Tax Policy – Higher Corporate Tax Revenues Globally Despite Lower Tax Rates
The OECD’s new database Corporate Tax Statistics provides insights into the recent history and current state of corporate income taxes (CIT) around the world. The database includes information on a variety of measures of corporate taxation including statutory tax rates, marginal and average effective tax rates, the cost of capital for different investments, and the net present value of capital allowances.
The data shows that while statutory CIT rates have decreased significantly across the covered 88 jurisdictions since 2000, average corporate tax revenues both as a percentage of total tax and as a percentage of GDP have increased slightly. Declines in the statutory CIT rates have been seen in every major region of the world. Our own research has shown similar declines across a broader set of jurisdictions.
Research by the OECD has found that corporate taxes are the most harmful form of taxation for economic growth.
Corporate Tax Revenues
In 2016, on average across the 88 jurisdictions covered in the database, CIT revenue as a percentage of total tax revenue was 13.3 percent, and CIT revenue as a percentage of GDP was 3.0 percent. Between 2000 and 2016, there was a slight increase in both CIT revenue as a share of total tax revenue (1.3 percent) and as a share of GDP (0.3 percent).
Groupings of jurisdictions show substantial differences across regions. CIT revenues tend to be particularly important in developing countries. While CIT revenue accounted for 15.3 percent of total tax revenue in African jurisdictions and 15.4 percent in Latin American and Caribbean (LAC) jurisdictions in 2016, the OECD average was 9 percent.
Statutory Corporate Income Tax Rates
Declines in statutory CIT rates have been seen in every region of the world. While the average statutory CIT rate for the jurisdictions in the OECD dataset was 28.6 percent in 2000, this decreased to 21.4 percent in 2018. In 2018, Australia and New Zealand was the region with the highest average statutory CIT rate (29.0), followed by North America (27.5), Africa (27.1), Europe (19.9), Asia (18.9), and LAC (17.3).
Between 2017 and 2018, the jurisdiction with the largest reduction in the combined statutory CIT rate was the United States with a decrease of 13 percentage points. The combined statutory CIT is now 26 percent in the United States.
Corporate Effective and Marginal Tax Rates
As opposed to the statutory CIT rate, the corporate effective average tax rate (EATR) provided in the OECD database captures provisions such as capital depreciation rules and other allowances and deductions. Depreciation rules are important because they, if poorly designed, inflate taxable profits by not allowing businesses to fully deduct the cost of investments. The EATR across the 74 covered jurisdictions in 2017 (20.5 percent) is 1.1 percentage points lower than the average statutory CIT rate (21.6 percent). Most jurisdictions provide some degree of accelerated depreciation; only a few have tax depreciation rules that reduce allowances for capital investment relative to the standard formula. In 2017, the United States and India were the jurisdictions with the largest discrepancy between the statutory CIT rate and the EATR (4.8 percentage points in the United States and 3.8 percentage points in India).
Effective marginal tax rates (EMTR) calculated by the OECD reflect the extent to which taxation increases the cost of capital at the break-even point of a capital investment project. In other words, it measures the extent to which taxation impacts business decisions to invest. According to the OECD estimates, in 2017, the four countries with the highest EMTRs in the sample were Costa Rica (33.1 percent), Chile (31.3 percent), Australia (28.5 percent), and Argentina (26.9 percent).
Tax incentives for research and development (R&D)
Since 2000, more jurisdictions have shifted from directly funding business R&D to providing R&D tax incentives. Many countries adopt tax provisions that are generous to R&D activities with the hope that those incentives will spur innovation in their economies. While only 19 out of 36 OECD jurisdictions offered tax relief on R&D expenditures in 2000, this number rose to 30 in 2018. A 70 percent increase in the volume of R&D tax relief in OECD jurisdictions can be observed between 2006 and 2016, reaching $45 billion in 2016. In the same period, direct support for business R&D through spending increased only by 10 percent, reaching $52 billion in 2016.
The BEPS Context
The OECD released its final report on “Measuring and Monitoring BEPS, Action 11” in 2015. At that time, the OECD estimated that global CIT revenue loss due to aggressive tax planning was between $100 billion and $240 billion annually or between 4 and 10 percent of global CIT revenues. Even if the high-end of the estimated range applies to the average country, then this new data from the OECD reveals that eliminating BEPS would increase total revenues by just 1.3 percent on average. However, even the OECD did not expect BEPS revenues to be fully captured, due to the administrative difficulty of collecting the marginal dollar of revenue. As mentioned previously, OECD research has also shown that the CIT is the most harmful tax for economic growth.
