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Changing Corporate Tax Rate? Staying Competitive with International Businesses

Michigan Tax ConferenceNovi, MI

November 4, 2015

Eric Lupher – PresidentCitizens Research Council of Michigan

www.crcmich.org / [email protected]

http://www.crcmich.org/

mailto:[email protected]

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Citizens Research Council of Michigan

• Founded in 1916• Statewide• Nonpartisan• Private not-for-profit• Promotes sound policy for state and local

governments through factual research• Relies on charitable contributions from

Michigan foundations, businesses, organizations, and individuals

Scope of Today’s Evaluation

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Some Goals of Taxation

• To fund public services

• To export tax burden to outsiders

• To share the burden of funding public services across all who benefit from those services

• To have the tax burden reflect the ability to pay

• To have users of a particular service pay for the service (transportation taxes)

• To create disincentives for negative behaviors (sin taxes)

Values in Creating a Tax System

• Yield adequate tax revenues• Equity

• Horizontal Equity• Vertical Equity

• Balance• Administrative Efficiency

• For taxpayers• For government administrators

• Minimize economic disruption

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Composition of Federal Receipts by Source, 1947

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Individual Income Taxes

47%

Corporation Income Taxes

22%

Social Insurance and Retirement Receipts Total

9%

Excise Taxes19%

Other3%

1947


9


46%


15%

Social Insurance

and Retirement Receipts

Total25%

Excise Taxes8%

Other6%

1973


10


46%


11%

Social Insurance

and Retirement Receipts

Total34%

Excise Taxes3%

Other6%

2014

U.S. Corporate Income Tax Revenues

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$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

1934

1936

1938

1940

1942

1944

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

(mill

ions

of

dolla

rs)

Fiscal Year

Real and Nominal Corporation Income Tax Revenues, 1934 - 2014

Corporation Income Taxes Inflation Adjusted Corporation Income Taxes

Multiple Methods of Evaluating Tax Systems

• Statutory Tax Provisions

• Effective Tax Provisions

• Marginal Tax Provisions

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Comparison G7 & OECD Nations

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U.S. Corporate Income Tax• 35% tax rate (+ state & local taxes)• VERY Complex Tax Code• Levied only on C-Corporations• Worldwide Tax System• No federal consumption tax

• but federal tax system must balance with state and municipal tax systems

• Adequacy of revenues depends on where you sit

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Commonalities Among OECD Nations

• Tax rates lower than U.S. Corporate Income Tax

• Varying levels of complexity

• Organization of business less significant

• Territorial Tax System most frequent

• Often paired with a consumption tax (VAT)

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Statutory Corporate Income Tax Rates in OECD (and G7) Nations

0 10 20 30 40 50

United StatesFrance

BelgiumAustralia

MexicoNew Zealand

SpainItaly

NorwayGreeceJapan

AustriaNetherlands

DenmarkSlovak Republic

South KoreaSweden

LuxembourgPortugal

United KingdomFinlandIcelandTurkey

Czech RepublicHungary

PolandSloveniaCanada

GermanyIreland

Switzerland

Percent 16Source: Corporate Tax Rates 2015, Deloitte., Updated March 2015

Statutory National and Local Corporate Income Tax Rates in OECD Nations

0 10 20 30 40 50

United StatesJapan

FranceBelgium

LuxembourgGermany

CanadaItaly

AustraliaMexico

New ZealandSpain

NorwayGreeceAustria

NetherlandsSouth KoreaSwitzerland

DenmarkPortugal

Slovak RepublicSwedenHungary

United KingdomFinlandIcelandTurkey

Czech RepublicPoland

SloveniaIreland

Percent

National

Local

17Source: Corporate Tax Rates 2015, Deloitte., Updated March 2015

To Whom does the U.S. Corporate Income Tax Apply?

