Jane G. Gravelle Senior Specialist in Economic Policy
of cutting corporate tax rates frequently make their argument based on the
higher statutory rate in the United States as compared with the rest of
the world; they argue that cutting corporate taxes would induce large
investment flows into the United States, which would create jobs or expand
the taxable income base enough to raise revenue. President Barack Obama has supported
a rate cut if the revenue loss can be offset with corporate base broadening.
Others have urged on one hand, a revenue raising reform, and, on the
other, setting deficit concerns aside.
Is the U.S. tax rate higher than the rest of the world, and what does that
difference imply for tax policy? The answer depends, in part, on which tax
rates are being compared. Although the U.S. statutory tax rate is higher,
the average effective rate is about the same, and the marginal rate on new
investment is only slightly higher. The statutory rate differential is relevant
for international profit shifting; effective rates are more relevant for
firms’ investment levels. The 13.7 percentage point differential in
statutory rates (a 39.2% rate for the United States compared with 25.5% in other
countries), narrows to about 9 percentage points when tax rates in the rest of
the world are weighted to reflect the size of countries’ economies. (The
OECD rates fell by slightly over1/2 of a percentage point between 2010 and
Regardless of tax differentials, could a U.S. rate cut lead to significant
economic gains and revenue feedbacks? Because of the factors that
constrain capital flows, estimates for a rate cut from 35% to 25% suggest
a modest positive effect on wages and output: an eventual one-time increase
of less than two-tenths of 1% of output. Most of this output gain is not an
increase in national income because returns to capital imported from
abroad belong to foreigners and the returns to U.S. investment abroad that
comes back to the United States are already owned by U.S. firms.
The revenue cost of such a rate cut is estimated at between $1.2 trillion and
$1.5 trillion over the next 10 years. Revenue feedback effects from
increased investment inflows are estimated to reduce those revenue costs
by 5%-6%. Reductions in profit shifting could have larger effects, but even
if profit shifting disappeared entirely, it would not likely offset revenue
losses. It seems unlikely that a rate cut to 25% would significantly
reduce profit shifting given these transactions are relatively costless
and largely constrained by laws, enforcement, and court decisions.
Both output gains and revenue offsets would be reduced if other countries
responded to a U.S. rate cut by reducing their own taxes. Evidence
suggests that the U.S. rate cut in the Tax Reform Act of 1986 triggered
rate cuts in other countries.
It is difficult, although not impossible, to design a reform to lower the corporate
tax rate by 10 percentage points that is revenue neutral in the long run.
Standard tax expenditures do not appear adequate for this purpose.
Eliminating one of the largest provisions, accelerated depreciation, gains
much more revenue in the short run than in the long run, and a long-run
revenue-neutral change would increase the cost of capital. Other
revisions, such as restricting foreign tax credits and interest
deductibility or increasing shareholder level taxes, may be required.
This report focuses on the global issues relating to tax rate differentials
between the United States and other countries. It provides tax rate
comparisons; discusses policy implications, including the effect of a
corporate rate cut on revenue, output, and national welfare; and discusses the
outlook for and consequences of a revenue neutral corporate tax reform.
Date of Report: December 28, 2012
Number of Pages: 32 Order Number: R41743 Price: $29.95
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