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Sunday, August 24, 2008

Statutory versus Effective Tax Rates

Greg Mankiw posts this graph from the Tax Foundation:

But it's not clear why he would post a graph showing statutory rather than effective tax rates, and why he would post a graph that combines the data in a way that just happens to exaggerate differences between the US and other countries. As Paul Krugman says:

The Tax Foundation is not a reliable source

and he links to this evidence detailing why the graph is misleading. As he explains:

What they don’t make clear is that:

1. The graph shows the “statutory” tax rate, which is the maximum rate a corporation can pay in principle. But because corporate tax rules allow all kinds of deductions and exclusions, the statutory rate is a poor guide to the actual disincentives the corporate tax creates.

2. Even more important, while they don’t explain how they calculate the “average” tax rate, the fact that their own data show that all the big economies have tax rates above 30%, while their graph shows an average rate of about 27%, seems to indicated that they’re showing us an unweighted average — that is, one that makes small economies like Ireland and Greece seem as important as big economies like Japan and Germany. And whaddya know, corporate taxes in big economies tend to be similar to those in the United States, a point made by the Congressional Budget Office in the study from which the chart above is drawn. (Yes Germany cut rates this year. Big deal.)

And, as Linda Beale notes:

[T]he US is actually a corporate tax haven, with the lowest effective corporate tax rates of almost all the countries that participate in the OECD. That's a little fact that the Tax Foundation apparently doesn't want the American public to understand, since all its hype is in terms of statutory rates and not in terms of effective tax rates.

    Posted by on Sunday, August 24, 2008 at 04:32 PM in Economics, Taxes | Permalink  TrackBack (0)  Comments (28)


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