During the same period as the BEPS effort has been underway, countries have not only chosen to reduce their CIT rates, but have also chosen to narrow their tax bases with respect to R&D as mentioned previously.
This new data helps to paint a broader picture on the BEPS effort and remind policymakers of the scope of that debate.
Despite the decrease in statutory corporate income tax (CIT) rates over the last two decades, both average CIT revenues as a percentage of total tax revenue and as a percentage of GDP have slightly increased. As one might expect, declining CIT rates on average have not led to lower CIT revenues as a share of GDP. Instead, changes such as adjustments in the tax base by countries weakening their treatment of capital investment have resulted in a slight increase in CIT revenue as a share of GDP.
The database also includes some issues that will need to be investigated further as estimates for marginal effective tax rates and capital allowances for some countries are dissimilar to other estimates using similar methodologies. We will provide updates to our analysis as we continue to explore this dataset and corresponding documentation.
Source: Tax Policy – Higher Corporate Tax Revenues Globally Despite Lower Tax Rates
Tax Policy – New Swedish Coalition Government Proposes Sweeping Tax Cut Plan
Sweden has been much in the news recently following the comments by Rep. Alexandria Ocasio-Cortez that her proposal to boost the top income tax rate in the U.S. to 70 percent is based on the tax policies in the Scandinavian nation.
According to a recent Reuters news report, it would seem that Sweden is trying to reverse its reputation for high taxes. After four months of attempting to build a coalition government, Reuters reports that “Prime Minister Stefan Lofven’s Social Democrats have agreed to a draft policy deal with the Centre, Liberal and Green parties” that “would cut taxes for wage-earners and companies.”
Below are key reforms outlined in the draft agreement according to Reuters.
- “A broad tax reform is to be implemented that would lower taxes on income and enterprise. The reform includes an agreement to cut marginal tax rates and raise the threshold at which people start to pay the higher rate of tax.
- “While income taxes are lowered, environmental taxes will be increased by at least 15 billion Swedish crowns ($1.66 billion) to help offset the loss of revenue.
- “Taxes for retirees to be lowered in 2020 and pensions raised for those on low and medium incomes.
- “Corporate taxes, especially for small and medium-sized companies, are to be made more [favorable]. Social contribution fees paid by companies are to be lowered while tax breaks for household services are to be extended.
- “[Labor] regulations are to be adapted in a way that would allow companies greater leeway regarding whom to lay off in case of redundancies.
- “Taxes on stock options will be lowered to make Sweden more attractive for start-ups in an international perspective.
- “Interest rate payments on deferred taxes on housing sales will be abolished.”
While the debate in the U.S. has focused on Sweden’s top marginal personal income tax rate of 57 percent, few have mentioned that Sweden has one of the lowest corporate income tax rates in Europe, at 22 percent. Moreover, Sweden abolished its estate and inheritance tax a few years ago and, unlike other European countries, it does not have a wealth tax.
Because of Sweden’s high-tax reputation, many are surprised that the country ranks 7th best on the Tax Foundation’s International Tax Competitiveness Index. The Index ranks OECD countries on how they raise taxes, not on how much they raise. Tax systems are judged on how little they distort economic behavior (tax neutrality) and how low their rates are relative to other countries (their competitiveness). Some of Sweden’s rates are high, such as the 25 percent Value-Added Tax, but they are levied on a broad base with a minimal amount of exemptions or carveouts for certain industries or products.
The tax cuts proposed by the new coalition government could well make Sweden even more competitive, despite how many Americans inaccurately view it as a socialist paradise.
Source: Tax Policy – New Swedish Coalition Government Proposes Sweeping Tax Cut Plan
Tax Policy – Sorry, Washington State: Capital Gains Taxes are Still Income Taxes—But There’s a Better Way
Every state has its traditions, and in Washington, you can mark the dawn of a new year by the inevitable attempt to tax capital gains—and the insistence that, despite appearances, it’s not a tax on income.
On Thursday, Washington Senate Majority Leader Andy Billig (D) went on Inside Olympia to discuss the proposal and to explain why, in his opinion, it does not constitute a tax on income (functionally prohibited by the state constitution), even though in other states and at the federal level, capital gains are taxed under the individual income tax.
Senator Billig observed that “income gets taxed at one level [while] capital gains, at the federal level, gets taxed at another level”—which is true, at least where long-term capital gains are concerned. This, however, is a tax preference within the individual income tax: long-term capital gains receive a lower, preferential rate.
