CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

Corporate Income Tax Rates:

International Comparisons

NOVEMBER 2005

The Congress of the United States O Congressional Budget Office

CBO

Corporate Income Tax Rates:

International Comparisons

November 2005

A

PAPER

Preface

C orporate income taxes can distort the allocation of productive resources both within 

the United States and across countries. This Congressional Budget Office (CBO) paper—prepared at the request of the Chairman of the House Committee on Ways and Means—examines the ways in which the corporate tax can distort economic behavior and shift resources 

among alternative uses in ways that reduce overall well-being in the United States. The analysis compares statutory and marginal corporate income tax rates between 1982 and 2003 across 

a broad range of countries. In keeping with CBO’s mandate to provide objective, impartial 

analysis, this report makes no recommendations.

William Randolph of CBO’s Tax Analysis Division wrote the paper under the direction of 

Roberton Williams and Thomas Woodward. Marika Santoro and Doug Hamilton of CBO 

provided helpful comments, as did James Hines of the University of Michigan and Kevin 

Hassett of the American Enterprise Institute. (The assistance of external participants implies 

no responsibility for the final product, which rests solely with CBO.)

Leah Mazade edited the paper, and Janey Cohen proofread it. Denise Jordan-Williams prepared early drafts of the text, tables, and figures. Maureen Costantino designed the cover 

and prepared the report for publication. Lenny Skutnik produced the printed copies, and 

Annette Kalicki and Simone Thomas prepared the electronic version for CBO’s Web site 

(www.cbo.gov).

Douglas Holtz-Eakin

Director

November 2005

Summary and Introduction ix

1 Analyzing the Distorting Effects of

Corporate Income Tax Systems 1

Domestic Distortions 1

International Distortions 5

2 Comparing the United States’ Corporate Income

Tax Rates with Those of Other Countries 11

The Structure of Corporate Income Taxes 11

Statutory Corporate Tax Rates 14

Effective Marginal Corporate Tax Rates 15

CONTENTS
VI CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Tables

S-1. Taxes on Corporate Income in OECD Countries in 2002 

as a Percentage of Gross Domestic Product x

2-1. Taxes on Corporate Income in OECD Countries in 2002 

as a Percentage of Gross Domestic Product 13

Figures

2-1. Top Statutory Corporate Tax Rates in All OECD Countries, 2003 22

2-2. Gross Fixed-Capital Formation in OECD Countries, 2003 23

2-3. OECD Countries’ Top Statutory Corporate Tax Rates 

Relative to Total Investment, 2003 24

2-4. Top Statutory Corporate Tax Rates in Selected OECD 

Countries, 2003 25

2-5. Top Statutory Corporate Tax Rates in the United States 

Compared with Summary Measures of Top Statutory 

Rates for Selected OECD Countries 26

2-6. Top Statutory Corporate Tax Rates in the United States 

Compared with Summary Measures of Top Statutory 

Rates for the Other G7 Industrialized Countries 27

2-7. Present Value of Depreciation Deductions for Investments in 

Machinery in Selected OECD Countries, 2003 28

2-8. Relationship Between Top Statutory Corporate Tax Rates and 

Depreciation Deductions for Investments in Machinery 

in Selected OECD Countries, 2003 29

2-9. Depreciation Deductions for Investments in Machinery 

in the United States Compared with Summary Measures 

of Depreciation Deductions for Selected OECD Countries 30

2-10. Present Value of Depreciation Deductions for Investments 

in Machinery in Selected OECD Countries Based on 

Actual Inflation, 2003 31

2-11. Depreciation Deductions for Investments in Machinery 

in the United States Based on Actual Inflation Compared 

with Summary Measures of Depreciation Deductions 

for Selected OECD Countries 32

2-12. Present Value of Depreciation Deductions for Investments 

in Industrial Structures in Selected OECD Countries, 2003 33
CONTENTS VII

2-13. Depreciation Deductions for Investments in Industrial Structures 

in the United States Compared with Summary Measures 

of Depreciation Deductions for Selected OECD Countries 34

2-14. Effective Marginal Corporate Tax Rates for Equity-Financed 

Investments in Machinery in Selected OECD Countries, 2003 35

2-15. Effective Marginal Corporate Tax Rates for Equity-Financed 

Investments in Machinery in the United States Compared 

with Summary Measures of Effective Marginal Tax Rates 

for Selected OECD Countries 36

2-16. Effective Marginal Corporate Tax Rates for Equity-Financed 

Investments in Machinery in the United States Compared 

with Summary Measures of Effective Marginal Tax Rates 

for the Other G7 Industrialized Countries 37

2-17. Effective Marginal Corporate Tax Rates for Equity-Financed 

Investments in Machinery in Selected OECD Countries 

Based on Actual Inflation, 2003 38

2-18. Effective Marginal Corporate Tax Rates for Equity-Financed 

Investments in Machinery in the United States Based on 

Actual Inflation Compared with Summary Measures of 

Effective Marginal Tax Rates for Selected OECD Countries 39

2-19. Effective Marginal Corporate Tax Rates for Equity-Financed 

Investments in Machinery in the United States Based on 

Actual Inflation Compared with Summary Measures of 

Effective Marginal Tax Rates for the Other G7 

Industrialized Countries 40

2-20. Effective Marginal Corporate Tax Rates for Equity-Financed 

Investments in Industrial Structures in Selected OECD 

Countries, 2003 41

2-21. Effective Marginal Corporate Tax Rates for Equity-Financed 

Investments in Industrial Structures in the United States 

Compared with Summary Measures of Effective Marginal 

Tax Rates for Selected OECD Countries 42

2-22. Effective Marginal Corporate Tax Rates for Equity-Financed 

Investments in Industrial Structures in the United States

Compared with Summary Measures of Effective Marginal 

Tax Rates for the Other G7 Industrialized Countries 43

2-23. Tax-Exclusive Effective Marginal Corporate Tax Rates for 

Debt-Financed Investments in Machinery in Selected 

OECD Countries, 2003 44

Figures (Continued)
VIII CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

2-24. Tax-Exclusive Effective Marginal Corporate Tax Rates for 

Debt-Financed Investments in Machinery in the United States 

Compared with Summary Measures of Effective Marginal 

Tax Rates for Selected OECD Countries 45

2-25. Tax-Exclusive Effective Marginal Corporate Tax Rates for 

Debt-Financed Investments in Machinery in the United States 

Compared with Summary Measures of Effective Marginal 

Tax Rates for the Other G7 Industrialized Countries 46

Box

2-1. Data and Methods for CBO’s Analysis 12

Figures (Continued)
Summary and Introduction

The corporate income tax is a significant part of the 

United States’ tax system. Federal corporate income tax 

revenues in 2004 were $189.4 billion, or 1.6 percent of 

gross domestic product (GDP).1

 Federal plus state corporate income tax revenues in 2004 totaled $225.8 billion, 

or 2.1 percent of GDP. Corporate income taxes are also a 

major source of revenues in other countries. For members 

of the Organization for Economic Cooperation and Development (OECD), corporate income tax revenues in 

2002—the most recent year for which data are available—averaged 3.4 percent of GDP (see Summary Table 

1).2 Like all taxes, the corporate income tax may distort 

economic decisions and reduce economic well-being.

