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Annette Nellen
Annette Nellen

Lowering Corporate Tax Rates

What's the status of calls to reduce the corporate income tax rates?

December 10, 2009
by Annette Nellen, CPA/Esq.

It has been widely publicized that the top corporate income tax rate in the United States is higher than in most other industrialized countries. Despite this attention over the past few years, the corporate income tax rate structure remains unchanged. This article looks at how the rate structure in the U.S. compares to other countries, a sampling of recent proposals and the prospects for change.

Tax Rate Data

Organization for Economic Co-Operation and Development (OECD) data on corporate income tax rates for various countries based on a combination of central and sub-central levels of government includes the following (OECD, Table II.1):

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Australia

30.00%

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Canada

31.32%

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Germany

30.18%

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Ireland

12.50%

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Japan

39.54%

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Mexico

28.00%

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United Kingdom

18.00%

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United States

39.10%

The OECD data indicates that the U.S. has the second-highest corporate-tax rate based on combined federal and state rates, with Japan having the highest rate.

Proposals

Several bills have been introduced in the 111th Congress to lower the corporate-income tax rates. Proposals vary as to whether all corporations would enjoy a rate reduction, how (and whether) revenue neutrality is maintained and the purpose (competitiveness, economic stimulus or major system reform). The following chart summarizes key elements of selected proposals of the 111th Congress.

Bill

Top rate

All corporations?

15% bracket?*

Tax offsets?

Apparent purpose

H.R. 99

25%

Yes

Yes

No

Major reform

H.R. 301

25%

Yes
Reduced only for 2009 through 2013

Yes

No

Economic stimulus

H.R. 470

25%

Yes

Yes

No

Economic growth and middle-class tax relief

H.R. 1613

30%

Yes

Yes

No

US investment

H.R. 4100

25%

Yes
Reduced only for 2009 and 2010

Yes

No

Economic stimulus

S. 1381

35%

No. Lower rate structure only for corporations with income of roughly $7 million or less. Current brackets broadened such as 15-percent bracket if taxable income does not exceed $1 million.

Expanded

No

Small business tax relief

(* The 15 percent bracket applies to taxable income of $50,000 or less.)

In addition, H.R. 3970 (110th Congress), Congressman Charles Rangel's (D-NY) tax-reform proposal, would reduce the top corporate rate to 30.5 percent with a variety of offsets including repeal of the IRC §199 manufacturing deduction and modification of foreign deferral rules. A 2007 report from the Treasury Department, Business Taxation and Global Competitiveness, noted that elimination of some corporate tax preferences would allow for the corporate-tax rate to be reduced to 27 percent (see Corporate Tax Under the Microscope).

Costs

The Congressional Budget Office (CBO) estimates that lowering the top corporate-income tax rate to 30 percent while keeping the existing 15-percent and 25-percent brackets, would reduce revenues by $22 billion for 2010 (CBO, Budget Options (PDF), Volume 2, August 2009, p. 215).

Considerations

Advantages of lowering the corporate tax rate include reducing the cost of corporate investment, improved international competitiveness and economic stimulus. Disadvantages include reduced government revenues and continuation of corporate-tax flaws such as double taxation. In addition, a lowering of the corporate-tax rate could add some complexity to the overall system because of the likely creation and reinstatement of rules to prevent aggressive planning strategies that can arise when the corporate rates are lower than the individual tax rates.

Given the range of bills calling for a lower corporate-tax rate and interest in tax reform from both Congress and the White House, it is very likely that discussion on this topic will continue. That discussion will likely include an examination of not only the current statutory tax structure, but also effective tax rates (tax divided by income). In addition, any discussion about lowering the corporate-tax rate is most likely to include international reform, elimination of certain preferences, new rules (such as codification of economic substance) and rules to prevent abusive use of the corporate structure.

Ideally, discussions on lowering corporate tax rates will also include corporate integration and consideration of business taxation in general. Unlike other OECD countries, the U.S. has a large percentage of business income outside of the corporate structure, such as in pass-through entities. In 2004, only seven percent of businesses were C corporations (Treasury, Business Taxation and Global Competitiveness (PDF), July 2009, p. 13).

Looking Forward

Despite heightened interest in lowering the top corporate-tax rate, when Congress seriously gets to looking at any of the proposals noted in this article, the reality of revenue offsets and how corporate tax fits within the entire business tax structure are likely to surface. While that discussion will slow down progress towards lowered rates, it will be important to the overall federal tax system.

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Annette Nellen, CPA/Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.