A Taxing Weekend
Odd debates on corporate taxation
As a tenured professor I have the ability to choose any research topic I want. I’ve chosen to look at the politics of corporate taxation. Hello? Still there? I also choose to marathon run for fun. But give this post a try.

What is especially interesting to me is that the rhetoric in the US and across the world (at least in the European countries I know). Many of the debates are centered on the tax rate paid by corporations.

The US corporate tax rate has been pretty much constant at 35% for the last few decades. (Ok, it rose from 34% to 35% under the Clinton Administration). What do firms actually pay in taxes?

According to a study by the GAO the median rates is 0%. For links to commentary on this study see here.

I’ve just starting to work with a Adam Rosenszweg at WashU Law and we did a some very preliminary data collection of the Fortune 500. Excluding major outliers, the effective rate of taxation for most firms has declined over time.

How does this work in practice? For examples from the New York Time on Apple see here and here. For GE see here.

Let’s forget about the partisan bickering about paying “the fair share” or how taxation hurts the “job creators”. Let’s also forget that I’m using quotes without attributing a source. The point is on the focus on tax rates seems odd.

What is interesting about this to a political scientist? There are obviously some unanticipated “loopholes” that firms have become very adept at exploiting. This includes the use of some tax havens and complex transfer pricing. Hello? Are you still here? Great!

But the use of high corporate tax rates and lots of exceptions/exemptions/loopholes/subsidies could be explained by a number of political factors. One, for example, is that fights between Republicans and Democrats over corporate tax rates are little more than posturing that have little effect on the economy (or tax revenue). Politicians can effectively grandstand, with Republicans pushing for lower rates, despite the fact most firms pay taxes much lower than the statutory rates. Democrats and hold the line with high corporate taxes, knowing full well that firms effectively avoid most of these taxes anyways.

An even more cynical view is that the current tax system is politically effective. Incumbent politicians can maintain high corporate tax rates that are generally politically popular, while offering major concession to firms under the table.

The most cynical view is that this is essentially legal corruption. Politicians can extract campaign contributions and other goodies from firms in exchange for lower effective tax rates.

There is clearly a lot of work to be done in this area. But the most interesting part to me is how meaningless tax rates are, and yet they tend to be the center of most (public) political debates on corporate taxation.

These are just some random thoughts before a holiday weekend. Questions, questions, questions.