The United States federal corporate income tax features a top statutory tax rate of 35 percent, a rate that rises to about 39 percent when state corporate income taxes are included. As the U.S. Department of the Treasury (2007b) notes, this statutory tax rate is the second-highest among Organisation for Economic Co-Operation and Development (OECD) countries. Treasury also notes, however, that the ratio of corporate tax revenue to Gross Domestic Product (GDP) from 2000-2005 was only 2.2 percent, substantially lower than the 3.5 percent OECD average. Treasury (2007b, p. 10) attributes the low revenue yield to "the narrowness of the U.S. corporate tax base," reflecting accelerated depreciation, "special tax provisions for particular business sectors," favorable treatment for debt finance, and tax planning.
The U.S. Office of Management and Budget (2009) lists numerous tax expenditures for the corporate income tax. Some of the larger items, with associated fiscal 2010 costs, are deferral of tax on overseas earnings ($38 billion), deduction for domestic production activities ($11 billion), exclusion of interest on state and local bonds ($10 billion), expensing of research costs and the research and development tax credit ($9 billion), various energy provisions ($6 billion), the low income housing tax credit ($4 billion), exclusion of interest on life insurance savings ($3 billion), inventory property source rules ($3 billion), lower rates for small corporations ($3 billion), deduction for charitable contributions ($2 billion), and the exemption of credit union income ($1 billion). For comparison, the budget projects fiscal 2010 corporate income tax revenue at $179 billion.
A number of economists have called for revenue-neutral reforms that broaden the corporate tax base while lowering the statutory tax rate. This approach has been endorsed by Aviva Aron-Dine (2008), then of the Center on Budget and Policy Priorities, and Jason Furman (2007), then of the Brookings Institution. At the November 2008 National Tax Association conference in Philadelphia, such a policy change was endorsed by Jane Gravelle of the Congressional Research Service and Rosanne Altshuler, then of Rutgers University, as reported by Tandon (2008).
Alan D. Viard is a resident scholar at AEI.