New Video Documents High Effective Rates

Washington, DC, February 6, 2012—U.S. companies pay among the highest corporate tax rates in the world, even after accounting for all deductions and loopholes, according to a new video produced by the Tax Foundation. This explanation of "effective" tax rates for corporations, based on recent academic studies of tax systems around the globe, is the third in a 5-part series on corporate taxes.

"The impression that a large number of U.S. companies are using loopholes and creative accounting to get out of paying taxes could not be more wrong," said Tax Foundation president Scott Hodge. "American corporations are consistently paying at the highest levels in the world, and that burden impacts their ability to compete both at home and abroad."

The U.S. currently has the second highest tax rate on corporations, and will soon become number one when Japan implements a planned rate cut later this year. When the average corporate tax rate on the state level is added in, the total is almost 40%. After deductions, the effective rate naturally falls several points, but remains well above the average for developed countries and our closest trading partners.

"Pointing to a handful of prominent companies with unusually low tax payments makes for catchy headlines, but in no way tells the real story," said Hodge. "The data on American businesses in general is clear: they’re paying much higher rates than their foreign competitors. That’s a problem, and comprehensive tax reform is the answer."

The Tax Foundation video "Effective Corporate Tax Rates" is available online.

Previous installments focused on the advantages of a territorial tax system and how the U.S. has fallen behind by standing still on tax policy.

Script: "Effective Corporate Tax Rates"

The U.S. has one of the highest corporate tax rates in the world at 35% -- almost 40% when you add in state taxes.

But, just like you and I get to deduct things like our mortgages and charitable contributions, corporations get to deduct things too – like the cost of research and development and building a factory.

These deductions – what some call “loopholes” – save businesses about $100 billion a year according to the U.S. Treasury.

And from what you hear in the press, you’d think that all those “loopholes” would help American companies compete against businesses from lower-tax countries.

It turns out that is not the case when you compare what is called the 'effective tax rate.' The "effective tax rate" is the tax rate that companies ACTUALLY pay after their deductions.

You see, other countries give tax breaks too and more than a dozen international studies have compared the effective tax rates US companies pay to the effective tax rates paid by companies in other countries.

And, no matter how you measure it, American companies almost always pay the highest effective tax rates.

Take this new World Bank study, for example. They looked at the effective tax rates paid by a typical company in 183 countries around the globe. They found that 164 countries have lower effective corporate tax rates than the U.S.

The global average rate, 16%. Our average rate, nearly 28% [27.6%].

Only New Zealand, Chad and a handful of much smaller countries had higher rates than the US.
[citation: World Bank/PWC “Paying Taxes 2012”]

Another study by British economists at Oxford University compared the average tax rates for a range of industries in 19 of the biggest economies in the world.

The US didn’t stack up so well.

The average rate for industries in the US, 34.9%.

But industries in countries such as Korea (19.8%), China (22.4%), Canada (25.7%), United Kingdom (26.3%), Germany (27%), and India (29.5%), all paid lower rates. Only Japan had a higher rate.

[citation: Devereux, et.al. (2011)]

And a study by American economists comparing the effective tax rates of large businesses in 15 countries found that US companies tended to pay among the highest tax rates.

Companies in places like Sweden (18%), Taiwan (18%), France (23%), and South Africa (25%), all paid lower effective tax rates than US firms (28%).

Only Japanese companies (36%) paid a consistently higher tax rate than those in the US. 
[citation: Markle/Shackelford (2011)]

But, Japan is cutting their corporate tax rate this year, which will leave us standing with the highest rate among large economies.

So not only do other nations offer lower rates, but their territorial tax systems can lower the tax burden for their companies even further.  It’s no wonder that they can out-compete US firms who pay high tax rates AND a second-layer of tax because of our worldwide tax system.

Headlines about a few companies that pay little in taxes may make for juicy political sound bites, but they don’t tell the whole story.

No matter how you look at the data, U.S. companies are paying one of the heaviest tax burdens in the world, and until our system is more competitive, we will struggle to keep jobs and industries in our country.

For more information visit tax foundation dot org.

