- [Announcer] This is Duke University. - Hi everyone, my name is Scott Dyreng. I am Associate Professor of Accounting and have been at Fuqua since 2008. And I am excited to be a part of the Fuqua Faculty Conversations Series and to chat with you
about some of my research. Most of my research focuses
on corporate taxation. Whether we like it or
not, we are all affected by the tax system, and
corporate taxes in particular have been a frequent
topic in the popular press and policy circles as of late. As I'm sure you've
noticed, there have been many articles in major newspapers and other publications
over the past several years that have argued the corporate
tax system is broken. Most of these articles use
one or two high profile firms as anecdotes to illustrate
variations on the common theme of a broken, non-competitive
corporate tax system. Exactly why the tax
system is broken, however, is sometimes less clear,
and often the articles have directly opposing
views about what makes the system flawed and how to correct it. I find these articles
scary, quite frankly, and I'm concerned that our policy makers could make long lasting,
growth damaging changes to our tax system, unless
great care is taken to first understand what
is broken with our system and what we want to fix about it. Prescribing tax policies
based on extreme anecdotes that sell newspapers might be like setting construction requirements for door frames based on the height of NBA players, the danger being that
the cost of implementing those policies might outweigh the benefits if the policies are based on
unusual or extreme examples. So, what are some commonly held beliefs about corporate taxes and what do the data actually tell us about those conceptions? I'll spend the next few minutes discussing three beliefs that I often hear recited. The first commonly held
belief is that large U.S. multinational companies pay very low or even no corporate income tax. This idea comes from a number of articles that have appeared over the past several years in the popular press. Some of the most widely
circulated articles publicized Google's 2.4 percent tax rate, or GE's 1.8 percent tax rate, or even Caterpillar's 2.4 billion in tax savings. These articles were adorned with the names of common tax haven
countries, like Bermuda, Cayman Islands, Switzerland and Ireland. And they described tax saving strategies with fascinating code names, like the Double Irish
or the Dutch Sandwich. So, just how common is it for a company to pay a tax rate below five percent? Well, it turns out that the average publicly traded U.S.
company pays about 28 cents of every pretax dollar
it earns in income taxes to governments around the world. Of course there are some firms that pay very low tax rates, like those highlighted in the articles that you've probably seen, but there are also companies
that pay very high tax rates. In fact, about a fourth of
publicly traded U.S. companies pay more than 35 cents
of every pretax dollar in taxes to governments around the world. So, how do Google, GE, and other companies manage to pay such low tax rates? It turns out there are volumes
of research, some of which I have worked on, that
examine this question. And the major take away
is that we don't have a very good understanding of the causes of variation in corporate
effective tax rates. But we do know that many of these firms have substantial earnings
in foreign countries, and have lots of intangible property like patents and trademarks. They also take advantage of tax credits for research and
development, manufacturing and energy, and they have sophisticated, sometimes very creative tax departments. Why do we have a tax system
that gives tax credits and is fraught with so many loopholes? While your gut reaction
might be to exclaim that the tax system is broken, a more complete answer is
definitely more complex. The objectives of the
tax system are multifold. It is true that one objective
is to raise revenue. But it is also the case
that the government uses the tax system to
encourage investment in certain types of assets
or in specific industries. The government also uses the tax system as a tool to stimulate economic growth and to achieve social goals,
like wealth redistribution. So, observing that some
firms pay low tax rates, while other firms pay high tax rates, is not a smoking gun suggesting
the tax system is broken, as some commentators suggest, but instead could simply be the result
of 30 years of legislation designed to achieve objectives other than collecting revenue and
filling government coffers. The second commonly held
belief is that the U.S. has the highest corporate
tax rate in the world. It turns out that this is mostly accurate. It is true that the statutory
U.S. corporate tax rate, at 35 percent, plus around five percent state corporate tax
rate, is higher than most other developed countries in the world, including most European countries. We have arrived at this
position not because the U.S. has raised corporate
tax rates, but because the rest of the world has steadily reduced corporate tax rates
over the last 30 years. But even though our
statutory rates have remained essentially constant for almost 30 years, the effective corporate tax rates, or the fraction of income tax paid on each pretax dollar of earnings has
steadily declined over time. In fact, between 1988 and
2012, effective tax rates, or the rates that companies actually pay, dropped about a half a
percentage point each year. Some point to this as
evidence that our tax system is not really broken,
but is indeed competitive with tax systems around the world. Others argue that making
firms jump through loopholes to achieve a competitive
tax rate is inefficient. Whichever opinion you
hold, the fact remains that the average U.S.