The choices that each country makes about its corporate 

tax structure are significant for two reasons. First, the corporate tax distorts domestic economic behavior, as investors respond to the incentives that the tax creates. Those 

purely domestic distortions may occur regardless of how 

other countries structure their tax systems. Second, corporate tax systems in different countries interact with one 

another to distort decisions about international investment and to invite additional kinds of costly international tax planning. Concern about the potential for such 

international distortions provides a rationale for comparing different nations’ corporate tax systems—the focus of 

this Congressional Budget Office (CBO) paper.

CBO presents the analytical context for such comparisons in Chapter 1 and discusses how corporate income 

taxes may distort economic incentives, both domestic and 

international. It also examines several features of corporate tax systems to show how corporate tax rates in the 

United States differ from those in other OECD countries. The comparisons themselves are presented in Chapter 2. Highlights of CBO’s analysis include the following:

B The domestic distortions that the corporate income tax induces are large compared with the revenues that the tax generates. That finding is 

independent of how the United States’ corporate 

income tax compares with the taxes imposed by 

other countries. The corporate income tax in the 

United States generates a variety of domestic economic distortions that may have little relationship to 

what other countries do with their corporate income 

taxes. Those domestic distortions bring about reductions in economic efficiency that researchers estimate 

are large relative to the amount of revenues that are 

collected.3 Reforms to the tax system that reduced 

those distortions would not depend on how the 

United States’ corporate tax rate ranked in relation to 

the rates of other countries.

B Differences among countries in their corporate income tax structures distort incentives for locating 

investments and create additional opportunities for 

tax planning. In addition to distorting firms’ decisions about domestic investment, corporate income 

taxes may distort their international economic decisions. Costs to efficiency may arise because countries 

impose varying tax rates on corporate income, which 

may influence where and for what purpose a corporation chooses to invest. Those differential rates may 

distort the international allocation of investment and 

cause businesses to engage in additional costly international tax planning. 

B An international comparison of corporate income 

taxes should account for differences among countries. The size of a country’s economy as well as its

1. For comparison, federal revenues from the individual income tax 

(excluding payroll taxes) in 2004 were $809 billion, or 7.0 percent 

of GDP.

2. Because that figure includes both national and subnational (for 

example, county or provincial) tax revenues, it is most comparable 

to U.S. state plus federal corporate income tax revenues.

3. Economic efficiency generally is the extent to which a given set of 

resources is allocated across uses or activities in a manner that 

maximizes whatever value they are intended to produce.
x CORPORATE INCOME TAX RATES:INTERNATIONAL COMPARISONS

Summary Table 1.

Taxes on Corporate Income in OECD 

Countries in 2002 as a Percentage of 

Gross Domestic Product

Source: Congressional Budget Office based on Organization for 

Economic Cooperation and Development, Revenue Statistics of OECD Member Countries (Paris: Organization for 

Economic Cooperation and Development, 2004), Table 12.

Notes: Percentages include both national and subnational taxes on 

corporate income.

* = data not available.

other economic characteristics influences the corporate tax rate that a country establishes. Consequently, 

an analysis of tax-rate differentials should recognize 

the ways in which countries vary. For example, comparing corporate income taxes in the United States 

with those of other large industrialized countries may 

be more revealing than comparing the United States’ 

corporate tax structure with the structures of much 

smaller and less industrialized countries.

B Both statutory corporate tax rates and effective 

marginal corporate tax rates affect economic incentives. The full effect of statutory corporate income tax 

rates, rules for depreciation of productive assets, and 

other features of the tax code—as they determine effective marginal corporate tax rates—influences where 

corporations choose to invest.4

 For certain other costly 

types of international tax planning, the most important factor is differences among countries in their statutory tax rates alone.

As a consequence, statutory and effective marginal tax 

rates in the international context have both combined 

and separate importance to corporate tax policy. For a 

country starting out with relatively high effective marginal and statutory tax rates, corporate tax cuts in the 

form of, for example, larger allowances for depreciation of equipment and structures will reduce effective 

marginal rates and attract more investment. But such 

cuts will not reduce the type of corporate tax planning 

aimed at taking advantage of the differences in countries’ statutory corporate tax rates. The incentives for 

that kind of activity can be diminished—and investment attracted—by adopting depreciation rules that 

more closely approximate economic depreciation and 

combining them with lower statutory rates.5

B Although the United States’ statutory corporate tax 

rates are among the highest of those in OECD 

countries, they are comparable with the statutory 

2.3

5.3

3.5

3.4

4.6

2.9

4.3

2.9

1.0

3.8

2.4

1.1

3.7

3.2

3.1

3.1

8.6

*

3.5

4.2

8.2

2.0

3.6

2.7

3.2

2.4

2.7

2.2

2.9

1.8

Unweighted average 3.4

Weighted average 2.5

Country

Austria

Australia

Belgium

Canada

Czech Republic

Denmark

Finland

France

Germany

Greece

Hungary

Iceland

Ireland

Italy

Japan

Poland

Portugal

Republic of Korea

Luxembourg

Mexico

Netherlands

Turkey

United Kingdom

United States

Percentage of GDP

Slovak Republic

Spain

Sweden

Switzerland

New Zealand

Norway

4. An effective marginal corporate tax rate is the percentage of the 

income from a marginal investment that must be paid as corporate income taxes. An investment is considered marginal when it 

pays just enough income to make the investment worthwhile.

5. Economic depreciation is what is generally meant by the term 

“depreciation”—that is, the decrease in the value of a productive 

asset that occurs because the asset provides less remaining productivity as it ages. By contrast, tax depreciation is the depreciation 

allowed by the tax code.
SUMMARY AND INTRODUCTION CORPORATE INCOME TAX RATES:INTERNATIONAL COMPARISONS xi

rates imposed by other members of the Group of 

Seven (G7).6

B How effective marginal corporate tax rates in the 

United States compare with other countries’ rates 

depends on the type of corporate investment being 

made and the way in which it is financed. Corporate investments are financed by either shareholders or 

lenders (which include corporate bondholders). Compared with the average effective marginal corporate tax 

rates for shareholder-financed investment in machinery among all other OECD countries, the United 

States’ rate is slightly higher; compared with the average among other G7 countries, the United States’ rate 

is about the same. Compared with the average rate for 

shareholder-financed investment in industrial structures among all other OECD countries, the United 

States’ rate is significantly higher; however, the United 

States’ rate is close to the average among other G7 

countries. In contrast to rates for shareholder-financed 

investment, the United States’ effective marginal corporate tax rate for lender-financed investment in machinery is low by comparison with the average for 

other OECD countries and for other G7 countries. 

