In Defense of Corporate America

My company had its annual Finance Conference this week (“All Your Budgets Are Belong To Us”), and while I found a lot of things there interesting, I have no intention of imposing 50-odd hours of concentrated audit and tax details on innocent bystanders , although you’re on notice, Chico  – if you don’t shape up and behave I will find a way to force you to listen to me explain the history and structure of Sarbanes-Oxley’s Section 404 reporting requirements.  

Anyway, during the sessions of taxes, a few points were revisited about corporate taxes.  And to put it bluntly, the folks who hate corporations and like to claim they don’t pay enough in taxes, well, they’re lying when they make claims like that.

The U.S. has one of the highest corporate tax rates in the world. Only Brazil, Uzbekistan, Chad and Argentina have higher corporate tax rates than the U.S.  According to a research study by the Cato Institute, the effective U.S. corporate tax on new investment was 34.6% in 2010. This was higher than the average OECD rate of 18.6% and the average rate for 83 countries at 17.7%.

So, if the corporate rate is 34.6%, what’s with the claims that companies don’t pay taxes, or at least don’t pay enough?  In some cases it’s deliberate lying, but in others it’s just an exaggeration based on a failure to understand how taxes work for corporations.   PriceWaterhouseCoopers prepared a study from 2006 through 2009  examining Global Effective Tax Rates, which provides some insights.  By the way, an ‘effective tax rate‘ is what a company really pays, not the rate assigned by a government.  The effective rate can be lower, or higher, than the official rate declared by the government.  The PWC study discovered that US-based companies operating globally pay more than eight percentage points more in ETR than companies operating globally with a headquarters outside the US.  Consequently, this demonstrates not only that corporations pay a higher effective tax rate than individuals in the United States, the rates charged by the U.S. government are among the highest in the world, and US-based companies are penalized for putting their head office here.  Certain individual companies fare better than others, but on the whole attacks against corporations as tax cheats are false and defamatory.

There are a number of significant differences between corporations and individuals, including the bull’s eye on the bank of corporate leaders.  What I mean is, corporations don’t vote but people do, so a lot of politicians, pretty much everywhere, try to promise low taxes to people but increase taxes on corporations, especially if those businesses can be smeared as economic villains.  In reality, however, corporations represent jobs, economic growth and stability, and when government goes after corporations, then government is attacking jobs and GDP.