That 35 percent effective corporate tax rate may actually be half that amount. So says a US Government Accountability Office, which issued a report at the request of Democratic Senator Carl Levin of Michigan and Republican Senator Tom Coburn of Oklahoma. The report doesn’t help the argument that US companies pay too much tax.
“For tax year 2010 (the most recent information available), profitable U.S. corporations that filed a Schedule M-3 paid U.S. federal income taxes amounting to about 13 percent of the pretax worldwide income that they reported in their financial statements,” the GAO report said.
The IRS implemented the Schedule M-3 reporting requirement in 2004, which requires corporates and partnerships that report assets of $10 million or more on their Schedule L balance sheet to reconcile taxable income or loss with financial statement income or loss. According to AccountingWeb, the goal of Schedule M-3 is to “provide consistency and standardization in the reporting of corporate book-to-tax differences, and to help the IRS identify possible areas that might require examination or audit.”
The GAO acknowledged that the 13 percent figure rose when state and local taxes were included in the math (to 17 percent), and also said excluding unprofitable firms also raised the figure. However, “even with the inclusion of unprofitable filers, which increased the average worldwide ETR [effective tax rate] to 22.7 percent, all of the ETRs were well below the top statutory tax rate of 35 percent.”
The new report undercuts arguments that the US’s 39.2 percent corporate tax rate makes US corporations less competitive. Ever since Japan lowered its corporate income tax rate in 2012, the US has had the highest rate in the OECD. The OECD average, according to observers, is 25 percent.
Proponents for lower corporate taxes also have another hurdle: corporate taxes are now equivalent to only one percent of US GDP—the lowest level in 30 years, according to the FY11 Federal Budget—in an environment where taxes overall are absorbing some 15 percent of GDP (and spending equals some 25 percent of GDP). A further decline in corporate taxes, either through a rate cut or more generous loopholes, could leave the government almost entirely financed by individual taxpayers.