The Tax Foundation video "Effective Corporate Tax Rates" is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Gap between Rich and Poor Driven by Business Cycle

Washington, DC, January 30, 2012- Contrary to recent reports suggesting that Bush-era tax cuts have increased income inequality in the U.S., the gap between rich and poor in recent decades has been driven mostly by the business cycle, i.e. multi-year fluctuations in economic activity, according to a new report by the Tax Foundation.

"Inequality generally increases during eras of growth and economic expansion and decreases during recessionary times," said Tax Foundation economist Will McBride. "Changes in tax rates on high-income earners over the last two decades have been incidental to this trend."

Historically, income inequality in the U.S. reached a peak in the 1920s, falling in the decades afterward and eventually rising again in the 1980s and 1990s. This rebound has been attributed to everything from globalization and immigration to the growth of super-star salaries and the computer revolution. All of these factors, however, might better be described as simply the reasonable outcomes of a growing market economy.

The resurgence of inequality in recent decades has also been attributed to tax policy. Based on the most recent IRS data, income inequality has fluctuated considerably since 2000 but is now at about the level it was in 1997. Thus, the Bush-era tax cuts, which had provisions benefitting both high- and low-income taxpayers, did not lead to increased income inequality. By contrast, inequality rose 12% between 1993 and 2000, following two tax rate increases on high-income earners. Thus, changes in inequality over the last two decades appear to be driven more by the business cycle than tax policy.

Levels of inequality can also be made to appear higher than they actually are based on how researchers present the data. The most recently published studies on income inequality use either 2006 or 2007 as their end point, without fully correcting for the business cycle. Since the peak in 2007, personal incomes have collapsed to a degree not seen since the Great Depression. The most dramatic collapse has been in high incomes. Since 2007, for example, the number of millionaires has dropped 40 percent, while income reported by millionaires has dropped in half.

"It is not evident that the Bush tax cuts in either the top marginal rate or capital gains rate had any long term effect on inequality. If anything, they appear to have reduced inequality," said Tax Foundation economist Will McBride. "Therefore, a return to Clinton-era tax rates would not necessarily reduce inequality."

Tax Foundation Fiscal Fact No. 289, "Reversal of the Trend: Income Inequality now Lower than it was Under Clinton" by Will McBride is available online.

The Tax Foundation has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org

Tax Foundation Releases Rankings on "Business-Friendliness" of State Tax Systems

Washington, DC, January 25, 2012 -- Wyoming, Florida, and Texas rank among the ten best states for taxes on business, while companies in states like New York, New Jersey, and California have a far less pleasant tax climate to deal with, according to a new report by the Tax Foundation.

The State Business Tax Climate Index, now in its 8th edition, accounts for dozens of state tax provisions, creating a single easy-to-use score that measures each state against the tax climates of every other state. Each state's ranking is therefore relative to the actual tax policies in place around the country, not a measurement against a theoretical "perfect" system.

The Index enables business leaders, government policymakers, and taxpayers to gauge how their states' tax systems compare. While some similar studies focus on the total amount residents pay in taxes each year, the Index focuses on how the elements of a state tax system enhance or harm the competitiveness of a state's business environment.

"Even in our global economy, a state's stiffest and most direct competition often comes from other states," said Tax Foundation economist Mark Robyn. "State lawmakers need to be aware of how their states' business climates match up to their immediate neighbors and to other states in their region."

The 10 best states in this year's 2012 Index are Wyoming (#1), South Dakota (#2), Nevada (#3), Alaska (#4), Florida (#5), New Hampshire (#6), Washington (#7), Montana (#8), Texas (#9), and Utah (#10). Many of these states do not have one or more of the major taxes, and thus do not have the associated complexity and distortions.

The 10 lowest ranked, or worst, states in the 2012 Index are Iowa (#41), Maryland (#42), Wisconsin (#43), North Carolina (#44), Minnesota (#45), Rhode Island (#46), Vermont (#47), California (#48), New York (#49), and New Jersey (#50). While New Jersey remained steady compared with 2011, Rhode Island improved by implementing a modest income tax reform. The states in the bottom ten generally have complex, non-neutral taxes with comparatively high rates.

