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BGU Economist Examines Corporate Tax Burden on 100 Largest Companies in U.S. and Europe

BGU Economist Examines Corporate Tax Burden on 100 Largest Companies in U.S. and Europe

November 11, 2011

Business & Management

On October 24, Ben-Gurion University economist and professor Yaron Lahav published a study with University of Michigan law professor Reuven Avi-Yonah examining the corporate tax burden on the 100 largest companies in the U.S. and the European Union. The data come from publicly available financial reports issued by the companies.

The study found that while the statutory tax rate is about 10 percentage points higher in the U.S., the effective tax rate paid by U.S. and European companies is about the same because European companies get fewer tax preferences.

The study suggests that this shows a path toward tax reform. If the U.S. broadened its corporate tax base to European levels then the U.S. could reduce its corporate tax rate to European levels.

However, on October 27, the Joint Committee on Taxation of the U.S. Congress released an estimate of how much the corporate tax rate could be reduced if all corporate tax breaks were eliminated. It found that completely wiping the slate clean would only allow the rate to be reduced by 7 percentage points to 28 percent. Republicans and the corporate community have been pushing to reduce the rate to 25 percent.

This suggests that if tax reform is to be done in a revenue-neutral manner—neither raising nor lowering aggregate revenues—then reducing the corporate tax rate will have to be paid for partially by raising taxes on individuals. This would seem to be prohibitively difficult, politically.

Congress can pay for tax rate cuts for individuals by closing corporate tax loopholes, as was done in the Tax Reform Act of 1986, but it is very unlikely that people will support doing it the other way around.

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