Companies: Drowning in taxes or artful dodgers?
By Kim Dixon | April 16, 2011 4:34 AM EST
Whether companies are drowning in high taxes or artful exploiters of loopholes is at the center of a debate over reforming corporate taxes.
Corporate America and Republicans often point to the United States as having among the highest tax rates in the world at about 35 percent, saying it makes the country less competitive and drives jobs overseas.
The Obama administration has acknowledged the need to overhaul the complex and confusing corporate tax code and agreed the top statutory rate is too high.
But administration officials say the 35 percent figure overstates U.S. companies' disadvantage once deductions and other breaks bring their "effective" tax rate much lower.
"Our tax system has not kept pace with the rest of the world," John Engler, the former Republican governor who heads up the Business Roundtable, a group of chief executives from the biggest U.S. companies.
The group of heavyweights like Verizon Communications and American Express Co. released a comparison of effective tax rates on Thursday that it said showed companies still pay more than their global peers.
The Business Roundtable-funded study, by corporate accountants PricewaterhouseCoopers, found an average effective tax rate of 27.7 percent among about 500 U.S.-headquartered companies.
But a lot depends on what countries you are comparing the United States against, and how you crunch the data.
Critics said the study's methods skew the reported U.S. tax rates paid upward.
"The report is hogwash," said Robert McIntyre, director of Citizens for Tax Justice, a consumer group whose own analysis finds companies pay on average rates in the upper teens, after deductions and loopholes.
COMPARED TO WHO? INCLUDING WHAT?
Lots of countries have lower effective rates than the United States, including Sweden with a 22 percent rate and smaller countries such as Hungary with a 14 percent rate, according to the study that covered the 2006-2009 period.
Some of the smaller countries only had reports from a handful of companies, while others had hundreds, which can distort the results.
Looking at the Group of Seven industrialized countries, the U.S. rate is on par, according to the study.
McIntyre and a former Treasury official said the study included both current taxes and taxes on income that is deferred, which may never be subject to U.S. tax.
"That makes the U.S. rate look higher than it actually is," McIntyre said.
The Roundtable study computed average effective tax rates paid by dividing total income taxes by pretax income.
The inclusion of deferred taxes also excludes the impact of timing advantages enjoyed by U.S. companies, according to Martin Sullivan, an economist and former U.S. Treasury Department official.
The United States has more liberal depreciation rules than many peers, letting companies more quickly write down the loss in value of equipment and other assets more quickly, .
"The study shows the unsurprising result that compared to multinational companies in other large countries -- like Japan, China, Germany, France, United Kingdom -- the U.S. book effective rate is marginally higher," Sullivan said. "Taking into account depreciation advantages could significantly change the relative rankings, i.e., the U.S. would almost certainly move down the list."