• U.S. Corporate Income Tax applies to C-Corporations

• Sole proprietorships, partnerships, S-Corps excluded

• Small businesses often opting for S-Corporation status• No more than 100 shareholders• Only domestic shareholders• Generally individual shareholders• Calendar fiscal year • Taxed almost like a partnership

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Shift from C-Corps to S-Corps

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0

10

20

30

40

50

60

70

80

C Corps S Corps Partnerships Sole Props

Perc

ent

1980 2008

Worldwide vs Territorial Tax Systems

• Pure Territorial Taxation• Tax on active business income earned outside of their

countries of residence only in the source country• Do no incur contemporaneous tax liability in home

country• Do no incur tax liability on dividend repatriation on

foreign subsidiaries

• Pure Worldwide Taxation• Corporations deemed resident are taxable in that

country on income from all over the world

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OECD Countries with Worldwide Taxation

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The U.S. Worldwide Tax System• Hybrid U.S. tax system

• Deferral of income of foreign subsidiaries• Liberal credit for foreign income taxes paid

• Net effect to act like territorial tax system

• U.S. does not collect much tax on foreign income earned from operating in another country

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Credits and Deductions in U.S. Tax Code• Foreign Income Tax Credit• Loss Carrybacks/forwards• Depreciation and depletion schedules• General Business Credit • Investment Credit • American Samoa Economic Development

Credit• Work Opportunity Credit • Alcohol and Cellulosic Biofuel Fuels Credit • Credit for Increasing Research Activities • Low-Income Housing Credit • Recapture of Low-Income Housing Credit • Orphan Drug Credit • Disabled Access Credit • Qualified Plug-in Electric and Electric

Vehicle Credit• Renewable Electricity, Refined Coal, and

Indian Coal Production Credit • Empowerment Zone and Renewal

Community Employment Credit

• Indian Employment Credit • Credit for Employer Social Security and

Medicare Taxes Paid on Certain Employee Tips

• Credit for Contributions to Selected Community Development Corporations

• Biodiesel and Renewable Diesel Fuels Credit • New Markets Credit • Credit for Small Employer Pension Plan

Startup Costs • Credit for Employer-Provided Childcare

Facilities and Services • Low Sulfur Diesel Fuel Production Credit • Qualified Railroad Track Maintenance Credit • Distilled Spirits Credit • Nonconventional Source Fuel Credit • Energy Efficient Home Credit • Alternative Motor Vehicle Credit• Alternative Fuel Vehicle Refueling Property

Credit• Mine Rescue Team Training Credit

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Ordinary Income Taxes and Payroll Taxes in OECD (and G7) Nations

0 10 20 30 40 50 60 70

PortugalBelgiumFinlandSweden

DenmarkFrance

NetherlandsIreland

SpainJapan

AustriaIsrael

CanadaAustralia

United StatesItaly

GermanyNorway

United KingdomGreece

LuxembourgIceland

South KoreaSwitzerland

ChilePolandTurkey

Slovak RepublicMexico

HungaryNew Zealand

Czech RepublicEstonia

24Source: International Tax Competitiveness Index 2015, Tax Foundation

Capital Gains/Dividends Taxes in OECD (and G7) Nations

0 10 20 30 40 50

DenmarkFranceFinlandIreland

SwedenUnited States

PortugalUnited Kingdom

NorwayItaly

AustriaGermany

IsraelSlovak Republic

AustraliaSpain

CanadaJapanChile

EstoniaIcelandPoland

HungaryGreeceMexico

BelgiumCzech Republic

LuxembourgNetherlands

New ZealandSlovenia

South KoreaSwitzerland

Turkey


Property Taxes

• Taxes on real property (land and buildings/structures) vs. Land value taxation

• General Property Taxes• Real Estate Transfer Taxes

• Wealth and Estate Taxes• Estate, Inheritance, and Gift Taxes• Corporate Asset Taxes• Capital Duties

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Consumption Taxes• Value Added Taxes (VAT)

• Difference between total sales to other businesses and their purchases of inputs from other businesses

• Neutral to business if pure VAT or sales tax

• Neutrality lost with• Deduction limitations• Sales thresholds• Complexity in administration

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Value Added / Consumption Taxes in OECD (and G7) Nations

