Corporate tax rates fall globally as governments consider austerity measures

Falling corporate tax rates in the U.S. are part of a global trend that has governments charging big business less in tax while looking to make spending cuts across a wide range of social programs. Reports from nonprofit Oxfam, the U.S. Government Accountability Office (GAO) and other organizations are showing that as governments weigh austerity measures in the wake of the pandemic, corporations with surging profits are being asked to foot less of the bill.

Corporate income taxes have dropped from a global average of 47.5 percent in 1980 to 24.9 percent today, according to international anti-poverty group Oxfam, which timed the release of its findings with the meeting of the World Economic Forum in Davos, Switzerland, where financiers and government officials gather annually to discuss policy issues.

Among richer countries, corporate income tax has fallen from 47.5 percent down to 9.6 percent over the same 40-year period, Oxfam found.

Those numbers mirror more recent trends in the U.S., where effective corporate tax rates, which account for deductions and other write-offs and give a more accurate picture of how much companies owe in tax, have also been on the decline.

These rates for large, profitable companies fell from 16 percent in 2014 to 9 percent in 2018, according to a GAO report released last week. 

That drop was especially pronounced after the Trump administration’s Tax Cuts and Jobs Act, which brought the nominal corporate tax rate down from 35 percent to 21 percent after 2017. Effective rates dropped by 40 percent the next year, falling from a 14.6-percent rate to an 8.9-percent rate for profitable corporations.

For all corporations, the drop in tax liability was more than 50 percent, falling from a 22.9-percent effective rate in 2017 to an 11.2-percent effective rate in 2018.

Economists say that the complexity of the U.S. tax code, comprising both rules and numerous exceptions to rules, is part of what makes the nominal corporate tax rate so different from the actual tax rate.

“It makes little sense to have a high tax rate that is easily avoided or evaded. This simply encourages companies to spend large amounts of money gaming the system. This gaming is a complete waste from an economic perspective,” economist Dean Baker of the Center for Economic Policy and Research said in an email to The Hill.

“We have many highly skilled people spending their time finding ways to play tax tricks rather than doing something that is economically productive. This is why almost all economists would prefer to have a lower tax rate that is actually collected,” he added.

The GAO report also found that the percentage of large, money-making companies that owed nothing in taxes jumped up by about 25 percent after the Tax Cuts and Jobs Act, though that increase was part of a longer trend starting in 2015.

Supporters of the lower corporate tax rates say they help increase U.S. production levels and increase investment.

“In 2017, we found that lowering the corporate income tax rate from 35 percent to 21 percent would raise long-term GDP by 2.6 percent. This lower statutory rate contributed to the fall in effective corporate tax rates after 2017, and improved economic growth by lower marginal tax rates on investment,” Garrett Watson of the Tax Foundation said in an email to The Hill.

Democrats who opposed the Trump administration’s tax cuts have been calling to the GAO’s findings.

“Republicans made it shockingly easy for profitable corporations to wave a magic wand and eliminate their tax liability,” Senate Finance Committee Chairman Ron Wyden (D-Ore.) said in a statement on Friday. “On this issue Senate Democrats are going to stand with working Americans and the middle class, who believe corporations and the wealthy must pay a fair share.” 

“The situation has become so absurd that over a third of the largest and most profitable corporations in our country pay nothing in federal income taxes,” Sen. Bernie Sanders (I-Vt.) said in a statement last week. “We need to repeal the Trump tax breaks for the rich and demand that the largest corporations in America finally start paying their fair share of taxes.”

As tax rates for the private sector have been falling, governments around the world are saying they’re strapped for cash and considering putting more social programs on the chopping block as part of austerity measures.

“If we really want to talk about the debt and spending, it’s the entitlements program,” Rep. Michael Waltz (R-Fla.) said on the Fox Business Network earlier in January, using a shorthand expression for Social Security and Medicare. “If we want to talk about big reforms, I look forward to hearing that from those folks who are pushing towards a balanced budget.”

Last year, as part of a programmatic 12-point plan to “rescue America,” Sen. Rick Scott (R-Fla.) said he wanted to “force Congress to issue a report every year telling the public what they plan to do when Social Security and Medicare go bankrupt.”

Scott’s proposal would have mandated all federal legislation to sunset within five years, requiring Congress to vote regularly on whether to renew Social Security, Medicare and Medicaid.

In his embattled path to the Speakership, one of Kevin McCarthy’s (R-Calif.) concessions was to support a balanced budget, which could entail a plan to scale back or privatize the national pension and medical plans.

Though cutting back such “entitlements” has a long history of GOP support, McCarthy said last week that Republicans intend to “protect” these programs.

“The one thing I will tell you as Republicans, we will always protect Medicare and Social Security. We will protect that for the next generation going forward, but we are going to scrutinize every single dollar spent,” he said.

Whether Republicans seek to cut or safeguard Social Security and Medicare, it’s unlikely that any major changes in these programs will make it into law in the next two years, as Democrats still control both the Senate and the White House.

The potential fight over pension and medical plans is also part of an international trend, with Oxfam calculating that three-quarters of national governments are planning to cut spending over the next five years to the tune of $7.8 trillion.

“Too many governments are choosing, or are being forced by international financial institutions, to cut public spending and implement other austerity measures, rather than increasing taxation on the richest,” Oxfam said in its report.

“Women are likely to be worst affected by austerity measures, from cutting the public wage bill, when the majority of public sector employees are women, to cutting health expenditure and social protection that women and their families rely on for their survival,” the group added.

A report released in September by the European Network on Debt and Development, a civil society agency, found that 143 countries are now instituting policies that cut back on education, health care, social protection and other public services.

“In effect, 85 percent of the world’s population will live in the grip of austerity measures by 2023. This trend is likely to continue until at least 2025, when 75 percent of the global population (129 countries) could still be living under these conditions,” the group’s report found.

Some Democrats in the U.S. have been drawing similar comparisons between taxation and social spending policies, saying the two need to be better aligned.

“While House Republicans want to make huge cuts to Social Security, Medicare and Medicaid because of their ‘serious concern’ about the deficit, they voted to provide over a trillion dollars in tax breaks to large corporations and the top one percent,” Sanders said in a statement last week.