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As McCain and Obama argue over corporate taxes (McCain says cut them, Obama says oil companies should pay more) data continues to pile up. What it all means, though, is awfully hard to say.
On paper the US certainly has one of the highest corporate tax rates. Other countries are widening that gap by chipping away at the rates they expect companies to pay. In this recent piece arguing that corporate taxes should be done away with altogether, James Pethokoukis notes that “nine of the 30 OECD member nations, including Canada, Germany, New Zealand, Spain, the United Kingdom, Italy, Switzerland, the Czech Republic, and Iceland, have lower corporate tax rates in 2008 than they did in 2007”. China just cut its levy from 33% to 25%. By contrast, the average combined federal and state corporate tax rate in the U.S. is 39.3 percent, according to the Tax Foundation.
But even with this stratospheric tax rate, companies from less-encumbered countries continue to amp up their US businesses. According to a Grant Thornton analysis of IRS data:
the earnings of foreign-controlled domestic corporations (FCDCs) in 2005 reached $3.5 trillion, which is $450 billion more than in 2004, twice the 1996 level and almost 90 times the level reported in 1971. These FCDC receipts in 2005 represented 13.7 percent of all U.S. corporate receipts, also an all-time high…The asset growth of FCDCs has been even more staggering. FCDCs reported assets of over $9.2 trillion in 2005, up 15.7 percent from 2004 and more than three times the 1996 level. FCDC assets represented 13.9 percent of all U.S. corporate assets in 2005, another all-time high.
The authors marvel at this rise in the face of an increasingly uncompetitive US tax rate, and argue that cutting the rate would drive even more foreign investment. It’s a technique they say has worked for others already.
But is it necessry?
At the moment we are in a bad economic slump with many legitimate questions being asked about regulators’ failure to stop the easy credit madness of the past few years. But in general, the US is a better-watched market than many, with well-off (if pressured) consumers and a high share of dynamic businesses. Maybe foreign companies are willing to pay a premium to get access to all that.
No manufacturer would cut its price just to match the competition when its product is in high demand. That would be management madness.
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