From an international perspective, although the 

United States’ effective marginal corporate rates for 

shareholder-financed investments are higher than the 

average, such rates for investments financed by a combination of shareholders and lenders may be lower 

than the average if a sufficient fraction of the marginal 

investment is financed by lenders.

B The history of corporate tax rates between 1982 

and 2003 suggests that countries do not change 

their corporate tax rates independent of one another. After large reductions in statutory corporate tax 

rates by Ireland, the United Kingdom, and the United 

States in the mid-1980s, other OECD countries also 

cut their rates, perhaps out of concern that they would 

lose investments or part of their tax base—for example, when corporations moved their operations to a 

lower-tax country. Hence, the corporate tax rates that 

the United States establishes may affect the choices 

that other countries make about rates. Thus, how the 

United States’ corporate tax rate ranks in relation to 

the rates in other countries is not determined by U.S. 

policy choices alone.

6. The G7 industrialized countries are Canada, France, Germany, 

Italy, Japan, the United Kingdom, and the United States.

1

Analyzing the Distorting Effects of

Corporate Income Tax Systems

Taxes—including corporate income taxes—distort 

incentives, primarily by taxing endeavors unevenly. When 

two kinds of economic activity are taxed at different rates, 

the more highly taxed activity tends to diminish and the 

less heavily taxed activity expands. Once economic activity takes on a pattern that is based on tax rates, resources 

in the economy are misallocated and inefficiency results, 

as economic activity shifts away from its most valuable 

opportunities.

In spite of its potential to distort economic behavior, the 

corporate income tax exists in part because it is administratively less costly to collect some taxes on income at the 

level of the firm rather than at the level of the individual. 

Corporations frequently distribute only some of their 

profits to creditors and shareholders; they retain the rest 

for reinvestment. Those reinvested profits typically increase the value of the firm and represent income for 

shareholders in the form of capital gains—that is, gains in 

the value of shareholders’ ownership shares. Although 

such capital gains may eventually be taxed, only profits 

that are distributed as interest to lenders or dividends to 

shareholders are considered cash flows, which are subject 

immediately to taxation under the individual income tax. 

Thus, in part to fully tax all profits, the United States’ tax 

system subjects a corporation’s profits to their own income tax.1

That arrangement has the advantage of bringing income 

that the corporation retains into the tax system. But the 

approach may go too far when it distorts economic incentives for investment by taxing some corporate earnings 

twice, first at the corporate level and then as income received by individual taxpayers. Policymakers could end 

the double levy by simply eliminating the corporate tax; 

doing so, however, would introduce new distortions by 

favoring corporations that did not distribute profits but 

rather accumulated and reinvested them. Moreover, some 

of the distortions that the corporate income tax causes are 

inherent to the taxation of capital income in general. To 

eliminate the distortions specific to the corporate income 

tax would require integrating the corporate and individual income taxes.2

Serious concern about the corporate income tax springs 

from the ways in which it distorts economic incentives 

both at home and abroad. The result of such distortions 

is that resources are not allocated to their best uses and 

thus cannot yield their fullest benefits to society.

Domestic Distortions

At a purely domestic level, the corporate income tax has 

the potential to distort economic incentives and generate 

inefficiency in at least six ways. First, because it is imposed on income from capital, it biases individuals’ decisions about how much to save and can therefore influence 

overall capital investment and economic growth. Second, 

because the corporate income tax is imposed only on 

some kinds of business profits (in the United States, typically those of corporations that have many shareholders) 

and not on others (such as the profits of partnerships and 

sole proprietorships), it affects the ways in which businesses are organized and creates biases in investment and 

CHAPTER

1. Using the corporation to withhold other taxes—for example, 

income and payroll taxes—may also confer advantages, but analysis of those levies is beyond the scope of this report.

2. See Richard M. Bird, “Why Tax Corporations?” Working Paper 

No. 92-2, prepared for the Technical Committee on Business Taxation (Ottawa: Department of Finance, 1996); and U.S. Department of the Treasury, Integration of the Individual and Corporate 

Tax Systems (January 1992).
2 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

production toward those types of business structures 

that are not subject to the corporate income tax. Third, 

it creates a bias in corporate financing toward the use 

of debt—because the tax is imposed on income from 

equity-financed investment and not on the return to 

debt-financed investment. Fourth, because the law treats 

a corporation as a separate taxable entity from which 

shareholders subsequently realize income in the form of 

either dividends or capital gains, the relatively beneficial 

tax treatment of capital gains under the individual income tax creates a bias toward them and against the payment of dividends. Fifth, because the United States levies 

corporate income tax on the basis of schedules for depreciation that do not correspond to economic depreciation, 

it taxes different kinds of assets and industries at different 

effective rates, creating a bias in investment and production toward the more lightly taxed assets and sectors. Finally, the corporate income tax may distort the allocation 

of resources by making corporations’ compliance with 

taxation costly and by creating additional opportunities 

for tax planning.3

Saving and Investment

The corporate income tax is part of the broader taxation 

of income from capital. Consequently, it may affect capital investment through its effects on both the supply of 

and demand for capital. The corporate income tax may 

affect the supply of capital by reducing the returns that 

individuals receive from saving. It may affect the demand 

for capital by changing what businesses must pay to acquire capital for investment.

Saving by Individuals. Saving is income that is not currently consumed. Saving is positive when individuals 

consume less than their current income to finance their 

future consumption. It may be negative if individuals 

consume more than their current income, either borrowing or using accumulated wealth to finance their current 

consumption. Taxes on income from capital introduce a 

bias into the incentives for saving because they make consumption in the future relatively more expensive than 

consumption today. Thus, such taxes may alter when an 

individual chooses to consume (although whether those 

taxes increase or decrease saving is uncertain because it is 

the temporal decision that they affect). For example, in 

the face of taxes on capital income, an individual who decides to keep future consumption at a fixed level must 

save more and consume less now. Alternatively, the same 

individual could decide to save less now and also consume less in the future. 

The net effect of capital income taxes on how much individuals save therefore depends on two offsetting factors. 

First, such taxes reduce the after-tax rate of interest that a 

saver (or investor) receives and thus decrease the price of 

current consumption relative to future consumption. 

That decrease in the relative price tends to cause people 

to increase their current consumption and save less (the 

“substitution effect”). Second, capital income taxes may 

decrease current consumption or future consumption, or 

both, by making less income available for consumption 

both now and in the future (the “income effect”). The income effect may lead people to respond to capital income 

taxes by consuming less now (and in the future) and saving more. Whether the overall effect of capital income 

taxes is to cause people to save less or more depends on 

whether the substitution effect is stronger or weaker than 

the income effect—and that depends on peoples’ preferences and can only be determined by empirical investigation.

A variety of empirical studies have tried to measure the 

net effect on saving of changes in the rate of interest, but 

the results have been inconclusive.4 No researcher has 

made a compelling case that a significant net effect exists 

in either direction. However, the shortcomings of the 

studies and of the data they use are such that a realistic 

chance remains that taxes on capital income affect saving. 

