McCain by the Numbers: Imaginary Tax Rates

McCain’s campaign website has a lot to offer—a veritable treasure trove of bad ideas, overly determined-looking photos, and a creepy link to his MySpace page (under ‘Body Type’, it says 0’0”—I’m not kidding!). Now we can add sly misinformation to the list.

Mr. McCain has his knickers in a loop about corporate taxes.

John McCain Will Reduce The Federal Corporate Tax Rate To 25 Percent From 35 Percent. John McCain believes the taxes we impose on American companies should be no higher than the average rate our major trading partners impose on theirs. We currently have the second-highest combined corporate-tax rate in the industrialized world, and it is driving many businesses and the jobs they create overseas.

(Did I mention his website has a little of the Bob Dole Bob Dole thing going on?)

So we have he second highest corporate tax rate (outfoxed by only Japan on this one!). The operative word here is rate. The rate may be high, but actual revenue collected is an entirely different matter.

First of all, our complex tax code enables corporations to use a variety of tools to reduce their tax liability. Accelerated depreciation, exorbitant executive pay (which is deductible), off-shore sheltering (which the GAO estimates accounts for about $85 billion in uncollected tax revenue), stock options (deductions taken from the price difference in exercised stock options given to employees as part of compensation), leasebacks, transfer pricing, etc., all reduce the effective tax rate much lower than the statutory rate. In the first years of the Bush tax cuts, the effective corporate tax rate sank to an average of around 23%, with many corporations (some that reported pretax profits to their shareholders) having negative effective tax rates.

According to a new Congressional Research Service report, since 1993 (when the top statutory rate was set at 35 percent), the effective corporate tax rate — that is, the share of total corporate profits that is paid to the federal government in corporate income taxes — has averaged 26.3 percent for non-financial corporations, or about one-quarter lower than the 35 percent statutory rate (Congressional Research Service, 2003, as quoted by the Center on Budget and Policy)

Another way of looking at it is taxes as a part of GDP. The Organization for Economic Co-Operation and Development (OECD), which is a research organization funded by the governments of major developed nations (i.e., not a fringe lefty think tank), released a report about real taxes in various nations. Their methodology looks at corporate taxes as a percentage of GDP. Corporate taxes in 2004 (after the Bush tax cuts), dipped to 2.4% of GDP (28th lowest out of 30 countries), versus a 4.0% average for other OECD member nations. The U.S., circa 1965, had a percentage closer to 4.0%. When you include all taxes paid, the U.S. remains one of the least taxed nations as a percentage of GDP. The idea that we’re taxing business off of U.S. soil is just ridiculous.

For yet another view, we can look at corporate taxes as a percentage of all federal tax revenues; the Bush tax cuts ushered in a new low in this figure. In the 1950’s, corporate taxes comprised 28% of federal tax revenue; in the 1960’s, 21%, and now less than 10%.

With all the damage the Bush tax cuts have done with respect to corporate taxes, it seems fairly irresponsible to slash them lower. Much of the criticism about McCain deals with how close he is to Bush on most issues. On this one, he’s even more radical than Bush, and that’s just plain scary.