Illinois moved most dramatically in its Index rank over the past year, falling twelve places after a significant income and corporate tax increase. Other states seeing a decline in their ranking include Vermont, which fell four places, while Massachusetts and North Dakota both advanced four places up the chart.

In 2011, the State Business Tax Climate Index was downloaded 487,000 times and cited in hundreds of newspaper articles, editorials, and broadcast media reports. Four governors also cited the Index's findings in their State of the State addresses.

Tax Foundation Background Paper No. 62, "2012 State Business Tax Climate Index" by Mark Robyn is available online.

The Tax Foundation has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Jon Huntsman Leads with B+, Santorum Trails with D+

Washington, DC, December 19, 2011--Taxes are at the top of the agenda in the 2012 presidential race, but the complexity of the competing candidates' plans can make them difficult to evaluate. To help clarify the issue, the Tax Foundation has reviewed the positions of the Republican nominees for President and assigned them letter grades based on how closely their plans are guided by the principles of sound tax policy.

Top of the class honors go to former Utah Gov. Jon Huntsman, who received a grade of B+, while former Pennsylvania Sen. Rick Santorum brought up the rear with a grade of D+. Herman Cain's plan is included for comparison purposes despite his campaign being suspended.

Tax Foundation Candidate Grades:

Huntsman: B+

Perry: B

Cain: B-

Paul: B-

Gingrich: C+

Bachmann: C

Romney: C-

Santorum: D+

Johnson and Roemer: incomplete

"We relied on candidate statements, websites, and all other available information for the specifics of each plan. We also took into account not only the specified ideal of each plan but the practical implementation as we see it," said McBride. "We believe this is the right approach, since the history of taxation tells us that the law and the practice are often two very different things." 

Tax Foundation economists judge every tax measure against the principles of economically sound tax policy, which say that taxes should be neutral to economic decision making, they should be simple, transparent, stable, and they should promote economic growth. From these principles, we have developed ten basic questions to judge the economic quality of any tax plan or proposal.

The basis for the candidates' grades are discussed in the recent study Tax Foundation Fiscal Fact No. 286, "How to Judge a Tax Plan" by Will McBride, Ph.D.

Information on the tax proposals of the current candidates for President of the United States is available on the Tax Foundation's Presidential Candidate Tax Plan Comparison page. Users can compare the plans side by side and click through to original source documents.

Candidate grades are provided for educational purposes only. The Tax Foundation is a nonprofit, nonpartisan organization and does not endorse or oppose any candidate for elected office.

The Tax Foundation has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Washington, DC, January 11, 2012—As Congress debates whether to continue allowing taxpayers to deduct the amount they pay in state sales taxes from their federal returns, a new analysis from the Tax Foundation finds that states vary widely in the number of individuals taking the deduction, with the greatest impact seen in states that have a very low or no state income tax.

Taxpayers who itemize deductions have the option of deducting state and local taxes from their income. In doing so, each individual taxpayer must decide to deduct either the income tax withheld from his or her wages, or the total sales tax he or she paid during the tax year. The option of deducting sales taxes, however, expired on December 31^st, and will need to be renewed by Congress in order to be in effect for 2012.

States vary widely in the percentage of taxpayers who use each deduction. In general, more taxpayers elect to deduct income taxes than sales taxes. However, as one might expect, states that have no (or low) income taxes tend to see most taxpayers deducting sales taxes instead. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming are all states in which over half of the taxpayers elect to deduct state and local sales taxes, rather than income taxes, on their federal return, and these are all states that have either a very limited income tax (in the case of Tennessee) or no income tax at all.

Individuals who choose to deduct sales taxes have the additional option of reporting the exact amount (if they saved all their receipts) or using an estimate from the IRS that depends on their state and their income level. If the provision is not extended by Congress, sales taxes on purchases in 2012 will not be deductible, but tax paid on purchases made in 2011 will continue to be for returns filed this year.