Investment by Businesses. How the corporate income tax 

affects businesses’ demand for capital is less ambiguous: 

the tax diminishes the demand for capital in the corporate sector by increasing the cost of capital (the before-tax 

rate of return that is just high enough for an investment 

to be funded). A business will undertake a particular investment only if the business expects to earn a before-tax 

rate of return that is high enough to satisfy its financial 

investors after taxes are paid; otherwise, the investors will 

supply their funds elsewhere. The corporate income tax 

increases the cost of capital by driving a wedge between 

3. See Jane G. Gravelle, The Economic Effects of Taxing Capital 

Income (Cambridge, Mass.: MIT Press, 1994), pp. 75-93, for a 

survey of the literature on the domestic efficiency costs of the corporate income tax.

4. See B. Douglas Bernheim, “Taxation and Saving,” in Alan J. Auerbach and Martin Feldstein, eds., Handbook of Public Economics, 

vol. 3 (Amsterdam: North-Holland Press, 2002), pp. 1173-1249, 

for a survey of the literature on the effects of taxation on saving.
CHAPTER ONE ANALYZING THE DISTORTING EFFECTS OF CORPORATE INCOME TAX SYSTEMS 3

the after-tax return that investors demand and the pretax 

return that a business’s investment must earn to pay both 

taxes and investors.

Organizational Form

The United States’ tax system does not subject all business activity to the corporate income tax. Unincorporated 

businesses, such as sole proprietorships and partnerships, 

do not pay the tax. Instead, all of their income, whether it 

is distributed to owners as dividends or retained for additional internal investment, is “passed through” and taxed 

only at the level of the individual—that is, the owner or 

owners. In the United States, some corporations may 

elect treatment under subchapter S of the corporate income tax, which allows them the same kind of passthrough arrangements that the tax code permits unincorporated firms.5 Pass-through treatment is also available to 

real estate investment trusts and to mutual funds that are 

organized as regulated investment companies. Limited liability companies (LLCs) are another form of business organization. Although practically indistinguishable from 

corporations, LLCs are not subject to the corporate income tax because technically they are not incorporated.

The fact that different types of organizations are taxed 

differently creates a bias against organizing as a corporation, which is subject to the corporate income tax, and an 

incentive for businesses to organize in noncorporate 

forms that are not subject to the tax. But the extent of 

those effects goes beyond a shift by some businesses to a 

different organizational form. Not all industries lend 

themselves to the noncorporate structure. The corporate 

form is particularly prevalent among industries that use 

large quantities of capital drawn from many investors. 

Consequently, the bias against the corporate form also 

becomes a bias against some industries and types of production. To the extent that the corporate tax lessens the 

demand for capital in the corporate sector, it makes more 

of that capital available for investment in the noncorporate sector. However, the overall efficiency of investment 

will be reduced if businesses invest that capital within the 

noncorporate sector even when those investments provide 

a lower pretax rate of return than do other potentially 

better investments forgone by firms in the corporate sector (because the tax has raised their cost of capital). Thus, 

the corporate income tax tends to distort production 

within both sectors by decreasing production in the corporate sector and increasing it in the noncorporate sector 

and by changing the ways in which those sectors use capital assets in production.

Financing

Businesses may finance investment either by selling ownership shares, or stock (equity), or by borrowing (debt). If 

firms choose equity financing, investors realize returns in 

the form of residual profits—that is, the profits that remain after the business pays all of its creditors and suppliers. If businesses finance investment through debt, investors receive their returns as interest. The corporate 

income tax may distort a business’s decisions about financing because the tax is imposed only on residual profits; it is not imposed on the income a firm pays as interest 

to investors (because such interest is deductible from the 

firm’s taxable corporate income). As a result, the tax creates a bias in favor of debt financing, and corporations are 

likely to be more heavily financed by debt than they 

would have been without the corporate income tax. That 

greater dependence on debt financing may increase the 

chance that companies will not be able to pay their creditors, thus heightening the risk of bankruptcy.6

 Further, 

shareholders, creditors, and managers have divergent interests that are partly balanced by each company’s chosen 

mix of debt and equity financing. The corporate income 

tax may upset that balance by encouraging firms to use 

too much debt.7

Dividends

After a corporation pays the interest owed to its creditors, 

it may distribute its residual profits to its shareholders as 

dividends, use the profits to repurchase shares from shareholders, or retain those profits for reinvestment. In each 

case, the profits become income of the shareholders; how5. Tax law requires that S corporations be structured in such a way 

that it is administratively easy to tax them as pass-through entities. 

Thus, an S corporation must be a purely domestic corporation 

that issues only one class of stock to no more than 75 shareholders. 

6. See Roger Gordon and Burton Malkiel, “Corporation Finance,” 

in Henry J. Aaron and Joseph A. Pechman, eds., How Taxes Affect 

Economic Behavior (Washington, D.C.: Brookings Institution, 

1981), pp. 131-198.

7. See Michael Jensen, “Agency Costs of Free Cash Flow, Corporate 

Finance, and Takeovers,” American Economic Review Papers and 

Proceedings, vol. 76 (May 1986), pp. 323-329. See Alan J. Auerbach, “Taxation and Corporate Financial Policy,” in Auerbach and 

Feldstein, Handbook of Public Economics, pp. 1252-1292, for a 

survey of the literature on how taxation affects corporate financial 

decisions.
4 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

ever, in the case of reinvested profits, the shareholders do 

not immediately receive that income. The reinvested 

profits will generally increase the value of the firm—and 

therefore the value of its stock—creating a capital gain for 

shareholders.

Under the individual income tax, capital gains are not 

taxed until they are realized, which in the case of stocks 

usually occurs when a stock is sold. That deferral of taxation reduces the effective tax rate on capital gains because 

of the time value of money—that is, the value that people 

place on receiving money now rather than later. If investors hold stock until they die, the gains may escape income tax altogether.8 Consequently, after taxes, corporate 

earnings that shareholders accrue as capital gains are more 

valuable to them than earnings paid as dividends, even if 

realized capital gains and dividends are taxed at the same 

statutory rate. The tax system thus creates a bias against 

paying dividends.9

The bias against dividends may diminish economic efficiency by reducing such payments. There are two general 

analytical viewpoints about the cost of that reduced efficiency. In one such view, a company uses dividend payments to send information to shareholders about the 

company’s prospects for future earnings. But the tax bias 

against dividends may make firms hesitate to send such 

signals—in which case, shareholders will have less information and will therefore make less efficient decisions 

when they buy and sell shares.10 In another view, corporate managers may not always make the best investments 

of retained earnings. A reduction in dividend payments 

will make more cash available to managers, who may then 

undertake inferior corporate investments.11

Types of Investments

The corporate income tax may affect the demand for various types of capital investment in different ways because 

its rules vary across investment types. For example, its 

rules for tax depreciation may have different effects on 

the cost of capital for investments in different types of 

business assets. Depreciation rules under the corporate 

income tax prescribe specific formulas for each type of 

asset to spread deductions for the initial cost of an investment over a number of years. Because the depreciation 

formulas do not necessarily track economic depreciation 

closely, differences in the formulas for different types of 

assets may increase or decrease the cost of capital for some 

business investments relative to other investments. Such 

differences may distort the incentives for investing in various types of assets and for producing various goods and 

services. 

