The Biden administration wants to hike the corporate income-tax rate from 21 percent to 28 percent — and claims the higher tax would still be low in international context. Kyle Pomerleau and Donald Schneider have a detailed explanation as to why the administration’s numbers are misleading:
The administration claims that the U.S. collects a relatively low amount of corporate tax revenue as a percent of GDP. Under the Tax Cuts and Jobs Act [TCJA], the U.S. will collect the lowest share of corporate tax revenue as a percent of GDP of 1.3% in 2018-2022. This is well below the average among other OECD countries of 2.7% (2.5% weighted by GDP). The Biden proposal will increase corporate tax collections to 1.8% of GDP.
This statistic, however, is a misleading measure of the tax burden on corporations. Corporate tax collections do not depend just on corporate tax policy. Some countries may collect a low share of GDP in corporate tax revenue due to having a small corporate sector relative to total GDP.
Basically, each country has a different mix of business types. The U.S. has a relatively small corporate sector and a relatively large non-corporate “pass-through” sector. (Pass-throughs are taxed on their owners’ individual returns, rather than through the corporate tax.) Pass-throughs are about 90 percent of U.S. businesses and account for half our net business income.
Pomerleau and Schneider adjust the data to account for this problem and two other, more technical ones (differences across countries in the labor share of corporate output, which isn’t subject to corporate tax, and depreciation). The upshot: “Once each of these issues is adjusted for, the U.S.’ tax burden on C corporations prior to the TCJA was higher than the OECD average, and the TCJA brought the burden to around the OECD average.”