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Q&A Of The Day – Corporate vs Personal Income Tax Rates
Each day I feature a listener question sent by one of these methods.
Email:brianmudd@iheartmedia.com
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Today’s entry: Hey Brian, thanks for all the research you do to keep us informed. Speaking of which... I have something for your Q&A. The Biden agreement with foreign governments on a minimum 15% corporate tax. How impactful would that be? Don’t companies already pay more than that anyway? Also, under the Trump tax policy how do individual taxes rates compare with corporate tax rates?
Bottom Line: Well, your inference is correct. Most companies pay far more than 15%. According to the Tax Foundation, the most recent net effective corporate tax rate was 24.6%, or nearly ten points higher than the Biden pledge. Notably, while the rate dropped from 37.5% prior to the passage of the Trump tax policy, to 21%, the US still has the 13th highest effective corporate tax rate in the world. 23 developed countries have lower corporate tax rates than the United States including countries like England, Ireland and Israel. In fact, the average net effective corporate tax rate in the developed world is 21.9%, meaning the US corporate tax rate is already 12% higher than the average of the rest of the world. This illustrates why pragmatism is critical when it comes to any potential increases in corporate taxes.
Prior to the passage of the Trump tax policy, the US had the 2nd highest net effective corporate tax rate in the world. The effect under the Obama-era tax policy was the continued loss of US manufacturing and business activity to other lower tax countries. We risk a similar outcome if we start imposing new mandates which will have the effect of increasing the net corporate tax rate. What’s commonly missed by most reporting on corporate tax rates – including the occasional company that seemingly skirts tax burdens – are the real rates. For the average company that effectively doesn’t pay any federal incomes tax because they show losses – they still pay an average of 11% in overall taxes. Payroll, unemployment and related taxes aren’t commonly included when corporate tax rates are discussed. Regarding personal income tax rates...
The net effective average personal income tax rate was 14.6% last year. As a result, the net corporate tax rate is already 10%, or 68% higher, than the personal income tax rate. As you probably know, posted tax rates are one thing...net tax rates are another. With the US already having above average corporate tax rates it’s risky to impose any increases. In fact, if anything the conversation should center around lowing rates to fit the average across the developed world – which of course won’t happen during the Biden administration.