corporation has a lower effective tax rate today
than 25 or 30 years ago when the tax system was last reformed. The third commonly held belief is that the U.S. tax system
encourages U.S. companies to invest overseas,
instead of here in the U.S. In theory, the U.S. tax system is designed to achieve capital export neutrality, meaning that U.S. firms
should be indifferent, in terms of taxation,
between investing a dollar in the U.S. and investing a dollar abroad. Thus, in theory, firms should
invest their marginal dollar in the country where it can
most efficiently provide a return on capital, with
taxes playing a minimal role. But, in practice, U.S.
companies can defer paying U.S. taxes on foreign earnings until they need the cash in the U.S. If the U.S. tax rate is expected to drop in the future because of
tax reform or a tax holiday, then U.S. companies will face lower taxes on foreign earnings
than domestic earnings. Moreover, there is an accounting benefit to foreign earnings. As long as those earnings
are determined to be indefinitely reinvested, then there is no requirement to record a tax liability for those earnings, even
though the firm may, in fact, owe tax to
the U.S. in the future. This quirk in U.S. accounting
rules can provide a boost to bottom line earnings for
multinational U.S. firms. So, while there is no
explicit tax provision written to encourage offshore investment, once all the nuances of our
current system are understood there is some incentive
to recognize earnings in relatively low taxed foreign countries, especially if those
earnings can be classified as indefinitely reinvested
and the cash left abroad. What then can tax reform accomplish? Will tax reform raise more revenue? While this might be
possible, most proposals are revenue neutral and
won't fill government coffers any more than the current system. Will tax reform tighten
the distribution of effective tax rates, so that there are fewer companies paying very low rates and fewer companies
paying very high rates? This could be achieved, but even in 1986, the last time the tax system was reformed, there was still significant variation in the rates companies paid. It seems that politicians don't have a strong appetite for
making the system fair. Instead, they each want
something that benefits their respective constituents,
which tends to lead to a tax system riddled with idiosyncratic provisions that benefit a few firms here and a few firms there,
creating winners and losers. Will tax reform encourage investment in the U.S. instead of abroad? Maybe the system can be refined to help, but the fact of the matter
is that most of the world's untapped markets are outside of the U.S., and there is nothing in the tax system that can change the fact
that the fundamental driver of foreign investment is
growth in foreign countries. So, could tax reform encourage repatriation of foreign earnings? Yeah, if tax reform were properly executed it could mitigate, or
even remove the incentive firms currently have to leave
their foreign earnings abroad. But, recent research suggests that even if those earnings were repatriated to the United States, we might not see massive new investments
in domestic projects. Instead, it is more
likely that we would see dividend payouts, or share repurchases. And if earnings are ultimately
returned to shareholders, then shareholders can make decisions about the most efficient
redeployment of their capital. In sum, many believe our
corporate tax system is broken and have issued calls to fix it. But very few seem to
understand what it means to have a broken system, or what a repaired system might accomplish. The research we are
undertaking here at Duke and at other institutions
around the country, is helping to shape this
debate in a way that we hope will result in meaningful,
effective tax reform. Clearly, a 10 minute
video is only sufficient to touch the surface of
the corporate tax system. I look forward to the
opportunity to chat with you in a few weeks, where we can
engage in meaningful discussion about the current state of
our corporate tax system and possible directions for future change. I hope to see you then.
