Statutory vs. Effective Tax Rates

Greg Mankiw posts this graph from the Tax Foundation:

But it's not clear why he would post a graph showing statutory rather than effective tax rates, and why he would post a graph that combines the data in a way that just happens to exaggerate differences between the US and other countries. As Paul Krugman says:

The Tax Foundation is not a reliable source

and he links to this evidence detailing why the graph is misleading. As he explains:

What they don’t make clear is that:

1. The graph shows the “statutory” tax rate, which is the maximum rate a corporation can pay in principle. But because corporate tax rules allow all kinds of deductions and exclusions, the statutory rate is a poor guide to the actual disincentives the corporate tax creates.

2. Even more important, while they don’t explain how they calculate the “average” tax rate, the fact that their own data show that all the big economies have tax rates above 30%, while their graph shows an average rate of about 27%, seems to indicated that they’re showing us an unweighted average — that is, one that makes small economies like Ireland and Greece seem as important as big economies like Japan and Germany. And whaddya know, corporate taxes in big economies tend to be similar to those in the United States, a point made by the Congressional Budget Office in the study from which the chart above is drawn. (Yes Germany cut rates this year. Big deal.)

And, as Linda Beale notes:

[T]he US is actually a corporate tax haven, with the lowest effective corporate tax rates of almost all the countries that participate in the OECD. That's a little fact that the Tax Foundation apparently doesn't want the American public to understand, since all its hype is in terms of statutory rates and not in terms of effective tax rates.

Comments

[Matt Blackman:]

More leftist propaganda from a extremely biased pro-Obama promoter. Thoma conveniently neglects to include the fact that the US is the only industrialized country in the world that taxes its corporations and citizens based on citizenship (not domicile) at US tax rates no matter where it the world they reside. This puts US corporations at a distinct disadvantage compared to corporations from the rest of the world.

Also, his beef about comparing statutory tax rates is groundless. When comparing tax rates it is essential to compare apples with apples which Mankiw does in his article and graph.

This article is in obvious support of Obama's policy that if he becomes president would see US corporate and individual tax rates rise dramatically, especially on US multinationals with operations overseas. This is a decidedly bad idea given that we are in a deteriorating economy.

2008 Aug 25 12:53 PM

[Matt Blackman:]

On Linda Beale's point above, yes the US is a corporate tax haven but only for non-US corporations and individuals and why the country has enjoyed strong foreign direct investment in the past. This is certainly not the case for corporations domiciled in the US. And yes, this will change if Obama's tax hikes are instituted on individuals, corporations, capital gains and dividends as the recent article in Barron's clearly points out. (See seekingalpha.com/artic... )

2008 Aug 25 12:59 PM

[flow5:]

U.S. corporations have an imbedded tax, they pay an average of 10% of their income on health care. However, the U.S. has the best health care in the world and socializing medicine will beat it down.

2008 Aug 26 10:58 AM