America is used to leading the world but not like this: As of April 1, the U.S. has the dubious distinction of being the developed economy with the highest corporate tax rates.
On Sunday, corporate taxes in Japan dropped to 38%, making America's 39.2% rate the world's highest and well above the average of 25.4% for developed nations, according to the Organization for Economic Cooperation and Development.
Amid the broader issue of reforming the tax code, corporate tax rates have already been a hot-button issue on the campaign trail: President Obama has proposed lowering the top rate to 28% while Mitt Romney's plan would drop it to 25%. Anti-tax crusader Grover Norquist says dropping corporate rates to 25% is just "the first bite at the apple." (See: 'Debacle': Grover Norquist's Case Against President Obama)
America's new standing as the world's top corporate tax regime is adding further fuel to the partisan fire.
"This isn't an April Fool's Day joke," Senate Finance Committee chairman Orrin Hatch (R-Utah) said in a statement. "Every industrialized country around the globe understands that tax rates can determine whether or not businesses succeed or fail. If we are serious about stopping so-called outsourcing, we absolutely must start overhauling our tax system that is a drain on economic growth and efficiency."
The tax rates in question include all federal, regional and local taxes. What's often lost in the discussion, and much of the political rhetoric, is a very critical reality: The effective tax rates most U.S. corporations pay is far lower than 39.2%.
Last year, 19 of the 30 companies in the Dow Jones Industrial Average paid an effective tax rate below the 28% level President Obama has proposed, Reuters reports.
And while a lot of attention was given to whether General Electric paid any taxes or not, Reuters notes that AT&T (T), Bank of America (BAC) and Travelers (TRV) each posted tax gains in 2011 (meaning they got the corporate equivalent of a refund) while Verizon (VZ) paid an effective rate of just 2.7%.
Given the realities of the taxes multinationals pay (or don't pay), several questions arise from the political hysteria over America surpassing Japan as the world's highest tax regime:
- With U.S. corporate profits margins near record levels, and corporations sitting on approximately $1 trillion in cash -- much of its parked overseas to avoid U.S. taxes -- is it really credible to say taxes are holding back American industry?
- Given the high levels of profitability and cash on corporate balance sheets already, is there any reason to think lower rates would really result in more hiring and investment in America?
- In an era of rising income inequality and increasing populist rhetoric, is it really good politics to give corporations another break?
According to Mitt Romney and the Citizens United decision, corporations are people too, but they're already doing a lot better than the average American citizen these days.