“It is a terrible tax system that was written in ’86. … The headlines write themselves: We tax our corporations at 35 percent, and successful small businesses are taxed as high as 44.6 percent. The average tax rate in the industrialized world for businesses is 22.5 percent.”
— House Speaker Paul D. Ryan (R-Wis.), during an interview with the Associated Press, Sept. 13, 2017
House Speaker Paul D. Ryan wants Americans to start 2018 with a new tax system. After the Republican-controlled Congress failed to repeal the Affordable Care Act, the pressure is mounting to pass major legislation. And Ryan is hoping to win on taxes.
Congressional leaders are creating a framework for tax reform that they plan to unveil Sept. 25. In the meantime, Ryan is trying to garner support for a major overhaul of what he calls the United States’ “terrible tax system.” On Sept. 13, Ryan sat down with the Associated Press to discuss his agenda. His main criticism of the tax code is that companies in the United States are taxed at a much higher rate than companies in other countries, which he says inhibits those companies from investing profits made overseas back into the United States. President Trump has made similar claims.
Regular readers of The Fact Checker know we’ve called out politicians before for using dubious statistics to advance their tax agenda. During his interview, Ryan rehashed several of the often-cited statistics. But he puts them together in a misleading way. Let’s take a look.
For the purposes of this fact check, we will look at three numbers — 35 percent, 44.6 percent and 22.5 percent — and how Ryan seamlessly stitched them together to make his case.
Corporations are taxed at 35 percent, Ryan said. When it comes to small businesses, the tax burden is even steeper, he said. “Small businesses are taxed as high as 44.6 percent,” he said. Then he asserted that the average rate in the “industrialized world” was 22.5 percent.
Although many other countries have changed their tax systems and slashed corporate tax rates in recent years, Ryan argues, the United States has fallen behind. A study on international tax policy from the Organization for Economic Cooperation and Development released Wednesday confirms that corporate tax rates in other economic powers declined over the past decade. “Overall, the number of countries with a statutory rate above 30 percent decreased from 21 in 2000 to 7 in 2008 and to 5 in 2016,” the report found.
Seems rather straightforward, right? Well, not so fast.
Ryan’s 35 percent corporate tax figure, which comes from the OECD, is the country’s statutory rate — it is the rate in law only. Once state taxes are factored in, corporations can pay closer to 39 percent.
However, the United States’ effective tax rate, or what companies pay once all the deductions are included, is 18.6 percent. The OECD does not report effective rates, but in 2013 the Congressional Budget Office conducted a study on the tax rates of another set of U.S. economic peers: the “Group of 20″ countries.
Update: An earlier version of this column failed to include a response from Ryan’s office regarding statutory rates. “Effective rates are irrelevant because that’s just total taxes divided by total profits. What matters for the economy, investment decisions, and location decisions is the marginal rate – i.e., the rate on the next dollar of income earned. And the statutory rate is a useful measure of the marginal rate on the next investment decision, whereas the effective rate is not. For example, you could have a 90 percent statutory rate but hand out so many deductions and credits that the effective rate is 20 percent. But that means that the profits on a new investment will be taxed at 90 percent, and thus our tax system will not be competitive with other countries.”
And what about the small-business tax rate? A Ryan spokeswoman noted that PolitiFact Wisconsin marked this figure as true based on a 2013 news release by the House Ways and Means Committee. But this was not an actual report, merely “an analysis” by the then-committee chairman, Dave Camp (R-Mich.), to pin the blame for higher taxes on Democrats. So it was not data from an independent research organization.
Politics aside, the 44.6 percent number is misleading. Ryan appears to understand this, as he carefully added the qualifier that the rate applied to “successful small businesses.” In other words, the 44.6 percent rate does not apply to all small businesses. Indeed, The Fact Checker previously reported that only 3 to 7.5 percent of small businesses pay the top rate. A 2013 study commissioned by the National Federation of Independent Businesses found that the average effective tax rate for small businesses was 21.3 percent.