Tax Foundation Fiscal Fact No. 288, “States Vary Widely in Number of Taxpayers Deducting State or Local Sales Taxes” by Nick Kasprak is available online.

The Tax Foundation has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Washington, DC, January 9, 2012—Businesses in the United States face a strategic disadvantage when competing abroad due to the current structure of the U.S. tax code. Unlike most other countries in the world, the U.S. government taxes profits earned abroad on top of what companies pay to foreign countries. In order to spur greater investment and economic growth, the U.S. should follow the example of our closest trading partners and embrace a territorial tax system, according to the second in a new series of videos produced by the Tax Foundation.

The U.S. corporate tax system is out of step with the rest of the world and is unnecessarily handicapping the ability of American companies to compete with their rivals in places like Europe, China, and India,” said Tax Foundation president Scott Hodge. “Corporations should pay their taxes in the places they do business – not to governments around the world and then a second time to the U.S. Treasury.”

Washington’s goal should be to make the U.S. a competitive place both to do business in and do business from. The U.S. corporate tax system undermines both of these goals. Thus, the key to making the U.S. more competitive globally is to put our tax system on par with our major competitors. This means moving toward a territorial system for taxing foreign earnings, while also cutting the U.S. corporate rate.

The Tax Foundation video “Advantages of a Territorial System” is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Principles for Evaluating the Proposals of Politicians

Washington, DC, December 15, 2011 Tax reform has become in both Congress and the presidential primary campaign and will remain a key issue through the 2012 general election. While the various plans vary considerably in their scope and intent, it is important that they all be judged against a standard set of principles. A guide to those principles is now available from the Tax Foundation. 

"The ideal tax system should do only one thing - raise a sufficient amount of revenues to fund government activities with the least amount of harm to the economy," said Tax Foundation economist Will McBride, Ph.D. "By all accounts, the U.S. tax system is far from that ideal."

Tax Foundation economists judge every tax measure against the principles of economically sound tax policy, which say that taxes should be neutral to economic decision making, they should be simple, transparent, stable, and they should promote economic growth. From these principles, we have developed ten basic questions to judge the economic quality of any tax plan or proposal.

"An economically sound tax code is one that is conducive to long-term economic growth," said McBride. "History and economic research suggests that the closer a tax reform plan adheres to the principles of simplicity, transparency, neutrality, and stability the more likely it is to lead to a more prosperous America." 

Information on the tax proposals of the current candidates for President of the United States are available on the Tax Foundation's Presidential Candidate Tax Plan Comparison. Users can compare the plans side by side and click through to original source documents.

Tax Foundation Fiscal Fact No. 286, "How to Judge a Tax Plan" by Will McBride, Ph.D. is available at taxfoundation.org.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Evaluate the Republican Contenders Side-by-Side

Washington, DC, December 12, 2011—How does Mitt Romney compare to Ron Paul on taxes? Does Newt Gingrich have a savvier plan than Michele Bachmann? With the new Presidential Candidate Tax Plan Comparison from the Tax Foundation, you can look at the tax policies of presidential candidates side-by-side and evaluate for yourself.

With the upcoming 2012 presidential election, tax policy is on voters’ minds more than ever. Taxes are one of the central issues in any national election, and it is important for the public to understand candidates’ general views toward tax policy as well as their positions on specific issues. The online Presidential Candidate Tax Plan Comparison outlines the candidates’ positions on the most important tax questions of this election.

“It can be a challenge for individual voters to wade through candidate statements, news reports, and attacks from opponents when trying to figure out how the candidates compare on the issues,” said Tax Foundation economist Will McBride. “Our Presidential Candidate Tax Plan Comparison tool gives voters the information they need to make apples-to-apples comparisons on where all of the candidates stand on tax policy.”

Ten presidential candidates were evaluated on six different parameters of tax policy: individual income tax rates, the corporate income tax, the estate tax, payroll taxes, the alternative minimum tax, and taxes on capital gains and dividends.

Data was collected from candidate questionnaires, campaign statements, and other publicly available information. Sources for all of the listed policy positions are cited and linked to, so users can easily have the opportunity to research the candidates more thoroughly.