0 5 10 15 20 25 30

HungaryDenmark

NorwaySwedenFinlandIcelandGreeceIrelandPoland

PortugalItaly

SloveniaBelgium

Czech RepublicNetherlands

SpainAustriaEstoniaFrance

Slovak RepublicUnited Kingdom

ChileGermany

IsraelTurkey

LuxembourgMexico

New ZealandCanada

AustraliaSouth Korea

JapanSwitzerland

United States


Canada’s Corporate Income Tax• Canada utilizes a “regional” flat rate of 15%

• Territorial Tax System

• CCPC deduction reduces rate to 11%

• Personal taxes currently account for 50% of tax revenue

• 11 Global 500 companies headquartered in Canada

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Mexico’s Corporate Income Tax• Top marginal rate of 30%

• Worldwide Tax System

• Tax credits available for foreign taxes

• Very high rate for a developing nation

• Focuses on manufacturing, not corporate attractiveness

• NAFTA’s effect marginal• 3 Global 500 companies headquartered in Mexico

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Great Britain’s Corporate Income Tax• 20% flat rate

• Territorial Tax System

• Marginal rate reduction for companies making between 300,000-1.5 million pounds

• Ring-Fence companies involved in oil production are charged 19% if profits are under 300,000 pounds and 30% if more

• 28 Global 500 companies headquartered in the United Kingdom

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Ireland’s Corporate Income Tax• 12.5% flat rate

• Worldwide Tax System

• 25% on non-tradable corporate income

• Currently viewed as top destination in the EU for firms concerned about taxes

• High corporate growth did not prevent a national debt crisis

• 2 Global 500 companies headquartered in Ireland32

Grading the U.S. Corporate Tax System

• Yield adequate tax revenues no grade• Equity – D

• Horizontal Equity – D • Vertical Equity – D

• Balance – E • Administrative Efficiency – E

• For taxpayers – E• For government administrators – E

• Minimize economic disruption – E

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Economic Disruptions• Savings and Investment

• Business Organization

• Corporate Debt

• Dividends vs Capital Gains

• Depreciation

• Tax Planning

34Source: Corporate Income Tax Rates: International Comparisons, Congressional Budget Office, November 2005

Michigan’s Interstate Tax Competitiveness

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State Corporate Taxes• Esoteric questions of treating corporations as people

• Should corporations be required to contribute to funding of public services necessitated by their physical / virtual location in the state?• Infrastructure (roads, ports, airports, water & sewer)• Public safety (police, fire, prosecutor, courts, corrections)• Quality of life (parks, libraries, museums, etc.)• Licensing and regulation

• Can sin taxes (casino gaming) or extraction taxes (oil & gas or coal & iron) adequately substitute for income/gross receipts taxes?

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Michigan Corporate Income Tax• In effect 1967 to 1975. Reenacted in 2011.

• Actually 3 taxes: • 6% corporate income tax on C-corporations• 1.25% premiums tax on insurance companies• 0.29% franchise tax on financial institutions

• Applies to businesses with activity in MI and gross receipts exceeding $350,000 sourced in MI

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How much do MI Business Taxes contribute to cost of state government?

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0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

SBT, MBT, CIT as Percent of Total State Taxes, 1983-2012

State Corporate Income Tax Rates (rate applied to top bracket)

0 2 4 6 8 10 12Iowa

MinnesotaAlaska

New JerseyMaine

DelewareUtah

IndianaMassachusetts

WisconsinNew Mexico

IdahoKansas

North CarolinaArizona

ArkansasHawaii

GeorgiaMichiganVermont

North DakotaSouth Carolina

NevadaSouth Dakota

Virginia

Percent 39Source: Facts & Figures, 2013, Tax Foundation, 2013

Corporate Income Tax Comparisons• Federal Income Used as State Tax Base

• Only 2 states (AR & MS) do not conform to federal definitions of corporate income

• Allowance of Federal ACRS and MACRS• Only CA fails to fully conform to federal system

• Deductibility of Depletion• 15 states do not conform: AL, AK, CA, DE, IA, LA,

MD, MN, MS, NH, NC, OK, OR, SC, TN• Michigan in conformity

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Corporate Income Tax Comparisons

