In its 2017 report on corporate taxation, Oxfam America uses numerous misleading or inaccurate statements to argue that U.S. businesses do not pay their fair share of taxes.
In page after page, the report misses the mark. It mixes effective tax rates and statutory tax rates to claim that businesses pay a rate far lower than they should.
The report also ignores the true reason that trillions of dollars of U.S. income is trapped overseas — the U.S. has one of the most complex, internationally uncompetitive tax codes and double taxes income earned abroad. As a result, this money is unable to be reinvested back into the economy.
Businesses don’t pay taxes – people do, so any higher tax rate on businesses is passed onto employees, consumers, and investors. The problems with the U.S. tax code hurt American taxpayers through lower wages, fewer jobs, and stagnant economic growth.
Contrary to the claims of the report, the House Republican “Better Way” Tax Reform blueprint would reverse these trends. The plan, proposed by House Speaker Paul Ryan (R-Wis.) and Ways and Means Chairman Kevin Brady (R-Texas), makes numerous dramatic pro-growth changes that will increase income for taxpayers across the board, and give a booster shot to the U.S. economy.
U.S. Tax Rates Are High By Any Measure
The report claims that U.S. companies do not pay enough in taxes because they have an effective rate of just 25.9 percent even though the corporate rate is 35 percent. However, this analysis purposely compares effective tax rates with statutory marginal tax rates to make it appear as if companies are paying less in taxes than they are supposed to.
There is a clear distinction between statutory rates and effective rates. The statutory rate is specified in law and applies to business income before any deductions. In contrast, the effective rate is the percentage a business actually pays in income tax. The effective corporate tax rate is calculated after a business takes deductions – such as employee wages and benefits.
In almost every case, the effective rate is lower than the statutory rate for taxpayers. While the U.S. combined state/federal corporate rate for ALL U.S. corporations is 39.1 percent, the effective corporate tax rate is just 18.6 percent after deductions and credits.
By any measure, the U.S. rate is too high. The U.S. has the highest statutory rate amongst the major economies of the Group of 20, as noted by the Congressional Budget Office. Major competitors have rates ten or twenty points lower including Canada (26.3 percent), China (25 percent), and the United Kingdom (20 percent).
Even when using effective tax rates, the U.S. has the fourth highest rate in the world. At a rate of 18.6 the U.S. effective rate is higher than Germany (15.5 percent), Australia (10.4 percent), China (10 percent), and Canada (8.5 percent).
Trillions Trapped Overseas Due to Complex Worldwide System of Taxation
This U.S. competitiveness problem has only gotten worse in recent years as other countries have modernized their tax codes. Today, only six modern countries have this system, and more than a dozen have abolished it for the simpler, more competitive territorial system of taxation.
While the Oxfam report alleges that trillions are “stashed” overseas, this money is actually stranded because of the U.S. worldwide tax system. The second layer of tax stemming from the U.S. worldwide system impedes the ability of U.S. businesses to compete and means these trillions are in limbo, unable to be brought back to America to be reinvested in new jobs or higher wages or paid out to shareholders.
The solution to this problem should be simple – enact repatriation at a single digit rate as part of a transition to territoriality, so that businesses can bring back after tax income with the second layer of taxation.
This would end the lockout problem for good and give the U.S. economy a booster a strong boost as occurred when Congress enacted temporary repatriation in 2005. This repatriation allowed businesses to bring back double taxed income that had been deferred at a rate of 5.25 percent, resulting in $320 billion returning to the country that went to federal revenues, or was reinvested in the economy.
The Real Problem is the Outdated U.S. Tax Code
The Oxfam report misses that the fact that the many legal, yet self proclaimed “tax dodging” strategies are symptoms of a tax code that is overly complex and outdated. When it comes to globally tax competition, the U.S. is decades behind.
Since 2000, 32 of the 35 countries in the Organisation for Economic Development (OECD) have reduced their corporate rates. Today, only the U.S. and Chile have higher corporate tax rates than they did at the start of the century.
The winners here are not U.S. businesses, but foreign countries and corporations that benefit from new jobs, higher wages, economic growth, and revenue at the expense of American taxpayers and businesses.
Between 2004 and 2014, almost 50 American businesses left the country through an inversion. When these companies move their headquarters from the U.S. to a more competitive environment, they also take high paying jobs with them.
Similarly, the U.S. had a net loss of nearly $180 billion in assets that have been acquired by foreign competitors over the past decade, according to a report by Ernst and Young. The uncompetitive code means that foreign competitors are able to acquire assets at a far greater pace than American businesses. The report estimates that a corporate rate at the developed average of 25 percent would have resulted in U.S. businesses acquiring almost $600 billion in assets over the same period.
The House GOP Blueprint is Strongly Pro-Growth
Maintaining high tax rates and an uncompetitive system does not only hurt U.S. businesses; it is passed on to the entire economy. A 2006 CBO report found that roughly 70 percent of the corporate tax is borne by labor, while a report by scholars at the American Enterprise Institute find that every dollar increase in taxes decreases wages by two dollars.
Any proposal must involve changes to the tax code, not new rules that have already tried and failed.
One way to resolve the many problems with the U.S. tax code would be passing the House Republican “Better Way” Tax Reform Blueprint. Among the many pro-growth changes, the plan calls for a competitive 20 percent corporate rate, full territoriality, and immediate full business expensing.
Despite the fact that this plan is hugely pro-growth, the Oxfam report falsely claims that the blueprint would not fix the problems with the code, and would hurt consumers.
In reality, the plan increases wages, and offers a net tax cut for all American families. The new border-adjusted cash flow business tax would incentivize doing business in the U.S. by taxing based on where a good or service is consumed, rather than where the income is earned. This plan cuts taxes for all businesses by 42 percent, and dramatically decreases the complexity of the tax code. This competitive new system will put an end to the exodus of jobs and assets to foreign competitors.
Every developed country in the world has a border adjustable tax system except the U.S., which disadvantages American businesses operating overseas and offers a benefit to foreign competitors importing into the country.
While the border adjustable component of the plan raises one trillion in revenue over a decade, the plan is a net tax cut of more than two trillion dollars. In fact, according to an analysis by the Tax Foundation, this plan will increase wages by close to $5,000 per family, create 1.7 million full time jobs, and increase economic growth by 9 percent.