Information is included on the following candidates for President: Michelle Bachmann, Herman Cain (campaign currently suspended), Newt Gingrich, Jon Huntsman, Gary Johnson, Ron Paul, Rick Perry, Buddy Roemer, Mitt Romney, and Rick Santorum. As candidates leave the campaign during the primary process, details of the plans they advocated will remain online for comparison purposes.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Washington, DC, December 6, 2011—The respected trade journal State Tax Notes has named the Tax Foundation as its 2011 Organization of the Year. Tax professionals, academics, and lawmakers overwhelmingly chose the Tax Foundation as the organization they rely on most for state and local tax information.

“We’re honored to be chosen by State Tax Notes as their Organization of the Year,” said Tax Foundation Vice President of Legal & State Projects Joseph Henchman. “We are particularly excited to be honored this week, on the occasion of the 74^th anniversary.”

Excerpts from the State Tax Notes announcement:

“The Tax Foundation is State Tax Notes’ Organization of the Year.” 

“Over the past decade, the foundation has become a source of data, studies, and other fiscal information for tax professionals, legislative staffs, media, governmental affairs offices, and academics.”

“…the Tax Foundation gets high marks for its commitment to the principles of sound tax policy.”

“The foundation is relied on by major news organizations, public finance scholars, and legislative staff more than any other organization.”

“… the foundation has been on the correct side of most state and local tax issues in the past decade. And appropriately, it has received high marks from both liberals and conservatives.”

“Liberal lawmakers and organizations are often critical of the Tax Foundation’s positions. But State Tax Notes found that even the most ardently liberal legislators acknowledged, often grudgingly, that the foundation was generally right in its approach to tax policy.”

Read more from the Tax Foundation on Tax Policy in the 50 States.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

New Online Tool for Consumers

Washington, DC, December 6, 2011—The Tax Foundation has created a new online calculator for tracking the tax burden created by the Patient Protection and Affordable Care Act, signed into law by President Obama in March 2010. The coverage provisions in the health care bill cost $788 billion in new spending over the next decade. This is paid for $511 billion in cuts elsewhere, as well as $420 billion in new taxes. This calculator shows how the new taxes will affect American households and explains how they work.

Last year’s health care law was complex and included dozens of provisions impacting Americans as consumers and taxpayers, so it’s not surprising that there’s a great deal of confusion surrounding the legislation,” said Tax Foundation analyst and programmer Nick Kasprak. “We hope the Health Care Tax Calculator will help individuals get a better idea of how revenue-raising provisions of the new law will collectively impact them.”

The Health Care Tax Calculator aggregates the cost of many different taxes included in the Patient Protection and Affordable Care Act using user-provided data, giving consumers an overall view of how those costs will affect their household budget. Main components include the “Cadillac tax” on employer-provided health plans above a certain cost, new payroll taxes on high-income earners, an annual fee on prescription drug manufacturers, and a new excise tax on medical devices.

We are glad to provide this tool to estimate tax costs, but users should remember that there are further costs to current health care laws as well,” said Kasprak. “For example, the impact of the individual and employer mandates, which are designed to change consumer behavior rather than raise revenue, need to be considered in addition to direct tax costs, as well as spending cuts to Medicare Advantage.”

In addition to the Health Care Tax Calculator , the Tax Foundation provides several other online data tools for consumers, taxpayers, and policymakers to examine the effects of taxes at the federal, state, and local level. Available tools include a searchable database of property taxes by county, the marginal tax rates calculator and graph, and state-to-state migration data.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

New Video Emphasizes Need for Reform

Washington, DC, December 5, 2011—The United States has been slipping from a position of economic competitiveness in recent years, in part because of changing corporate tax rates across the globe. Once a leader internationally, waves of tax reform in dozens of countries have left the U.S. burdened with one of the highest corporate tax rates in the world, slowing new investment and job growth, according to the first in a new series of videos launched today by the Tax Foundation.