• Graduated Rate Structure• 27 states levy flat tax• Michigan flat 6% tax

• Net Operating Loss Deduction• Ensure that, over time, CIT is a tax on average

profitability

• Carryback and Carryforward• States treat carryforward better than carryback• 5 states limit carrybacks: DE, ID, NY, UT, WV• 2 states limit carryforwards: PA, NH

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Michigan Corporate Income Tax• Begins with Federal tax base adjusted to

1. add back certain deductions (e.g., interest income and dividends from other states’ obligations; income taxes paid; net operating loss carryback/forward; royalty, interest, or other expense paid to a person related to the taxpayer by ownership or control for the use of an intangible asset);

2. deduct certain items (e.g., dividends and royalties from non-United States entities; interest income from U.S. obligations; income and expenses from producing oil and gas);

3. deduct any business loss.• For corporations with multi-state activity, the tax base is

allocated in proportion to sales in Michigan.

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State Individual Income Tax Rates (rate applied to top bracket)

0 2 4 6 8 10 12California

OregonIowa

VermontMaineIdaho

South CarolinaNebraskaDelaware

GeorgiaLouisiana

TennesseeNorth Carolina

VirginiaOklahoma

AlabamaMississippi

UtahKansasArizonaIndiana

PennsylvaniaFlorida

South DakotaWashington

Percent 43Source: 2015 State Business Tax Climate, Tax Foundation

State and Average Local Sales Tax Rates

0 2 4 6 8 10TennesseeLouisiana

OklahomaNew YorkCalifornia

TexasNevada

ColoradoMinnesotaMississippi

Rhode IslandNew Jersey

IowaNebraska

FloridaConnecticut

MassachusettsWest Virginia

KentuckyMichigan

WisconsinMaine

HawaiiDelaware

New Hampshire

Percent 44Source: 2013 Facts and Figures, How does your state compare?, Tax Foundation

State and Local Property Tax Revenues per Capita

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000New JerseyConnecticut

New YorkRhode Island

AlaskaMaine

ColoradoFlorida

MarylandCalifornia

VirginiaIowa

MontanaPennsylvania

IndianaSouth Dakota

GeorgiaNorth Dakota

MissouriMississippi

UtahLouisianaDelaware

OklahomaArkansas

45Source: 2013 Facts and Figures, How does your state compare?, Tax Foundation

Great Lakes States Corporate Income Tax Rates (rate applied to top bracket)

0 2 4 6 8 10 12

Minnesota

Illinois

Indiana

Wisconsin

Michigan

Ohio

Percent 46Source: Facts & Figures, 2013, Tax Foundation, 2013

Great Lakes States Individual Income Tax Rates (rate applied to top bracket)

0 2 4 6 8 10 12

Minnesota

Wisconsin

Ohio

Illinois

Michigan

Indiana

Percent 47Source: 2015 State Business Tax Climate, Tax Foundation

State and Local Property Tax Revenues per Capita

$0 $500 $1,000 $1,500 $2,000

Illinois

Wisconsin

Michigan

Minnesota

Indiana

Ohio

48Source: 2013 Facts and Figures, How does your state compare?, Tax Foundation

State and Avg. Local Sales Tax Rates

0 2 4 6 8 10

Illinois

Minnesota

Indiana

Ohio

Michigan

Wisconsin

Percent 49Source: 2013 Facts and Figures, How does your state compare?, Tax Foundation

Grading the MI Corporate Tax System

• Yield adequate tax revenues –• Equity – B-

• Horizontal Equity – A • Vertical Equity – D

• Balance – B • Administrative Efficiency – B

• For taxpayers – B• For government administrators – B

• Minimize economic disruption – B-

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The Citizens Research Council of Michigan is supported by gifts and grants of all sizes coming from many different donors including:

• Foundations• Businesses • Organizations• Individual Citizens like you

We hope you will consider supporting CRC. For more information or to donate, contact us at:

Citizens Research Council of Michigan38777 Six Mile RoadLivonia, MI 48152

(734) 542-8001 www.crcmich.org


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www.crcmich.org

Providing Independent, Nonpartisan Public Policy Research Since 1916


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