The U.S. corporate tax rate of 35% is one of the highest in the world and is a topic of debate in the upcoming presidential election. Setting the best corporate tax rate is tricky. If the rate is too high, companies will move their operations overseas to countries with lower tax rates, resulting in lower corporate income for the government to tax and fewer jobs for Americans. A tax rate that is too high will also make it less profitable for businesses to operate and stifle long-term growth of the economy. If the rate is too low, however, the government forgoes desperately needed tax revenue.
In practice, many American companies run a substantial share of their operations overseas and, as a result, pay far lower than 35% of their income in taxes to the U.S. government. In fact, the top ten most profitable U.S. corporations paid an average of only 9% of their pre-tax earnings in taxes to the U.S. federal government last year. There are many legitimate reasons for actual taxes paid to be lower than the statutory rate, but the fact that the rate paid differs so greatly suggests that the statutory rate may be too high, a position held by both presidential candidates.
But how much lower a rate is optimal to maximize tax revenue, keep jobs in the U.S., and allow the economy to prosper long-term? Unfortunately, there are no easy answers. Republican presidential nominee Mitt Romney would lower the rate to 25%, while President Barack Obama prefers 28%.
For more details, check out the candidates’ official positions below or see what each large company actually pays with the NerdWallet Tax Rate Transparency Tool.
Republican Presidential Candidate Mitt Romney
Source: Mitt Romney Campaign Website (July 24, 2012)
The U.S. economy’s 35 percent corporate tax rate is among the highest in the industrial world, reducing the ability of our nation’s businesses to compete in the global economy and to invest and create jobs at home. By limiting investment and growth, the high rate of corporate tax also hurts U.S. wages.
- Cut the corporate rate to 25 percent
- Strengthen and make permanent the R&D tax credit
- Switch to a territorial tax system
- Repeal the corporate Alternative Minimum Tax (AMT)
President Barack Obama
Source: ABC News (Feb 22, 2012)
President Obama proposes reducing the corporate tax rate from 35 to 28 percent.
“Our current corporate tax system is outdated, unfair, and inefficient. It provides tax breaks for moving jobs and profits overseas and hits companies that choose to stay in America with one of the highest tax rates in the world. It is unnecessarily complicated and forces America’s small businesses to spend countless hours and dollars filing their taxes. It’s not right, and it needs to change,” the president said in a written statement.