Ryan’s argument for slashing corporate taxes hinges on this one number. Based on his statistics, businesses in the rest of the industrialized world pay 12.5 percentage points less in taxes than businesses in America. Setting aside the fact that the numbers Ryan uses are statutory and not effective tax rates, the 22.5 percent figure is still misleading.
Ryan arrived at this number by calculating the straight average of the statutory tax rates for all the countries in the OECD. But a simple average treats all countries equally, so small countries like Iceland, Estonia and Luxembourg are weighted the same as economic powerhouses like the United States, Japan and Germany. That distorts the numbers.
“If we are looking at the relative taxes for making investment decisions we want countries with larger economies where more investment is feasible to be weighted more heavily,” Jane Gravelle, author of a 2014 report for the Congressional Research Service comparing international corporate tax rates, said in an email.
In 2016, Iceland’s gross domestic product, the broadest measure of a country’s economy, was $17.2 billion, according to the OECD. That’s minuscule compared with the United States’ GDP of $18.6 trillion. Ryan’s calculation weights Iceland, which has a 20 percent statutory corporate tax rate, the same as the United States — even though the U.S. economy is more than 1,000 times as large. (Note: an earlier version of this article incorrectly said 100 times.)
When weighted for GDP, according to the Tax Foundation, the average corporate rate in the OECD is 31.4 percent. For the G-20 countries, the weighed average is 31.3 percent; for the whole world, it is 29.5 percent.
Ryan’s office defended the statistic, saying the “GDP doesn’t determine where corporate profits are located.”
The Missing Statistics
Ryan made a big fuss about corporate tax rates, but he did not mention individual income tax rates. Here’s one possible reason: Many OECD countries have much higher rates for individual income taxes than the United States.
The United States ranks 18 out of 34 OECD countries with a statutory personal income tax rate, which includes federal and state taxes, of 46.3 percent, and an “all-in” rate of 48.6 percent when including Social Security. Sweden has the highest statutory rate, at 60.1 percent, and Portugal has the highest “all-in” rate of 61.3 percent.
Additionally, with respect to GDP, U.S. taxes are much lower than other in developed countries, according to an analysis from the Tax Policy Center. In 2014, revenue from all tax streams made up 26 percent of the U.S. GDP, compared with an average of 34 percent of GDP for the OECD countries. Denmark had the highest rate, with taxes at 50 percent of its GDP. Only three of the 34 member countries collect less taxes than the United States: South Korea, Chile and Mexico.
The Pinocchio Test
Ryan is very adept at citing what appear to be authoritative facts and figures. But just like watching a magician who disguises the cards hidden in his sleeve, Ryan’s facts sometimes require careful scrutiny.
In this case, Ryan made his case with numbers that can be found in official statistics. But for the purposes of comparing tax systems across countries, two numbers — 35 percent and 44.6 percent — are too high, and one number — 22.5 percent — is too low.
His 35 percent figure is the statutory rate, whereas the lower effective rate reflects the taxes that businesses actually pay. His 44.6 percent rate for small businesses is a number that more than 90 percent of small businesses do not pay; again, the effective rate is less than half the rate cited by Ryan. And Ryan’s 22.5 percent figure is based on a simple average that assumes all countries are the same, whereas experts say a better measure takes the size of a country’s economy into consideration.
Ryan also somehow doesn’t mention how most of the OECD countries with low corporate tax rates make up the difference with other forms of taxes.
We wavered between Two and Three Pinocchios. Many of the United States’ economic competitors already have reduced their corporate rates. But Ryan ginned up his case for change in the United States in a misleading way. Two of his statistics are real numbers but used inappropriately. We were tempted to award a Three for Ryan’s calculation of the average corporate rate for U.S. economic competitors. But again, that is not a made-up figure, just an inappropriate one. So we kept it at Two Pinocchios.
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