Evan Soltas
May 11, 2012

In Corpore Sano?

America is having the wrong conversation about corporate taxes.

The problem isn't that corporate tax rates are too high, or that these rates are rendering us uncompetitive. This all-too-common story is simply untrue: our effective corporate tax rate in 2011 was 17.4 percent, which is consistent with rates in the OECD and EU, and just about the lowest it has been since the 1930s.

The problem is that we have established a high statutory rate and then written in a system of tax credits which is so complicated as to be laughable -- if it wasn't a major source of inefficiency and an opportunity for gross political favoritism.

Our corporate tax code creates massive incentives for rent-seeking behavior for firms, makes firms who don't game the code uncompetitive in global markets, and subsidizes for those who look to avoid every last cent of taxes. This is desperately bad for American competitiveness -- even worse than the high statutory rate, which is all but irrelevant in practice -- and for American economic growth in the long run, which is hurt by the distortions created by a broken tax code.

Most people who participate in this policy debate simply don't understand how large and distortionary the corporate tax credits are. Let me give you a taste. Hospitals and nursing homes pay 97.8 percent of the corporate taxes they are assessed before credits. The petroleum and coal products industry pays 24.5 of their corporate taxes -- it has managed to secure fully $38.4 billion dollars in tax credits.

This is by no means limited to oil and coal, lest anyone think I'm out against them. The mean industry reduced their corporate tax burden by 32.5 percent in 2008, but these credits are concentrated only a handful of industries -- the median reduction was only 10.0 percent. Here's a graph I've made which I think tells this story better than I can in words:
The height of the bar is the fraction by which that industry has managed to reduce its corporate taxes from its scheduled liability.