The Corner

A Familiar Dilemma

On the subject of Sanders, Democrats, and the Danish model, a correspondent protests that I have erred in comparing the U.S. and Danish corporate tax rates and insisting that the U.S. rate is dramatically higher. The complaint is that I used the statutory rate—the top rate under law—rather than the average effective rate, i.e., what companies typically pay in reality after all of the credits and exclusions and such. In the U.S., the statutory rate is dramatically higher; in Denmark, the effective rate is slightly higher.

So, what’s what?

A thought experiment: Imagine that the United States had a top statutory corporate tax rate of 100 percent, but an effective rate of 5 percent. Would you say that the United States was enjoying a low level of corporate taxation, or would you say that the United States was suffering from a high level of political extortion of corporate taxpayers, with the cudgel of the 100 percent rate obliging firms to grease politicians in order to secure the deductions that take them down to 5 percent? The difference between the U.S. statutory rate and the U.S. effective rate is evidence of political favoritism, not of a light and liberal tax regime. There are firms that pay the top rate, and there are firms that make friends with politicians and secure for themselves a lower rate. It’s all legal, but it stinks of corruption.

You can use either comparison, statutory or effective, as the situation calls for. But if you are looking at the political relationship between state and enterprise, the statutory rate is the more relevant one. 

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