"The key to restoring American competitiveness and our long-term economic growth is cutting the corporate tax rate," said Tax Foundation president Scott Hodge. "The Tax Foundation’s new video series will help put the burden of corporate taxes in perspective and encourage policymakers to consider new ideas for reforming the U.S. corporate tax system."

The federal corporate income tax was first instituted in 1909 with a one percent tax rate. Since then it has changed dozens of times, with the current top rate at 35%. When additional state rates are added, the average tax rate for U.S. corporations rises to 39.2%, the second highest in the developed world, only slightly behind Japan’s.

The Tax Foundation video "Falling Behind by Standing Still" is available online.

Script: “Falling Behind by Standing Still”

No matter where you look these days, there is another headline on big corporations and their taxes.  And it can be hard to separate the facts from the rhetoric. So let’s look at where we are. 

Back in early 1980s, before globalization, the U.S. had a corporate tax rate that was about the same as the rest of the world. Companies in the U.S. paid 46% in taxes.

Then, in 1986, the U.S. cut the corporate tax rate below 35%. And suddenly, the U.S. had one of the most competitive business taxes in the world.

As a result, the economy grew, tax revenues grew, and the deficit went down.

But over time, countries around the world lowered their tax rates as well, countries like Canada, Great Britain, Germany…even Sweden. And it wasn’t long before the average corporate tax rate of those countries fell way below U.S. corporate tax rate.

In other words, when it came to taxes, it became cheaper to do business OUTSIDE the United States.  

This meant that tax-friendlier countries became a magnet for new investment and jobs – NOT the U.S.   

And while the international corporate tax rate continued to decline, the rate in the United States stayed the same – slowing our economy and making our workers and businesses even less competitive.

We fell behind by standing still.

As the corporate tax rates fell in other countries, their share of the global economic pie grew while ours’ shrank.

Good for their workers, bad for ours.

And here’s why corporate tax rates matter.

Research has found that the corporate income tax is THE most harmful tax to long-term growth.

Meaning countries with a lower corporate income tax are likely to grow faster and attract more investment and jobs than high-tax countries like the U.S.

Also, here in the U.S., corporate taxes cost each household about $2,384 per year in higher prices, lower wages or smaller 401ks.

In fact, 75 countries large and small have cut their corporate taxes in just the past five years alone. 

While our rate remains the 2nd highest rate in the world only to Japan – whose economy has been stalled for 20 years.

Until our corporate tax rate is competitive with the rest of the world, our economy will also remain stagnant and the good jobs will be created in places where the taxes are friendlier to investment and innovation. 

For more information, visit Tax Foundation dot org.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Reform Needed for "Subpart-F" Rules

Washington, DC, November 22, 2011-- The current U.S. system for taxing international businesses is out of step with today's global economy and needs to be reformed. Tax provisions applying to companies operating abroad—largely unchanged for nearly fifty years—have created distortions and inefficiencies that are a drag on growth both overseas and at home, according to a new study by the Tax Foundation.

"As globalization and competitiveness become more pressing concerns, serious reconsideration of the U.S. international tax system may be in order," said Tax Foundation Vice President for Legal & State Projects Joseph Henchman.

U.S. corporations operating overseas face a unique combination of burdens not borne by their international competitors: taxes owed to the United States, taxes owed to the country where the operating activity takes place, and a complex tax system that attempts to reduce the resultant economic harm but involves an array of credits and definitions, primarily the Internal Revenue Code's "Subpart F."

The provisions in Subpart F, originally adopted in 1962, call for so-called "passive" income like interest and dividends to be taxed immediately but permits "active" income to be deferred from U.S. taxes until it is brought back to the U.S.

To add to the complication, rents and royalties must not only be "active" to be eligible for deferral, but must also have been "received from a person other than a related person." Royalty income, unless received from third parties and even if it meets the stringent "active" test, is subject to Subpart F taxation. Thus, the tax treatment of royalties received from foreign operations under the U.S. company's direct ownership and operation is less favorable than those received from operations by third parties.

"Provisions of the corporate tax code like Subpart F should be scrubbed of policies that no longer work in today's global economy," said Henchman. "Exceptions originally meant to discourage firms from operating as overseas tax havens have instead introduced uncertainty and distortions for legitimate business activity. The 'active income' test can effectively police against tax haven behavior until such time that the United States decides to forego taxing profits from activities occurring beyond its borders."