The tax code is full of preferences, old and new. Under the new federal tax law, pass-through business income receives preferential tax treatment, for instance, though this is accomplished through a deduction. For an alternative rate, one might look to the alternative minimum tax (AMT), which uses an entirely different rate schedule than the rest of the individual income tax, but is undeniably still taxing income. Which is why Sen. Billig is correct about this prediction: “Ultimately it’s going to be up to a court to decide.”
At the federal level, short-term capital gains are taxed as ordinary income, while long-term capital gains are taxed at a lower rate. Somewhat ironically, proposals in Washington would exempt short-term capital gains altogether and only tax long-term gains (which receive preferential federal treatment) because the state law would draw from that line of taxpayers’ federal income tax return—another hint, perhaps, that this is clearly an income tax.
But forget hints: consider the difference in how income and excise taxes function, since proponents of a Washington capital gains tax want to call this an excise tax on the privilege of earning capital gains. Excise taxes fall on specific transactions—for instance, the purchase of gasoline or cigarettes—and are typically levied per unit (on volume). For instance, Washington’s gas tax is 49.4 cents a gallon, regardless of the price of gasoline. Occasionally they look more like specific sales taxes, levied on an ad valorem basis, like Washington’s 37 percent excise tax on recreational marijuana.
But in either case, they fall on a specific good or service and—most importantly—they’re based on sales, either in price or volume. That’s not how capital gains taxes work. They’re not levied at a set rate on each financial transaction. Rather, they’re imposed on the net income from investments when that income is realized. There’s no getting around that this is an income tax—just a very narrow one.
Interestingly, in his interview, Sen. Billig observed that “the best tax system is a tax that is wide but not deep, so tax a lot of things, but don’t tax them a lot.” Unfortunately, that’s pretty much the opposite of what can be achieved by a tax on long-term capital gains. It’s a volatile tax on a narrow definition of income, in an area where people often have significant control of when and how they realize that income.
If Washington did adopt a capital gains tax, moreover, one wonders whether state officials would maintain their insistence that it’s an excise tax for purposes of the state and local tax deduction.
When determining federal tax liability, taxpayers can deduct property taxes plus their choice of income or sales taxes, up to a (new) cap of $10,000. In a state like Washington, which forgoes an individual income tax, itemizers go with the sales tax—though, more accurately, most taxpayers use IRS tables that convert their income into a “standard” sales tax figure that can be substituted for actually tracking purchases.
If Washington adopted a capital gains tax, some taxpayers would benefit from deducting their state capital gains tax payments rather than their estimated sales tax payments, but that of course depends on their ability to characterize the tax as an income tax. It’s pretty clear the IRS would allow it—but what would state officials think, given their position that it’s decidedly not an income tax?
Incidentally, that new $10,000 cap also means that the cost of state taxes is now higher. The state and local tax deduction essentially subsidizes state taxes, allowing a portion of the burden to be exported to taxpayers across the country. The cap limits the ability to do that, particularly for high earners. States like New York, New Jersey, and Connecticut have all expressed concern that their high rates on higher-income residents could backfire on them, driving people out of state, now that this federal subsidy has been cut.
Yet Washington policymakers want to impose a particularly high rate tax on capital gains income. That could be a risky move even if the tax didn’t face such an enormous constitutional challenge.
Sen. Billig is right to want a tax code with broad bases and low rates. This is the opposite of that. Instead, legislators might look to broaden the state’s narrow sales tax base, taxing additional services. This would make the tax more stable while also enhancing progressivity, since services are disproportionately consumed by higher-income individuals, and yet are currently exempt—a huge tax break for wealthier Washingtonians that carries very little economic benefit.
Source: Tax Policy – Sorry, Washington State: Capital Gains Taxes are Still Income Taxes—But There’s a Better Way
IRS Tax News – Some individual taxpayers get relief from underpayment penalty
The relief applies to individuals whose tax withheld and estimated tax payments equal at least 85% of the tax shown on their 2018 tax return.
Source: IRS Tax News – Some individual taxpayers get relief from underpayment penalty
IRS Tax News – Final regulations govern Sec. 965 transition tax
The IRS finalized proposed regulations issued last August on the new transition tax, which generally taxes the accumulated post-1986 deferred foreign income of a corporation.
Source: IRS Tax News – Final regulations govern Sec. 965 transition tax