The US policy debate on international tax reform often includes comparisons to an OECD average of 24% for non-US corporate statutory top tax rates. Yet many of the US exports, imports and foreign direct investment are with non-OECD countries such as Brazil, China, India, Singapore, Taiwan and tax havens. The 24% average tax rate is unweighted, so counts Estonia and Slovenia with the same weight as Germany and Japan.
The Tax Foundation did a good analysis of statutory corporate tax rates in over 200 countries. They present an unweighted average (23.0%), but also an average weighted by countries’ Gross Domestic Product (29.4%). Clearly a weighted average is more appropriate for a comparative analysis, but I don’t think GDP is the best weight for analyses of international business competitiveness or base erosion and profit shifting. Domestic consumption accounts for most of GDP and government spending is another significant percentage.
Four measures focused on international business activity are exports and imports, outbound and inbound foreign direct investment (FDI). These measures are specific to U.S. multinational business activity. For convenience, I calculate the weighted average corporate statutory tax rate for the top 15 countries which account for 66% of US exports, 72% of US imports, 81% of the assets of US multinational enterprises’ affiliates, and 91% of the assets of foreign-owned US affiliates.
The weighted average of the top 15 countries that are US major trading partners is 27%, using 2017 top statutory corporate tax rates. The weighted average of the top 15 countries with FDI into the US is 26%. The weighted average of the top 15 countries where US multinationals have affiliates is 20.5%, since a significant share of US outbound FDI is in 0% tax rate havens. The outbound US FDI rate would be even lower if intangible assets, often placed in tax havens, was included in total assets.
A federal corporate tax rate of 20% combined with state corporate income tax would be slightly under 25%, so the US would no longer be an outlier. Of course, many multinational corporations are able to avoid state corporate income taxes on their foreign source income, so a 20% rate would be below the current averages for exports, imports and inbound FDI.
Statutory marginal tax rates are important determinants of base erosion and profit shifting (BEPS). Tough anti-BEPS tax rules are also important. Average effective tax rates reflecting not only the statutory tax rate, but also the tax base and tax credits, affect foreign direct investment. Reducing the US statutory tax rate is important to curtail a number of economic distortions, but other dimensions, such as territorial and anti-BEPS rules, are also key elements of a balanced international tax system for the U.S.