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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 / elupher@crcmich.org
2
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
3
Scope of Today’s Evaluation
4
Scope of Today’s Evaluation
5
6
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
7
Composition of Federal Receipts by Source, 1947
8
Individual Income Taxes
47%
Corporation Income Taxes
22%
Social Insurance and Retirement Receipts Total
9%
Excise Taxes19%
Other3%
1947
Composition of Federal Receipts by Source, 1973
9
Individual Income Taxes
46%
Corporation Income Taxes
15%
Social Insurance
and Retirement Receipts
Total25%
Excise Taxes8%
Other6%
1973
Composition of Federal Receipts by Source, 2014
10
Individual Income Taxes
46%
Corporation Income Taxes
11%
Social Insurance
and Retirement Receipts
Total34%
Excise Taxes3%
Other6%
2014
U.S. Corporate Income Tax Revenues
11
$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
12
Comparison G7 & OECD Nations
13
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
14
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)
15
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
18
Shift from C-Corps to S-Corps
19
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
20
OECD Countries with Worldwide Taxation
21
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
22
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
23
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
25Source: International Tax Competitiveness Index 2015, Tax Foundation
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
26
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
27
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
28Source: International Tax Competitiveness Index 2015, Tax Foundation
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
29
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
30
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
31
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
33
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
35
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?
36
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
37
How much do MI Business Taxes contribute to cost of state government?
38
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
40
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
41
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.
42
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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CRC Publications are available at:
www.crcmich.org
Providing Independent, Nonpartisan Public Policy Research Since 1916
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