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  • Deficient GAO Report Hurts Tax Reform Efforts

    There is broad consensus that corporate tax reform is necessary to unleash business investment that the currently uncompetitive system prevents. Regrettably, some will use a recent report by the Government Accountability Office (GAO) on the effective tax rates paid by U.S. businesses to slow the growing momentum for reform.

    The GAO report found that U.S. businesses paid an effective tax rate (ETR) of 26.2 percent in 2008 and that it fell to 21.5 percent in 2010 as the effect of the recession took hold. The many technical deficiencies in the GAO report are ably pointed out by Will McBride of the Tax Foundation and J. D. Foster of the Chamber of Commerce.

    Aside from the GAO’s technical problems, the method the report uses to accomplish its purpose is problematic. The GAO says in the beginning of the report that it was “asked to assess the extent to which corporations are paying U.S. corporate income tax.” The GAO sought to answer that question by looking at the differential between the statutory marginal tax rate prescribed in law and the ETR U.S. businesses pay.

    An ETR shows how much of a business’s income is consumed by taxes. Statutory marginal rates (for the most part) measure how much tax businesses pay on an incremental dollar of investment. It is that incremental tax that matters for businesses’ investment decisions.

    A GAO report wasn’t necessary to establish the difference between the two. ETRs are always lower than statutory marginal rates for a variety of reasons. A differential doesn’t mean U.S. businesses are ducking taxes or aren’t “paying their fair share.”

    Moreover, the GAO leaves out vital information that would put its ETR figures in proper context. The report doesn’t show what ETRs were before the three-year snapshot it provides and gives no indication of where ETRs will go after 2010. (There is a strong chance that as the economy recovers, businesses’ ETRs will rise as well.) Nor does the GAO provide information on the ETRs of businesses in other countries.

    Without these vital pieces of information, there is no way for readers to know whether the ETR that the GAO calculated is high, on par, or low compared with previous periods or the U.S.’s foreign competitors. Without this comparable data, the GAO report has little analytical value.

    Nevertheless, the GAO’s findings will be used to make tax reform more difficult. Those opposed to corporate tax reform could use the disparity between the statutory marginal rate and the ETR to make it seem like U.S. businesses aren’t paying enough tax.

    The need for corporate tax reform is too great for misleading data to slow its progress. It would be better if the GAO issued a report with meaningful data that moved the debate forward.

    Posted in Economics [slideshow_deploy]

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