Writing for the Washington Post’s Fact Checker, Nicole Lewis accuses House Speaker Paul Ryan of using “fuzzy math” in defense of corporate tax cuts. Ryan emphasizes statutory corporate tax rates, says Lewis, but the effective tax rate paid by corporations is far lower—a point often made by progressives. But effective tax rates are themselves misleading.
For example, Lewis notes that the U.S. statutory corporate tax rate is 35 percent, compared to just 19 percent in the UK. Yet the U.S. effective rate, after taking into account all deductions and exclusions, is actually lower than the British rate—18.6 percent vs. 18.7 percent. The implication is that American corporations have nothing to whine about.
But Lewis misses a key point: The effective rate paid significantly understates the actual burden of the corporate tax because it ignores the very real costs of qualifying for those lucrative loopholes. Here is an example I used in a recent post, “The Progressive Case for Abolishing the Corporate Income Tax:”
Suppose that if your corporation paid taxes at the full statutory rate, you would owe $35 million in tax on $100 million in pre-tax profit, for a net of $65 million. By changing your product line, moving your corporate headquarters, and using more tax-deductible debt instead of equity financing, suppose you can cut your taxes to $10 million. Unfortunately, taking those measures incurs administrative costs of $12 million and cuts your revenue by $8 million. You end up with after tax income of just $70 million, even though the government only gets $10 million in revenue.
Yes, that’s still worthwhile in the sense that you are $5 million better off than if you had just paid your taxes. But what is the accurate measure of the burden that the corporate tax system places on your company? Is it the $10 million, or 5 percent, that you pay on your remaining $80 million in before-tax profits, or is it 30 percent—the bite that $10 million in taxes plus $20 million in tax avoidance costs takes out of your original $100 million? Obviously, it is the latter.
The specific numbers here are hypothetical, but the point stands: a corporate tax system like that of the United States, with a high statutory rate and lots of loopholes, is far more burdensome than a system like that of the UK, with a low statutory rate and almost no loopholes, even if the effective rates are essentially the same.
It’s a pity that Ryan himself didn’t think to make that point. If so, a progressive newspaper like the Washington Post might be supporting efforts to cut the top corporate rate and close loopholes, instead of assigning Pinocchios for fuzzy math.