Last week, President Biden unveiled a $2.7 trillion spending package that would be partially financed by additional corporate tax revenue. Arguing in favor of their corporate tax increases, the administration claimed that, even after its proposals, the U.S. would raise less revenue from corporations as a percentage of GDP than our trading partners. This talking point, however, is misleading. After adjusting for the relative size of corporate sectors across countries, we find that the U.S. tax burden on corporations as a share of GDP is about equal to the OECD average, and Biden’s plan would increase the burden to one of the highest in the OECD.
Biden’s plan proposes to raise the corporate income tax rate from 21% to 28%. In addition, it would raise the tax burden on foreign profits of U.S. multinational corporations, enact a minimum tax on book income, eliminate unspecified tax provisions for fossil fuel companies, and increase corporate tax enforcement. Altogether, these tax increases will raise corporate tax revenue by approximately 0.5% of GDP, according to the administration.
The administration claims that the U.S. collects a relatively low amount of corporate tax revenue as a percent of GDP. Under the Tax Cuts and Jobs Act, the U.S. will collect the lowest share of corporate tax revenue as a percent of GDP of 1.3% in 2018-2022. This is well below the average among other OECD countries of 2.7% (2.5% weighted by GDP). The Biden proposal will increase corporate tax collections to 1.8% of GDP.
This statistic, however, is a misleading measure of the tax burden on corporations. Corporate tax collections do not depend just on corporate tax policy. Some countries may collect a low share of GDP in corporate tax revenue due to having a small corporate sector relative to total GDP.
A small corporate sector helps explain why the U.S. has smaller corporate tax collections relative to GDP than some other countries. In the U.S., there are generally two forms of businesses, each facing a different tax regime. Traditional C corporations pay corporate income tax at the entity level and their payments show up in the corporate tax revenue statistic. In contrast, “pass-through” businesses—S corporations, partnerships, and sole proprietorships—do not face the corporate income tax. Instead, their profits are immediately passed to their owners as business income each year and, typically, taxed as ordinary income. These owners’ tax remittances show up as individual income tax collections, not corporate income tax collections.
The U.S.’ pass-through sector is large and has grown significantly since the 1980s. According to IRS data, pass-through businesses were 92% of all businesses and accounted for 50% of net business income in 2015. The movement of output from the corporate sector to pass-through businesses would have reduced corporate tax revenue as a percentage of GDP, even without any policy changes.
There can also be differences in the corporate sectors across countries that influence this statistic. The corporate tax is a tax on capital income. Even if total corporate output is the same in two countries, the share of that output going to capital may differ. A country with a higher labor share of corporate output will have a smaller corporate tax base than a country with a lower labor share.
And because the corporate tax base is on net capital income rather than gross capital income, the depreciation rate of capital can also distort this statistic. Two countries with identical gross corporate capital income may have different corporate net capital income due to differences in the rate of capital consumption. A high level of intellectual property, for example, would result in lower net income compared to a country with a high share of buildings, which depreciate much more slowly.
Once each of these issues is adjusted for, the U.S.’ tax burden on C corporations prior to the TCJA was higher than the OECD average, and the TCJA brought the burden to around the OECD average.
In the table below, we compare corporate tax revenue as a percent of GDP as presented by the OECD and corporate tax revenue as a percent of GDP if each OECD nation’s net C corporate capital income were the same share of GDP as the U.S. For example, Germany’s adjusted collections as a percent of GDP is 0.9% (compared to its unadjusted value of 1.9%). To calculate the adjusted value, we multiply Germany’s corporate revenue collections as a percent of Germany’s net corporate capital income (13.6%) by the U.S. net corporate capital income (excluding S corporations) as a percent of U.S. GDP (6.5%).
We find that if all countries in the OECD had the same share of net corporate capital income as a percent of GDP as the U.S., the average corporate tax collections would be 1.2% of GDP between 2013 and 2017 (1.3% if weighted by GDP), 0.7 percentage points lower than the pre-TCJA U.S. share of 2.0%. This places the U.S.’ burden the second highest, behind France. The Tax Cuts and Jobs Act reduced the share of corporate tax revenue as a percent of GDP to roughly the same as the adjusted OECD average of 1.3%.
Contrary to what the Biden administration claims, its plan to raise corporate tax revenue would push the U.S. burden higher than the OECD average after adjusting for differences in corporate sectors. Their plan to increase corporate tax revenue collection to 1.8% of GDP would push collections well above the adjusted OECD average of 1.3% and would be the fourth-highest among the countries we examined (although it would still be slightly below the Pre-TCJA average between 2013 and 2017).
The total tax burden on corporations in the U.S. is about average under current law and would rise well above the OECD average under Biden’s proposal. Yet, this measure is not the only thing that matters. Biden’s proposal would also raise the effective marginal tax rate on investment. This will discourage investment, leading to a smaller capital stock, lower labor productivity, and lower wages and economic output in the long run. In addition, the higher statutory tax rate would increase the incentive to shift profits out of the U.S., and the higher tax burden on foreign profits of U.S. multinational corporations would increase the incentive to engage in corporate inversions.
It is important to provide an accurate look at the effective tax burden on corporations. Comparing corporate revenue collections as a percent of GDP without accounting for differences in the size of the corporate sector is misleading.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Kyle Pomerleau (@kpomerleau) is a Resident Fellow at the American Enterprise Institute and Donald Schneider (@DonFSchneider) is a member of the US policy research team at Cornerstone Macro.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.