Over the past couple of weeks, Melissa and I have questioned whether US corporations really have a competitive disadvantage because the US corporate tax rate is relatively high compared to other countries.
Color us skeptical given that while the statutory rate is relatively high at 35%, the effective rate recently has been 26% for the S&P 500, according to S&P data. For all corporations, it has been 20% and 13%, according to GDP and IRS data.
Just by coincidence, the Organisation for Economic Cooperation and Development (OECD) recently published its Revenue Statistics 1965-2016. The annual publication provides information on tax levels and structures in OECD countries.
Most of the written portion of the report focuses on the averages for the 35 countries that are members of the OECD country average over periods of time. What piqued our interest was the supporting data released along with the report on the OECD’s database website. We constructed a few charts comparing US taxes to those in other countries for 2016, the latest available dataset. (See Comparing Tax Burdens Among the OECD Economies, or YRI-OECD.)
The OECD data focuses on the following categories of tax revenues: total, individual, consumption (i.e., both sales and value-added tax, or VAT), property, social security, and corporate. Overall, comparing tax revenue to GDP, the US is relatively competitive with other OECD nations. However, drilling down to the components of tax revenues, we found that the results are mixed. Nevertheless, contrary to popular belief, US corporate income taxes are quite competitive relative to other OECD nations! That is, based on the OECD’s measure of tax revenues to GDP.
Let’s have a closer look at these data:
(1) US total taxes low. The 2016 data show that the US has low total tax revenues as a percentage of GDP relative to other OECD nations (YRI-OECD, Fig. 1). The US percentage is 26.0% versus 34.3% for the unweighted OECD average for 33 of the 35 OECD member countries, based on available data. This puts the US at the fifth-lowest ratio of tax revenues to GDP among the OECD.
(2) US corporate taxes low. Comparing income, profits, and capital gains of corporations relative to GDP shows that the US is 10th lowest among the OECD countries (YRI-OECD, Fig. 2). The ratio is 2.2% versus an unweighted average of 2.9% for the available data for 32 OECD countries. However, three large Eurozone economies have lower ratios: Italy 2.1%, France 2.0%, and Germany 2.0%.
New Zealand holds the top spot at 4.7% in corporate income, profits, and capital gains tax revenues. Even Ireland, known for its favorable corporate tax environment, generates more corporate tax revenues as a percentage of GDP, 2.7%, than the US.
(3) US individual taxes high. On the other hand, the US ranks as the 11th highest in tax revenues on individual income and profits, excluding capital gains, at 9.6% (YRI-OECD, Fig. 3). That’s above the 8.9% unweighted average of the data available for 27 OECD countries. Among the larger OECD economies, higher tax burdens on consumers are found in Canada (11.6%), Sweden (11.5), Italy (11.1), and Germany (10.0). Lower than the US are France (8.6), Japan (5.7), and Korea (3.8).
(4) No VAT in US. The US generates the lowest consumption tax revenues relative to GDP of all OECD nations at just 4.4% (YRI-OECD, Fig. 4). This compares with an unweighted OECD average of 11.2% (based on the 33 countries with these 2016 data available). A notable difference is that sales taxes are imposed by state and local governments in the US; there is no national VAT as in many other countries.
(5) US social security taxes low. US tax contributions to pay for social welfare spending are also quite low on a relative basis. The US ranks 8th lowest at 6.2% (YRI-OECD, Fig. 5). That’s well below the unweighted OECD average of 9.6% (for the 32 countries with these 2016 data available). At much higher levels are France (16.7), Netherlands (14.8), Germany (14.1), and Italy (13.0).
(6) US property taxes high. One area where the US tax burden is relatively high is property taxes. Property tax revenues as a percentage of GDP is 2.7% in the US, or the 9th highest in the OECD (YRI-OECD, Fig. 6). Yet for 20 OECD nations, property taxes represent less than 2.0% of GDP. Notably, homeownership tends to be higher in the US than elsewhere.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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