A Reminder: The United States is a low-taxed nation

by Ugh

Since this is the issue I know best and as we head further into the darkness that started on Friday, I thought I would post this helpful reminder when it comes to the debate regarding "tax reform" this year:  the U.S. is a low taxed nation among developed economies, our supposed competitors.

This may surprise some folk, as we are used to hearing about how the U.S. has one of the the highest corporate tax rates in the world, or at least among OECD countries, which is true but that is (a) the marginal corporate income tax rate and (b) it only accounts for ~9% of revenue at the federal level.  All in - federal, state, and local income and other taxes - the U.S. ranks 32nd out of 35 OECD nations by taxes as a percentage of GDP, at 25.88% in 2014 (only Mexico, South Korea, and Chile are lower). OECD data.*

For comparison, the FY2017 U.S. budget deficit was estimated at 2.6% of GDP and in FY2016 it was 3.2%.  Thus, raising taxes to close out the deficit completely for FY2016 (to use the higher % of GDP number), or perhaps spend on infrastructure, would put us at 29.08%, or only up to 27th out of 35 OECD countries, behind those communists in Canada, which at 31.22% would still be 2% of its GDP higher.  But that would apparently kill all our jobs (do they bleed? he asks), there not being any jobs in those aforementioned high-tax countries, apparently.

So when you hear that the U.S. needs tax reform or lower taxes to become "competitive" with the rest of the world, view it with some skepticism.  If that's a reference solely to the U.S. corporate income tax and how the U.S. is virtually alone with such a high rate and a purported "worldwide" tax system, note that most major U.S.-based MNCs (i) currently pay tax at an  effective rate on their non-U.S. income of somewhere between 0 and 15%; (ii) do not intend to ever repatriate that money "home" to the United States where they would incur the higher U.S. corporate rate - or at least most say so in SEC filings (and they wouldn't lie, would they?); (iii) pay a much higher effective tax rate on their U.S. source income - something like 20-30%, or even higher; and thus (iv) a move to a lower U.S. corporate tax rate and a territorial system means primarily a tax cut on income earned in the United States by U.S.-based MNCs - the stuff we're supposed to tax under a territorial system - and the ability to repatriate foreign earning tax free, which history tells us (specifically, the 2004 American Job Creation Act repatriation tax holiday) will be used to pay dividends, engage in share buybacks, or buy other U.S. companies, not "create jobs" (whether they bleed or not).

Why then, you may ask, the big push for large US based MNCs to invert?  Because most of the "juice" in inversions involves stripping income out of the United States via interest and royalty payments to related parties, thus reducing U.S. tax on their U.S. income.  But this is something U.S.-based multinationals can't do (and we wouldn't want them to do) and the U.S. congress refuses to implement strong earnings stripping rules - a feature of most of those aforementioned countries' tax systems - because that would be a tax increase (and/or they want to do it in "comprehensive tax reform").

More than you wanted to know, I'm sure.

*If you want to throw in the "BRICS" - Brazil 34.4%, China 22.0%, India 17.7%, Russia 19.5%, South Africa 26.9% this from wikipedia based mostly on Heritage Foundation numbers so caveats apply.  

Comments

[Ugh]

Another thing - this destination based cash-flow tax the House published last year is gumming up the works on tax reform. If they hadn't put it out, my guess is that we would see tax reform (or at least "reform") by May at the latest. Now it might not happen at all.

As it is, it seems the House GOP has become wedded to/deeply invested in the idea for whatever reason, whereas Senators/Trump are like "eh, what's that? Sounds complicated and risky" and would rather do regular old reform. You probably also have Ryan and Brady running to Trump and his advisers saying "this works just like a tariff just like you wanted!!" while saying the opposite publicly, which leads to Trump going back and forth (or is it around in circles?) on this further slowing things down.

My guess is that the House put this blue print out last year never expecting that they would have a chance to get it past President HRC and so, like ACA repeal, didn't think everything through. That is, they expected to use the next several years studying the new kind of tax and gathering more information and convincing skeptics and then making it part of the GOP's pitch in the 2020 election. Instead everyone is expecting tax reform (especially corporate tax reform) NOW NOW NOW and there is no consensus even among the GOP in Congress on an approach.

Oops.

[Tony P.]

ugh: Other complexities inherent in system that may not be amenable to fix - e.g. ... taxing net income for businesses instead of, e.g., gross receipts, etc.

I'd like to see a single solitary business stand up and ask to be taxed on gross receipts instead of net income before I die. It would be a hoot and three quarters. Imagine "businesses", the sacred cows of American politics, being taxed the same way job consumers get taxed! Scandalous!!

(BTW, not that anybody here needs reminding, "small businesses" DO NOT PAY TAXES, Lyin' Ryan's persistent insinuations to the contrary notwithstanding.)

Consider instead what income taxes would be like if individuals got to act like businesses, and pay tax on their net income after deductions for their actual costs of doing business, down to and including the clothes they need to be presentable at work and the coffee they need to stay awake at work. Actually, don't: the implications at both the personal tax filing level and the national tax policy level would boggle your entire mind.

--TP

[wj]

My guess is that the House put this blue print out last year never expecting that they would have a chance to get it past President HRC and so, like ACA repeal, didn't think everything through.

The transition from being the opposition to actually being expected to govern does appear to be being extremely difficult for them.

Gosh, suddenly people expect you to step up and execute all that stuff you have been declaiming about. They will expect it to work like you said, too! And those who are not totally lost to reality realize that it won't -- and there won't be a Democratic administration to blame for the problems. Ouch, indeed.

[Tony P.]

wj: And those who are not totally lost to reality realize that it won't -- and there won't be a Democratic administration to blame for the problems.

A lovely thought, but alternative facts are powerful things. If the "white working class" can't find a way to blame the Obama administration for the woes He, Trump inflicts on them, they can always fall back on the "fact" that He is actually a Democrat.

--TP

[Snarki, child of Loki]

TP: just like Bill Clinton got the blame for 9/11, and Obama got the blame for the 2008 financial crisis.

These are not honest people.

[russell]

i think it's less about honesty and more about the fact that we no longer share the same reality.

[Ugh]

I guess my hope of Ivanka exercising some kind of moderating influence was rather ill-considered. Things might get better if Bannon and Stephen Miller went down in scandal, perhaps Trump would find less horribly poisonous people as advisers.

[wj]

I'm trying, with total lack of success, to imagine a scandal which would bring down Bannon. Getting booted because he told Trump he's an idiot? Sure. But a scandal? What might that be?

[russell]

I'm trying, with total lack of success, to imagine a scandal which would bring down Bannon

caught binge-watching "the sound of music"

[Ugh]

Any scandal that makes Trump look bad. It might have to be very bad. Caught on tape vigorously using the N word maybe.

Speaking of, it would be nice if those rumored Apprentice tapes appeared.