Although the distortions that arise from depreciation 

rules may be significant, they are not inherent to corporate income taxation. It is possible in principle, though 

perhaps difficult in practice, to design a corporate income 

tax that will minimize those biases by aligning tax depreciation with economic depreciation. The failure of tax depreciation to track its economic counterpart is not unique 

to the corporate income tax: the same depreciation rules 

apply to noncorporate businesses and introduce similar 

distortions.12

Tax Compliance and Planning

The corporate income tax may distort the allocation of 

resources by making compliance with the tax costly and 

by creating additional opportunities for tax planning. Significant costs may arise simply from the task of properly 

applying detailed corporate tax rules to often highly com8. Under the individual income tax, when an appreciated stock is 

transferred on the death of its holder, the calculation of any subsequent capital gain to the recipient is based only on the appreciation that occurs after the stock is acquired from the decedent, 

which results in the forgiveness of tax on previous capital gains. 

The Economic Growth and Tax Relief Reconciliation Act of 2001 

capped that so-called step-up in basis for individuals who die during 2010.

9. The Jobs and Growth Tax Relief Reconciliation Act of 2003 temporarily weakened that bias by cutting the tax rates on both dividends and capital gains to 15 percent. However, the change did 

not eliminate the bias against dividend payments because the tax 

on capital gains is still deferred—that is, it is not due until an asset 

is sold.

10. That bias is called the signaling view. See Sudipto Bhattacharya, 

“Imperfect Information, Dividend Policy, and the Bird in the 

Hand Fallacy,” Bell Journal of Economics, vol. 10 (1979), pp. 259-

270; and Merton H. Miller and Kevin Rock, “Dividend Policy 

Under Asymmetric Information,” Journal of Finance, vol. 40 

(1985), pp. 1031-1051.

11. That so-called agency cost view is discussed in Michael Jensen and 

William Meckling, “Theory of the Firm: Managerial Behavior, 

Agency Costs, and Ownership Structures,” Journal of Financial 

Economics, vol. 3 (1976), pp. 305-360.

12. The importance and difficulties of following patterns of economic 

depreciation are discussed by David W. Brazell and James B. 

Mackie III, “Depreciation Lives and Methods: Current Issues in 

the U.S. Capital Cost Recovery System,” National Tax Journal, 

vol. 53, no. 3 (September 2000), pp. 531-561.
CHAPTER ONE ANALYZING THE DISTORTING EFFECTS OF CORPORATE INCOME TAX SYSTEMS 5

plex business activities, organizational structures, and 

transactions. Additional costs, perhaps larger, may result 

from companies’ efforts to maximize their after-tax profits, in part by taking full advantage of tax-planning opportunities. Companies are likely to engage in tax planning up to the point at which additional gains in their 

after-tax profits are equal to the added costs and risks of 

greater planning. 

Tax planning leads to efficiency costs when businesses 

structure their organizations and activities in less-thanoptimal ways to take advantage of the opportunities that 

tax planning offers. Examples include some of the distortions discussed earlier, such as the choice between corporate and noncorporate forms of organization or the ways 

in which corporations finance their investments. Although a company benefits its shareholders when it reduces its tax payments through such planning, the resulting decrease in tax revenues may lead to less well-being 

elsewhere in the economy. In addition, the resources that 

the corporation expends on tax planning, though producing a private benefit for the shareholders, provide no additional output. Therefore, from an overall economic perspective, those resources are essentially wasted.

The Economic Importance of Domestic Distortions

Considerable economic research has tried to measure the 

efficiency costs from distortions associated with the corporate income tax. Studies have produced a wide range of 

estimates, some quite large, of the tax’s inefficiency.13

Several well-known studies examine the costs that result 

from distortions in the allocation of capital and output 

between corporate and noncorporate businesses. Harberger, for example, estimates that those costs equal about 

24 percent of corporate income tax revenues.14 On the 

basis of research with Kotlikoff, Gravelle puts those costs 

higher—as exceeding half of all such revenues;15 an even 

larger estimate, by Fullerton and Rogers, suggests that 

they represent about 65 percent of revenues.16 In contrast, Fullerton’s and Henderson’s estimate of the costs of 

that inefficiency is much smaller than Harberger’s.17

Overall, on the basis of a survey of estimates derived from 

published corporate tax studies, Gravelle concludes that 

the combined cost of the first five domestic inefficiencies 

discussed in this chapter could exceed the total amount of 

corporate tax revenues collected.18

Measures of the costs of complying with the corporate 

income tax have also been large. Slemrod and Blumenthal, for example, estimate that average annual compliance costs for a Fortune 500 company in 1992 exceeded 

$2 million.19 And Slemrod reports total annual compliance costs for midsized companies in 2002 of approximately $22 billion.20

International Distortions

Corporate income taxes may also distort the incentives 

for international investment and create opportunities for 

international tax planning. If an economy was closed off 

from the rest of the world, total domestic investment 

would equal total domestic saving. The effect of the corporate income tax on total investment would then depend critically on the extent to which the tax affected domestic saving. For example, if the tax did not influence 

the total amount of domestic saving, it could not affect 

the total amount of investment. Such prices as interest, 

wage rates, and the prices of goods and services would adjust to bring saving and investment into alignment.

13. See Congressional Budget Office, The Incidence of the Corporate 

Income Tax (March 1996), and Gravelle, The Economic Effects of 

Taxing Capital Income, pp. 76-93, for discussion of the reasons 

that studies have produced a variety of estimates. 

14. Arnold C. Harberger, “Efficiency Effects of Taxes on Income from 

Capital,” in Marian Krzyzaniak, ed., Effects of the Corporate Income 

Tax (Detroit: Wayne State University Press, 1966), pp. 107-117.

15. Gravelle, The Economic Effects of Taxing Capital Income, p. 81.

16. Don Fullerton and Diane Lim Rogers, Who Bears the Lifetime Tax 

Burden? (Washington, D.C.: Brookings Institution, 1993).

17. Don Fullerton and Yolanda Kodrzycki Henderson, “A Disaggregate Equilibrium Model of the Tax Distortions Among Assets, 

Sectors, and Industries,” International Economic Review, vol. 30, 

no. 2 (May 1989), pp. 391-413.

18. Gravelle, The Economic Effects of Taxing Capital Income, pp. 89-90.

19. Joel Slemrod and Marsha Blumenthal, “The Income Tax Compliance Cost of Big Business,” Public Finance Quarterly, vol. 24, no. 4 

(October 1996), pp. 411-438.