Tax Foundation Special Report No. 197, "Rethinking U.S. Taxation of Overseas Operations," by Vice President for Legal & State Projects Joseph Henchman is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Single Out Candy, Soda for Unequal Treatment

 Washington, DC, October 31, 2011--States are increasingly extending higher tax rates to products like candy and soda, ostensibly to fight obesity. Such moves are unlikely to have an impact on obesity rates and health outcomes, but will create a complex and confusing classification system to divide the "good" food and drink products from the allegedly "bad" ones, according to a new study by the Tax Foundation.

Seventeen states tax candy at a higher rate than other groceries, while four states collect a special excise tax on soda. In 2011, fourteen more states proposed new soda taxes and two states proposed new candy taxes. Some of the soda tax proposals would have raised prices as much as 264%.

"While reducing obesity-related health problems is a worthy goal, adding an additional tax burden to particular food and beverage categories is a clumsy and inefficient strategy," said Tax Foundation analyst Scott Drenkard. "Obesity taxes fall on all consumers, including those who consume candy and soda in moderation and have no weight-related health issues."

Recent studies suggest that even when selective taxes on certain food products do cause individuals to consume less, those same individuals replace the calories avoided with other foods, resulting in no net decrease in caloric intake.

In addition to questions about the effectiveness of reducing obesity rates, the systems already in place for taxing candy and soda illustrate the unexpected difficulties in deciding what does and what does not count as candy and even soda. Chocolate bars that include any kind of flour, for example, generally do not meet the legal definition of candy. In the case of soda, some states exempt beverages with as little as 10% fruit juice, while in Tennessee, Oregon and Texas, drinks must be 100% juice to be exempt.

"The solution to the obesity problem will not come from government authorities picking out a handful of products to saddle with extra taxes," said Drenkard. "Consumers need to be free to make prudent decisions about their own diets and health needs without lawmakers trying to stack the deck in one direction or another."

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Annual Gala to Honor 2011 Distinguished Service Award Recipients

 Washington, DC, October 26, 2011--The Tax Foundation is pleased to announce that the recipients of its 2011 Distinguished Service Awards will be John Boehner, Speaker of the U.S. House of Representatives and David M. Cote, Chairman and CEO of Honeywell. The awards will be presented during the Tax Foundation's 74th Anniversary Dinner on Thursday, November 17, 2011 at the Mayflower Renaissance Hotel in Washington, D.C.

"We're delighted to be honoring such outstanding leaders from the public and private sectors," said Tax Foundation President Scott Hodge.

Since 1941, the Tax Foundation has awarded the Distinguished Service Award to a wide range of tax professionals, elected officials, and business leaders. Former recipients include Senate Finance Committee Chairman Max Baucus (D-MT), Eli Lilly Chairman and CEO Sidney Taurel, House Ways and Means Committee Chairman Bill Thomas (R-CA), Treasury Secretary James A. Baker III, Federal Reserve Chairman Paul Volcker, and President Dwight D. Eisenhower.

John A. Boehner serves as Speaker of the United States House of Representatives. Elected to represent the Eighth Congressional District of Ohio for an 11th term in November 2010, Boehner is a national leader in the drive for a smaller, less costly, and more accountable federal government. Rep. Boehner's first run for public office was for a seat on his neighborhood homeowners association, followed by a seat on his township board of trustees. He was elected to the Ohio General Assembly in 1984, where he served until the voters of southwest Ohio sent him to Congress.

David M. Cote is chairman and CEO of Honeywell, a diversified technology and manufacturing company serving customers worldwide. In 2010, Cote was named by President Barack Obama to serve on the bipartisan National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson. Before coming to Honeywell, Cote was chairman, CEO, and president of TRW, a multibillion dollar products and services provider for the automotive, aerospace, and information technology markets. Cote joined TRW from General Electric, where he served 25 years in various manufacturing, finance, and management positions.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation's Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.