McCain's Wish Comes True

Granting McCain his Wish
by Richard G. Sims
John McCain seldom speaks for more than a couple of minutes without mentioning the need to cut corporate taxes. His web site says, “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.” So, Mr. McCain will be delighted to learn that, according to the World Bank, his wish for taxes no higher than the average of our major trading partners has been granted.
According to a recent international survey of corporate taxes (Doing Business: OECD Business Taxes as a Percent of Profits, 2008), the World Bank finds the businesses located in the U.S. are taxed at exactly at the average rate of our major industrialized trading partners. Taking combined taxes paid by businesses at the federal, state, and local level into consideration, the combined tax rate for businesses in the U.S. is 46.2%. The average rate for 24 industrialized nations (the member nations of the OECD) studied in the report is an identical 46.2%. Eleven nations had higher combined taxes, twelve nations had lower. Anyway you cut it, total U.S. business taxes are right in the middle of those of these industrialized nations.
McCain’s “second-highest” statistic apparently comes from having looked only at one tax, the corporate profit tax. The problem with this simplistic approach to international comparisons is pointed out by John Whiting, a tax partner at PricewaterhouseCoopers, the principle consultant to the World Bank study, “There is room for confusion and misinterpretation over a company’s tax bill, particularly if you just look at the corporation tax. Businesses face a huge array of taxes over and above the tax on their profits.” In other words, comparing nations’ business taxes by looking only at profits taxes will leave you mislead and confused.
To illustrate this point, this study found that the US tax rate on corporate profits is, indeed, comparatively high—5th highest among the 24 industrial nations. But for other major business taxes, such as those on labor and social contributions, the U.S. is 3rd lowest as a percent of profits. In many nations, business taxes on employment and social contributions are much higher than their outlays for profit taxes. For example, in the U.S. taxes on labor and social contribution taxes, which here are comprised mainly of the employers share of social security and state unemployment contributions, are 9.6% of profits. The average for such taxes in rest of the industrialized world is 23.4%. The labor and social contribution tax rates are over 30% of profits in seven nations, and in two of those nations, France and Belgium, the rates are over 50%. It is clearly misleading and confusing to ignore these taxes. Not to mention, plainly wrong.
Still, does Mr. McCain take the position that taxes not based directly on profits somehow don’t matter to business? If so, then some may ask why not simply raise those taxes, spend the money, and no harm is done. Alternatively, if those taxes do matter, then how do you explain not counting them when comparing international taxes? But then by including them, we have come full circle, and his stated goal of having U.S. business taxes being no higher than the average of its majors trading partners is already achieved and the principle argument being offered to support the need for a corporate tax cut has vanished.