20. Joel Slemrod, The Economics of Corporate Tax Selfishness, Working 

Paper No. 10858 (Cambridge, Mass.: National Bureau of Economic Research, October 2004), p. 25. It is not clear how that 

amount should be divided between the costs of routine compliance and the costs of other types of tax planning. Also unclear is 

whether the costs of the latter are captured fully by these or any 

other existing estimates of corporate income tax inefficiency. (The 

costs reviewed in this paragraph may include some of the costs of 

international tax planning discussed later in this chapter.)
6 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

However, because nations’ economies are open to international flows of capital, the supply of funds available for 

domestic investment in each country is determined not 

only by the total worldwide amount of saving but also by 

where savers choose to supply their funds. Consequently, 

regardless of whether corporate income taxes affect total 

worldwide saving, such taxes—by varying across countries—may affect where savers decide to invest. In such 

an internationally open economy, differences in the tax 

rates that countries impose may distort the total amount 

of investment within each country, the tax revenues that 

each nation collects, and the costs that companies bear in 

order to plan ways to reduce the taxes they must pay.

The international dimension adds three main concerns 

about the corporate income tax. First, the potential for 

shifting the location of investment outside a country and 

for drawing investment into a country in response to differences in tax rates may reduce the efficiency of investment, as businesses allocate capital to specific uses on the 

basis of tax considerations. A country with a relatively 

high corporate income tax, for example, stands to lose investment to lower-tax countries. Second, a drop in investment in a relatively high-tax country may reduce the 

amount of capital available to workers and thus reduce 

real (price-adjusted) wages in that country. Third, the tax 

base of a relatively high-tax country may erode further 

because businesses with operations in multiple countries 

can reduce their taxes by “recharacterizing” where their 

taxable income is earned to place relatively more of it in 

low-tax countries. 

International Tax Policies and Cross-Country 

Variation in Corporate Tax Rates

Countries have structured their international tax policies 

in such a way that cross-country differences in tax systems 

distort economic decisions. If, however, every country 

chose to levy capital income taxes only on its own resident individual savers and then imposed a tax whose rate 

remained the same regardless of where the savings were 

invested, the tax would not distort decisions about international investment, even if each country had a different 

rate.21 Under such an approach, where a saver invested or 

made income appear to be located for tax purposes would 

be immaterial, because the saver would face the same tax 

rate regardless of where the investment or income was located. Although another saver in a different country 

might face a different home-country tax rate on income, 

that other saver would also face a uniform home-country 

tax rate everywhere and—for tax purposes—would not 

care where the savings were invested. If all countries followed that approach, international differences in capital 

income tax rates would cause neither an international 

misallocation of capital investment nor a shifting of taxable income among countries.

Although such uniform taxation has merit in terms of 

global economic efficiency, countries have not embraced 

it, perhaps because they view it as not being in their national interest. Moreover, even if countries wanted to 

adopt uniform taxation, the ability that individuals have 

to invest through corporations raises legal and administrative barriers that stand in the way of fully achieving it. 

Adhering to the uniform taxation principle would require 

countries to fully integrate individual income taxes with 

the taxes of domestic and foreign corporations, so that an 

individual investor would be subject to the same rate of 

tax regardless of where the investment was located.

For example, the United States would have to tax individual U.S. shareholders in a U.S. company on their shares 

of the corporation’s worldwide income as it was earned—

whether that income came from the firm’s domestic or 

foreign operations—regardless of whether the company 

or its foreign subsidiary businesses paid dividends. However, the United States would not tax foreign shareholders 

in the same company on their shares of the company’s 

worldwide income. In addition, the United States would 

have to tax U.S. individuals who owned stocks in foreign 

companies on their portion of the income those companies earned—as the income was accrued—through the 

foreign companies’ worldwide operations. That taxation 

would occur regardless of whether the foreign companies 

had any operations in the United States and regardless of 

whether the companies paid dividends. To achieve the 

full advantages of taxation based on the uniform taxation 

principle, other countries would have to follow the same 

approach when taxing their own resident savers.22

21. That principle of international taxation is known as capital export 

neutrality (CEN). For a discussion of that and other international 

taxation issues, see Roger H. Gordon and James R. Hines Jr., 

“International Taxation,” in Auerbach and Feldstein, Handbook of 

Public Economics, pp. 1935-1995.

22. Each country could also impose tax on income earned within it 

from investments of foreign-supplied capital, but to achieve CEN 

in that case would require each country to allow a full credit for 

any foreign taxes paid by its resident savers. Countries are unlikely 

to allow such an unlimited foreign tax credit because such a policy 

could result in unacceptable transfers to foreign treasuries.
CHAPTER ONE ANALYZING THE DISTORTING EFFECTS OF CORPORATE INCOME TAX SYSTEMS 7

Such a fully integrated approach to the taxation of worldwide corporate profits might not be administratively feasible. To adopt that approach, the United States, for example, would have to be able to collect information on all 

of the income earned by U.S. individuals through their 

ownership shares of foreign corporations, including income that was retained and reinvested by companies’ affiliates located throughout the world. Such information is 

not likely to be available unless other countries fully integrate their systems in a similar way—which will bring 

them face to face with similar administrative obstacles. 

And because most countries that currently integrate their 

corporate and individual income taxes do so only partially and do not typically pass the benefits of integration 

through to foreign shareholders, the United States would 

have to provide the tax relief that should have been available from those countries’ integration. That relief would 

come in the form of full credits to U.S. shareholders for 

income taxes paid by the foreign corporations in which 

they owned shares, an approach that would essentially 

transfer funds from the U.S. Treasury to treasuries 

abroad. 

As a practical alternative to taxing the capital income of 

resident individuals at the same rate regardless of where 

their savings were invested, the United States could 

choose to apply the uniform taxation principle at the corporate level alone.23 But it is not clear how well that alternative would work if the United States applied it only to 

U.S. corporations and their foreign subsidiaries. Because 

the same tax rates on capital income could not apply to 

investments made through foreign companies that were 

owned directly by individual U.S. shareholders, switching 

to such a system would create an additional incentive for 

U.S. individuals to purchase shares in foreign rather than 

in domestic companies. Those foreign companies would 

then have a substantial advantage over U.S. firms: they 

would be better able either to acquire U.S. companies or 

to use capital raised from U.S. shareholders to produce 

the same or similar goods and services as the U.S. companies produced but at lower costs—provided they could 

achieve lower effective corporate tax rates on their worldwide operations under foreign tax laws. Such a reorganization of business activity, however, might be costly to execute, lead to less efficient organizational structures, and 

undermine the goal of taxing investment income at the 

same rate regardless of the investment’s location. Applying the principle of uniform taxation at the corporate 

level alone therefore would not necessarily improve economic well-being.24

Other countries face similar administrative and legal obstacles and are likely to have similar concerns about 

adopting uniform taxation at the corporate level only. As 

a consequence, the corporate tax rate that a country 

chooses may affect the international supply of capital and 

the degree to which companies engage in tax planning to 

shift taxable income among countries. 

