Saturday, December 05, 2009

A Little Gentle Economics Lesson

Wikipedia is not necessarily unbiased as we all know, but sometimes it is just misleading. Take this quote about corporate profit taxes:

The high average combined federal and state corporate tax rate, estimated at 39.3%, second only to Japan's combined rate of 39.5% among OECD countries, has been seen by many as a hinderance to the competitiveness of the US economy.[10]

Moreover, critics claim the corporate tax hinders economic growth as it directly reduces the level of investment by taxing away money that would otherwise be used to invest by corporations.[citation needed]

The spelling error is not mine and neither is the "citation needed" comment.

The high U.S. corporate tax rates are one of those wingnutty things which come up all the time, and the demand is usually to slash those taxes. But what really matters for corporations is not the tax rate but how much tax they end up paying, and to answer that question you need to look at the formula:

tax to be paid = (tax rate) X (taxable profit)

What the wingnuts don't point out is that the "taxable profit" number also differs by country. In some countries you can deduct more expenses from the gross profit before you end up with the definition of taxable profit. In some countries there are more loopholes where to hide some part of that profit so it never ends up taxed at all. And, as it happens, the U.S. has loads of both of those!

This means that though the number on the left hand-side of that definition is high here, the number on the right-hand side of the definition is lower than it would be in most other countries. And that means that the product of the two is, indeed, not very high at all for U.S. firms.

I know that my dear readers know this. Still, it's worth writing down.