax jurisdictions — especially low-tax jurisdictions where those businesses do not plan to invest and from which they don’t expect any benefits from tax preferences for business investments.
For 2012, the five G20 countries with the highest corporate tax rates were:
|Statutory rate||Average rate||Effective rate|
|U.S. (39.1%)||Argentina (37.3%)||Argentina (22.6%)|
|Japan (37%)||Indonesia (36.4%)||Japan (21.7%)|
|Argentina (35%)||U.S. (29%)||UK (18.7%)|
|South Africa (34.6%)||Japan (27.9%)||U.S. (18.6%)|
|France (34.4%)||Italy (26.8%)||Brazil (17%)|
Changes in recent years
Since 2012, four G20 countries have modified their corporate income tax systems:
As of 2015, Japan’s top statutory corporate tax rate was 32.1% — 5 percentage points lower than its top rate in 2012. As a result, the CBO estimates that Japan’s effective corporate tax rate fell from 21.7% in 2012 to 18% in 2015.
South Africa’s top statutory corporate tax rate fell from 34.6% in 2012 to 28% in 2015, and its estimated effective corporate tax rate fell from 9% in 2012 to 6.2% in 2015.
The UK reduced its top statutory corporate tax rate from 24% in 2012 to 20% in 2015 but also slightly tightened the tax treatment of depreciation for equipment. On net, those changes led to a reduction in the estimates of effective corporate tax rates from 18.7% in 2012 to 15.7% in 2015.
India’s top statutory corporate tax rate rose from 32.5% in 2012 to 34.6% in 2015 due to a surcharge increase. That change led to an increase in the estimates of the effective corporate tax rates from 13.6% in 2012 to 15% in 2015.
The Trump effect?
President Trump has vowed to reduce corporate taxes, specifying a target rate of 15%. Republicans in the House of Representatives have similarly called for reducing the rate, but to a 20% rate. Whether either of these proposed rates will come about is anybody’s guess. Irrespective of all the drama in Washington D.C. at the moment, there is still momentum for a Tax Reform Bill to be enacted this year. However, there will certainly be significant compromises reached in arriving at the final draft bill. Whether, and to what extent, the overall corporate tax rate change will be the subject of such compromise remains to be seen.