Tax Rates and the Location of Investment

Differences in corporate tax rates affect where businesses 

decide to invest. In general, investment in countries 

whose corporate income taxes are relatively high is likely 

to account for a smaller share of the world’s supply of 

capital than it would if countries did not differ in their 

tax rates. Total investment is likely to be smaller in countries that have relatively high corporate income tax rates 

and larger in countries that have relatively low rates.

Once differences in tax rates affect decisions about where 

to invest, those decisions no longer properly reflect the 

underlying social costs and benefits. Investment becomes 

misallocated—in terms of economic efficiency—on a 

worldwide basis. But worldwide efficiency is not typically 

the motive for nations’ actions, and countries often set 

tax rates to attract investment and boost their own national well-being. Such policies may decrease investment 

in other countries, which may then respond in kind by 

changing their tax rates to increase their national 

well-being.

23. Even at that level, application of the principle would be incomplete unless the United States fully credited taxes paid by U.S. corporations abroad, even when foreign nations’ tax rates exceeded 

the United States’.

24. Harry Grubert and John Mutti (“Taxing Multinationals in a 

World with Portfolio Flows and R&D: Is Capital Export Neutrality Obsolete?” International Tax and Public Finance, vol. 2, 1995, 

pp. 439-457) show that under certain conditions, it may be economically desirable for the United States to follow a policy of 

CEN at the corporate level, even if U.S. individuals can easily purchase shares in foreign companies. Grubert and Mutti, however, 

show that CEN’s desirability as policy depends on the degree to 

which goods produced by domestic and foreign firms may be substituted for each other. But the authors do not establish that conditions are actually such that CEN should be preferred. In 

addition, even if conditions did favor CEN, Grubert and Mutti 

do not claim that switching from current U.S. policies to a policy 

of CEN will increase economic efficiency.
8 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Under such circumstances, one country’s choice of its 

“best” tax rate to impose depends to some extent on the 

rates imposed by other countries. That country’s decision, 

however, is more complicated than simply trying to 

choose a low tax rate to garner an advantage over other 

nations. To maximize its national well-being in an international environment, a country must balance several, 

sometimes competing, goals. One goal is to ensure that 

residents receive the maximum returns possible from 

their saving, taking into account the fact that they may 

invest either at home or abroad. Another of the country’s 

goals is to maximize the real wage income of its workers 

by considering the effect of its corporate taxes on the international flow of capital and the size of its domestic 

capital stock. Yet another goal is to minimize the costs of 

administering taxes and of complying with them. Last, a 

country will balance those goals with broader policy objectives, such as the size of government it desires and the 

fairness it requires of its tax system. That balance is likely 

to differ from country to country.

Moreover, a country’s ability to change its tax rates to 

gain an advantage varies with its economic circumstances. 

For example, such flexibility may depend on whether the 

country’s total capital investment is small or large relative 

to investment worldwide.25 It may also depend on the extent to which the country provides unique opportunities 

for investment and the degree to which other countries 

might change their tax rates in response.

At one extreme, a country may choose to set a low corporate tax rate because that country accounts for a very 

small part of worldwide investment and does not offer 

any unique investment opportunities tied to its location.26 In such a case, the demand by businesses for capital within that country will essentially determine the 

amount of domestic investment that occurs. International investors will supply those businesses with as much 

or as little capital as they request, as long as the investors 

receive a sufficiently high rate of return after the businesses pay their corporate income taxes. For investment 

in such a small country (measured, that is, in terms of its 

share of worldwide real investment), world capital markets determine the rate of return that international suppliers of capital require. That rate is not influenced by the 

level of investment in the small country or by its level of 

corporate income taxation. As a result, the supply of capital to such a country may be very sensitive to the level of 

its corporate income tax. 

In contrast, the international supply of capital in a country that accounts for a large share of worldwide investment is likely to be less sensitive than in a smaller country 

to the after-tax rate of return that suppliers receive. Supply will be less affected if the country’s total demand for 

investment is large enough to influence the after-tax rate 

of return required in world capital markets. Supply may 

also be less sensitive if the country provides investment 

opportunities that cannot be found elsewhere.

From a purely international perspective, small countries 

are likely to choose low corporate income tax rates. Such 

countries are often more concerned than are nations with 

larger shares of worldwide investment about the effect of 

a higher corporate income tax rate on their ability to attract capital and the effect that such a choice may have on 

domestic labor productivity and real wages. In contrast, 

larger countries may worry less about the effects their tax 

rates have on international investors’ willingness to supply capital. Instead, their choices of corporate tax rates are 

likely be governed primarily by a broader range of policy 

considerations.

An international comparison of corporate income taxes 

should therefore account for differences among countries. 

Economies differ with regard to how much their taxes are 

likely to affect the international supply of capital and 

therefore the extent to which differences in tax rates will 

affect the overall amount of investment within each 

country. Although broad comparisons of tax rates can be 

informative, it is also useful to limit comparisons to 

countries that face similar opportunities and constraints 

in their attempts to balance the competing objectives of 

their tax policies.

Tax Rates and the Location of Income

In addition to their effect on the location of capital, international differences in corporate tax rates may also create 

significant incentives for multinational companies to engage in costly tax planning that aims, for tax purposes, to

25. In economic terms, the issue is whether investment within the 

country is large enough to influence the after-tax rate of return 

required by financial investors.

26. The amount of investment in a country can influence the after-tax 

rate of return required by financial investors, even if that country 

is small, if the country offers investors unique opportunities to 

reduce the riskiness of their investments. See Gordon and Hines, 

“International Taxation,” pp. 1948-1951.
CHAPTER ONE ANALYZING THE DISTORTING EFFECTS OF CORPORATE INCOME TAX SYSTEMS 9

alter, or recharacterize, where their income was earned.27

The motivation underlying that kind of behavior is the 

same as the motivation to locate investment in a country 

with low corporate tax rates: to raise the investment’s after-tax return by avoiding taxes. The outcome is analogous: it imposes economic efficiency costs and shifts tax 

revenue between countries. The mechanism, however, is a 

little different. Instead of placing capital in a low-tax 

country so that the profits generated by that investment 

are taxed at lower rates, a firm uses various tax-planning 

methods to recharacterize its profits—regardless of where 

they were actually earned—as originating in low-tax 

countries.

One such means of shifting income involves the choice of 

where to borrow and what method to use. Because interest expenses are deductible, a multinational corporation 

may shift taxable income by borrowing relatively more 

through affiliated companies in high-tax countries than 

they borrow through affiliates in low-tax countries. Corporations may also shift income out of a high-tax country 

by financing investments undertaken by an affiliated 

company in that country using direct loans from affiliates 

in low-tax countries.28

Internal transfer pricing provides another means for shifting profits out of high-tax countries. Multinational corporations engage in a substantial amount of international 

trade between affiliated companies located in different 

countries. A multinational firm may try to shift profits 

out of high-tax countries by setting their internal prices 

artificially high or low for goods or services that are 

traded between its business affiliates in different countries.29 For example, the firm may shift income out of a 

high-tax country when an affiliate in that country is paid 

too little for its export sales to affiliates in low-tax countries. It may also shift income when an affiliate in a hightax country pays too much for imports purchased from 

affiliates in low-tax countries. 

