B5

NEIL REYNOLDS
CONTRARY MINDED

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In an editorial the other day, The New York Times called it "a uniquely American paradox." On the one hand, U.S. corporate tax rates are among the highest in the world. On the other hand, the actual taxes that these corporations pay are among the lowest in the world.

The real U.S. tax rate is not the 40 per cent nominal rate that Canadians cite when they compare U.S. and Canadian corporate taxes. More often than not, the U.S. rate is zero per cent. In these circumstances, it's obvious that Canada (nominal rate: 36 per cent) is not competitive with our No. 1 trade competitor - nowhere, indeed, close to competitive.

The U.S. Government Accountability Office (GAO) said last week that two of every three U.S. corporations paid no federal income taxes of any kind in the seven-year period from 1998 through 2005. (The GAO is an independent investigative agency that reports to Congress, not to the White House.)

The GAO studied tax returns from 1.3 million corporations (with annual sales of US$2.5 trillion) and determined that 66 per cent of them were able to record enough expenses - that is, tax deductions - to avoid paying any income taxes whatsoever.

The largest 1,000 U.S. corporations (with assets of $250 million or annual sales of $50 million) didn't get off quite so easily. Only 25 per cent of these corporations (with combined revenue of $1.1 trillion) escaped income taxes completely. Yet the other 75 per cent paid a tax rate much lower than the country's oft-cited nominal rate. In an earlier study of Fortune 500 companies, in the three-year period from 2001 through 2003, the Institute on Taxation and Economic policy, a Washington-based think tank, calculated that the real tax rate for these companies was 18.4 per cent.

U.S. corporations now pay the lowest income-tax rate since the end of the Second World War - and provide the least tax revenue as a percentage of GDP. In a comment on this trend, calling it "a conundrum," PricewaterhouseCoopers executive Peter Merrill said: "The United States has the second-highest combined statutory corporate tax rate among the 30 democracies with membership in [the Paris-based Organization for Economic Cooperation and Development] - yet it tied with Hungary for the fourth-lowest amount of corporate income tax revenue relative to GDP."

U.S. corporate taxes now equal a mere 2.2 per cent of GDP. Canada's corporate taxes now equal 2.6 per cent of GDP (a decrease from 3.2 per cent a decade ago but an increase from 1.9 per cent only four years ago.) Though European nominal corporate tax rates are generally much lower than the nominal U.S. rate, the OECD average is significantly higher - 3.4 per cent. Nevertheless, as The New York Times reported: "Corporate tax receipts have risen sharply as a percentage of federal revenue [since 1998]."

In fact, of course, there isn't much of a paradox here.For that matter, there isn't much of a conundrum here, either. When shopping the globe for corporate tax rates, the sticker price isn't for real - especially the U.S. sticker price.

In national economies, governments used to be able to tax corporations as captive entities. In a global economy, they cannot. Now it's a buyer's market. More and more, governments must compete for corporations, for the investment and the jobs that they provide; more and more, corporations are free to choose the tax rate they will pay.

In the U.S., real corporate tax rates have been falling for years - and the U.S. has the foreign investment to prove it. (The GAO found, interestingly enough, that foreign companies operating in the U.S. pay less corporate income tax than domestic corporations pay.)

An OECD team of economists confirmed this assessment in an illuminating report, published in July, which confirms the remarkable decline in corporate tax rates, both nominal and real. These economists concluded that corporate income taxes are the most destructive of all taxes. In a report entitled Taxation and Economic Growth, the economists asserted that, in a global economy, high tax rates can be preserved only on "immoveable property" or on personal consumption. (The revolutionary implication here is that personal income taxes themselves must necessarily erode over time as well.)

In 1981, this report concludes, the average nominal OECD corporate tax rate was 47 per cent. By 1994, it had fallen to 40 per cent. By 2007, it had fallen to 27.6 per cent. (The Top Five corporate tax-rate cutters since 1981 were Italy (by 20 per centage points); Poland and the Slovak Republic (by 21 per centage points); Turkey (by 26 per centage points); and Ireland (by 27 per centage points).

The simple fact is that corporate taxation isn't worth the trouble. The elimination of corporate income taxes would stimulate economic growth around the world - and would produce a far less cumbersome, far less bureaucratic and far less corrupt tax regime. The perfect corporate tax rate is now self-evident: zero per cent.

Neil Reynolds, a former editor-in-chief of the Telegraph-Journal, is the Ottawa-based national affairs columnist for the Globe and Mail's Report on Business. He can be reached by e-mail at reynolds.globe@gmail.com.