A cornerstone of Sen. John McCain’s (R-AZ) economic plan — Jobs for America — is cutting the corporate tax rate from 35 percent to 25 percent, which McCain claims will turn America into a “low-tax business environment.” But as it turns out, even with the rate at 35 percent, most corporations are not paying taxes.
Today, the Government Accountability Office (GAO) released a report showing that between 1998 and 2005 “about two-thirds of corporations operating in the United States did not pay taxes.” Corporations have a “variety of reasons” for not paying, including “the cost of producing their goods, salary expenses and interest payments on their debt.”
McCain, meanwhile, has derided the U.S. corporate tax rate as the “second highest in the world.” While his statement is technically accurate for the purely nominal rate, U.S. tax revenue as a share of the economy is significantly lower (See graph below), and is below the Organization for Economic Cooperation and Development (OECD) average. The U.S. raises less revenue from corporations than Japan, the United Kingdom, and even Ireland, which the McCain campaign cites as a country with a competitive corporate rate.
The reasons for low U.S. revenue are the tax loopholes, shelters, and giveaways that minimize, or completely eliminate corporate taxes, and which McCain has not proposed fixing. A loophole allowing corporations to keep profits offshore aided Hewlett-Packard, whose CEO at the time was McCain economic adviser Carly Fiorina, in defering taxation on $14.4 billion. This lowered Hewlett-Packard’s effective tax rate from 35 percent to 12 percent.
As ABC’s George Stephanopolous pointed out during an interview with Fiorina, McCain’s proposed cut in corporate taxes won’t entice any corporations to bring money back to the U.S. “if they can pay no taxes” by taking advantage of offshore loopholes.
UPDATE: During an interview on CNBC today, Center for Economic & Policy Research co-director Dean Baker explained that it “doesn’t make any sense” to say that the corporate tax rate is “smothering the economy.” (4:20 into the video)
Baker: We used to have a 50 percent tax rate in the 50’s and 60’s when the economy had its most prosperous period, so I think you’re pretty hard-pressed to make the case that taxes are smothering the economy […] [T]he idea that somehow the tax rate, which is lower now than its been in years past, is strangling corporations, it doesn’t make any sense.