Advocates of cutting corporate tax rates frequently make their argument based on the higher statutory rate observed in the United States as compared with the rest of the world. Sometimes the higher rate alone is used as an argument, and in other cases the arguments include claims that cutting corporate taxes would induce large investment flows into the United States, which would create jobs or expand the base enough to raise revenue. President Barack Obama has supported a rate cut if the revenue loss can be offset with corporate base broadening, while the Citizens for Tax Justice has urged a revenue raising reform and business leaders have urged setting deficit concerns aside. This report focuses on the global issue relating to tax rate differentials between the United States and other countries. The second section discusses policy implications, including the effect of a corporate rate cut on revenue, output, and national welfare; the possibility that a rate cut may induce reactions from other countries; and the outlook for and consequences of a revenue-neutral corporate tax reform. The effective rate is the same. Marginal tax rates are also significantly lower than the statutory rates: the U.S. rate is about half the statutory rate and the weighted OECD rate is about 60% of the statutory rate. (These types of taxes would not be relevant for profit shifting.) First, it is important when forming a composite rate for the rest of the world to weight the tax rates by output or some other measure of economic importance. Economic Effects of a U.S. Rate Cut

The previous analysis has shown that U.S. statutory corporate tax rates are about 10 percentage points higher than a weighted average of the OECD or the large countries that account for most of output (7 percentage points when including the production activities deduction). Effects on Revenue, Output, and National Welfare, Assuming No Tax Rate Changes by Other Countries or Offsetting Base Broadening in the United States

This section examines the effects of a corporate rate cut from 35% to 25% on revenues and international capital flows, and their effects on the U.S. economy (including feedback effects on revenues and effects on national welfare). For thinking about this effect, consider separately inbound capital (capital owned by foreigners and invested in the United States) and outbound capital (capital owned by U.S. persons and invested abroad). These estimates of profit shifting suggest that they amount to 14% to 20% of total corporate tax revenue, which would not be enough to offset the revenue loss even if profit shifting disappeared entirely. The U.S. rate fell from 39.2% to 39.1%. The observation of rate cuts in the rest of the world in the wake of the U.S. tax cut is not proof that countries will cut their rates again if the United States does, but it does provide some support for that expectation. (Much more revenue would be raised in the short run, but revenue neutrality based on a 10-year budget window would lead to a long-run loss, because slowing depreciation leads to much larger revenue gains in the short run compared with the long run.) A revenue neutral revision that cuts the rate in exchange for higher taxation of new investment would raise the marginal effective tax rate, because the rate reduction would apply to the return to existing capital. It would increase the cost of deferral by about 10%. In that case, the percentage point reductions are 5, 2.3, and 1.5, respectively, beginning at a 35%, 30%, and 25% corporate tax rate. Summing Up

This section has identified enough provisions to allow the corporate tax rate to be reduced to 25% without losing revenue over the long run (i.e., that do not depend on large short-run gains, such as those from reducing accelerated depreciation), but that would require going beyond corporate tax expenditures (which would account for only 5 percentage points) to business preferences associated with unincorporated businesses, foreign tax credit restrictions, or more fundamental reforms.
Advocates of cutting corporate tax rates frequently make their argument based on the higher statutory rate in the United States as compared with the rest of the world; they argue that cutting corporate taxes would induce large investment flows into the United States, which would create jobs or expand the taxable income base enough to raise revenue. President Barack Obama has supported a rate cut if the revenue loss can be offset with corporate base broadening. Others have urged on one hand, a revenue raising reform, and, on the other, setting deficit concerns aside.
Is the U.S. tax rate higher than the rest of the world, and what does that difference imply for tax policy? The answer depends, in part, on which tax rates are being compared. Although the U.S. statutory tax rate is higher, the average effective rate is about the same, and the marginal rate on new investment is only slightly higher. The statutory rate differential is relevant for international profit shifting; effective rates are more relevant for firms' investment levels. The 13.7 percentage point differential in statutory rates (a 39.2% rate for the United States compared with 25.5% in other countries), narrows to about 9 percentage points when tax rates in the rest of the world are weighted to reflect the size of countries' economies. (The OECD rates fell by slightly over one-half of a percentage point between 2010 and 2012.)
Regardless of tax differentials, could a U.S. rate cut lead to significant economic gains and revenue feedbacks? Because of the factors that constrain capital flows, estimates for a rate cut from 35% to 25% suggest a modest positive effect on wages and output: an eventual one-time increase of less than two-tenths of 1% of output. Most of this output gain is not an increase in national income because returns to capital imported from abroad belong to foreigners and the returns to U.S. investment abroad that comes back to the United States are already owned by U.S. firms.
The revenue cost of such a rate cut is estimated at between $1.2 trillion and $1.5 trillion over the next 10 years. Revenue feedback effects from increased investment inflows are estimated to reduce those revenue costs by 5%-6%. Reductions in profit shifting could have larger effects, but even if profit shifting disappeared entirely, it would not likely offset revenue losses. It seems unlikely that a rate cut to 25% would significantly reduce profit shifting given these transactions are relatively costless and largely constrained by laws, enforcement, and court decisions.
Both output gains and revenue offsets would be reduced if other countries responded to a U.S. rate cut by reducing their own taxes. Evidence suggests that the U.S. rate cut in the Tax Reform Act of 1986 triggered rate cuts in other countries.
It is difficult, although not impossible, to design a reform to lower the corporate tax rate by 10 percentage points that is revenue neutral in the long run. Standard tax expenditures do not appear adequate for this purpose. Eliminating one of the largest provisions, accelerated depreciation, gains much more revenue in the short run than in the long run, and a long-run revenue-neutral change would increase the cost of capital. Other revisions, such as restricting foreign tax credits and interest deductibility or increasing shareholder level taxes, may be required.
This report focuses on the global issues relating to tax rate differentials between the United States and other countries. It provides tax rate comparisons; discusses policy implications, including the effect of a corporate rate cut on revenue, output, and national welfare; and discusses the outlook for and consequences of a revenue neutral corporate tax reform.