Debate on lowering corporate taxes

A recent Washington Post article about the relatively high marginal corporate tax rates in the US has sparked off a heated debate. Paul Krugman responded (here and here) by claiming that the 35% statutory (maximum) corporate tax rate in the US means very little, given the large numbers of potential deductions available which ensures that the effective rates are far lower.



Dean Baker puts the record straight using data from the OECD and the Congressional Budget Office to show that in the average member country corporate taxes are equal to about 3.5 percent of GDP, whereas in the United States, corporate taxes have generally been between and 1.5-2.5% of GDP over the last two decades.

A NYT editorial highlighted the deep problem of corporate American evading taxes utilizing the large number of deductions. An investigation by the Government Accountability Office found that almost two-thirds of companies in the United States usually pay no corporate income taxes. Corporations have become increasingly skilled at tax-avoidance strategies, including transfer pricing — overcharging their American units for products and services provided by subsidiaries abroad to artificially reduce their profits here.

The article claims that while corporate profits have soared — reaching a record of 14.1% of the nation’s total income in 2006 — the percentage of these profits paid out in taxes is near its lowest level since the 1930s. It writes, "This country’s corporate tax rates are among the highest in the industrial world, yet the taxes that corporations pay are among the lowest."

The debate has strong echoes in India too, where the large numbers of exemptions available have opened up numerous avenues for corporate tax evasion. The corporate sector is at the forefront of calls to lower taxes, alleging that the high corporate tax rates are lowering the competitiveness of Indian companies. Taking advantage of various exemptions and rebates, the corporate sector paid taxes at the rate of 20.60% in 2007-08, substantially lower than the statutory tax rate of 33.66%.

Interestingly, public sector companies paid taxes at the rate of about 23% while private sector paid at the rate of about 20%. Private sector companies earned Rs 5,56,190 crore as profits before taxes, but declared taxable income of Rs 3,41,606 crore only, or only 60% of their profits, during the financial year 2006-07, thereby getting total tax concessions worth Rs 58,655 crore, an increase of 30% over the previous year. IT companies and ITes and BPO firms pay some of the lowest tax rates anywhere in the world, at 6% and 7% respectively. This issue has been discussed in detail in an earlier post here.