In such instances, the cross-country tax differentials may 

also influence where businesses choose to invest but in a 

more complicated way than by simply moving their production operations to low-tax countries. Instead, tax 

planning may require that businesses structure their activities in ways that make it easier to shift income. Such 

planning may result in economically inefficient behavior 

by the company, both in terms of how it must structure 

its operations and finances to shift the income and in 

terms of the direct costs that it must pay to acquire planning expertise and either avoid or resolve controversies 

with tax authorities.

The incentives to shift profits between two countries depend for the most part on the differences between statutory tax rates. That contrasts with the incentives for the 

location of capital used in production, which depend on 

the ways in which a wider range of tax provisions work 

together to determine the taxes imposed on new investment. When a company shifts profits from a high-tax to a 

low-tax country, the company pays tax on those profits at 

the lower statutory rate. The company’s tax saving equals 

the amount of profits shifted times the difference between the statutory tax rates in the two countries.

In that way, the shifting of income may also redistribute 

tax revenue between the two countries, as the company 

pays tax to the low-tax country—at a lower rate—instead 

of paying it to the high-tax country. As a result, only part 

of the revenue lost by the high-tax country represents a 

reduction in the taxes paid by the company. The rest is 

revenue gained by the low-tax country.

27. Gordon and Hines, “International Taxation,” pp. 1970-1975, discuss evidence that such incentives may have large effects on tax 

revenues and economic behavior.

28. The tax laws of some countries limit the extent to which borrowing can be used to shift taxable income. (An example is the U.S. 

tax code’s rules about the use of foreign tax credits and other laws 

that effectively constrain the amount of lending among affiliates.) 

Still, the paragraph describes the basic structure of a key aspect of 

multinational tax planning.

29. The United States and other member countries of the Organization for Economic Cooperation and Development impose limits 

on the ability of companies to manipulate such internal transfer 

pricing, generally on the basis of the arm’s-length principle. Under 

that approach, the “correct” price is the price at which companies 

or people would be willing to trade if those traders were not economically related. In many cases, determining the correct arm’slength price—especially when the item traded is unique, such as a 

patent or a trademark—is difficult. As a result, taxpayers and tax 

authorities often disagree about the correct price. 

2

Comparing the United States’ Corporate Income

Tax Rates with Those of Other Countries

International comparisons of corporate income tax 

rates are potentially difficult to carry out, for several reasons: effective tax rates may be measured in a variety of 

ways, the differences among countries’ tax rates may distort aspects of economic behavior, and the characteristics 

of countries’ economies may differ and interact in ways 

that affect how those nations’ tax systems should be compared. Further complicating such analyses are the existence of subnational corporate income taxes, differences 

between the ways that returns to investments financed by 

debt and by equity are taxed, and the various ways in 

which taxable income may be defined and calculated.1

On the one hand, comparisons that do not fully account 

for such intricacies must be interpreted with care. On the 

other, an attempt to account for all factors would quickly 

become unwieldy as countries and years were added to 

the analysis.

Rather than trying to account for all such factors, the 

Congressional Budget Office compared corporate tax systems across a number of countries and in various years, 

focusing on the systems’ simplest and most essential features. Its analysis begins with a comparison of statutory 

corporate tax rates and then considers the factors (such as 

depreciation and sources of financing) that are essential 

to understanding how the different countries’ tax systems 

affect economic incentives. The data that CBO used in 

its study come primarily from the work of M.P. Devereux, R. Griffith, and A. Klemm (see Box 2-1). 

An important goal of this international comparison is to 

characterize the influence that corporate taxes have on the 

incentives for businesses to invest. Every corporation invests in the assets it uses in its productive activities so that 

it can provide income to its financial investors. A business 

will invest only if it expects to earn enough income before 

taxes to pay those investors at least as much income after 

taxes as they could earn from other similar investments. 

Corporate taxes affect the incentives to invest when they 

raise the cost of capital by driving a wedge between the 

after-tax return required by financial investors and the return before taxes that investments must yield if they are 

to cover both taxes and investors’ returns. 

The Structure of Corporate Income 

Taxes 

In the United States, in addition to the national tax on 

corporate income, many states tax the portion of such income attributable to business activity within the state. In 

many other countries as well, corporate income taxes are 

imposed at both the national and subnational levels (see 

Table 2-1). International comparisons must take both 

levels of taxation into account.

The corporate income tax rules can be excruciatingly 

complicated, but most of their specific details may be ignored in favor of a basic understanding. Briefly, to determine its total corporate income tax, a business first calculates its taxable income. It then applies a schedule of 

statutory tax rates to that income and subtracts any tax 

credits.

To understand how corporate income tax rules affect the 

incentives for business investment requires combining 

statutory tax rates with the effects of legal provisions that 

define taxable income and allow for tax credits. The ecoCHAPTER

1. Still other complications arise from the ways in which a corporation’s foreign earnings are taxed at home. Complex provisions 

relating to foreign tax credits, deferral of tax payments, and other 

features of the tax code may cause companies’ investment and 

other business decisions to depend on more than just the tax rates 

imposed in different countries.
12 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Box 2-1. 

nomic construct that results is the effective marginal corporate income tax rate, which is defined as the percentage 

of the income from a marginal investment (an investment 

for which the income is just high enough to pay the cost 

of capital) that must be paid as corporate taxes.2 An increase in the effective marginal corporate tax rate will 

tend to reduce the amount of investment that a corporation seeks to undertake. For a particular after-tax return 

that investors require, a higher effective marginal rate implies that the threshold for businesses to undertake investments (the cost of capital) will be higher. As a result, 

fewer potential investments will provide businesses with a 

sufficiently high rate of return, and those firms’ investment will be reduced.

Effective marginal tax rates typically differ from statutory 

tax rates. If the tax code defined taxable income as always 

equal to economic income (see below) and provided no 

special tax credits, an international comparison of investment incentives could be based on a comparison of statutory tax rates alone. However, because the corporate tax 

rules cause taxable income to diverge from economic income, the rules for computing taxable income may be 

just as important as the statutory tax rates when measuring effective marginal corporate tax rates. 

Economic income from a business investment equals receipts minus expenses, with both measured on a real accrued basis—that is, as they accrue, adjusted for inflation. 

(The main types of expenses include the costs of labor 

compensation; purchases of raw materials, goods, and 

services; and the economic depreciation of a company’s 

capital assets.) In contrast, taxable income is defined by 

law; it reflects no adjustment for inflation and excludes 

some components of economic income earned from certain types of business activity, such as investment in research and development, oil exploration and extraction, 

and marketing. Economic income can be very difficult to 

measure, and the tax rules contain some practical compromises. For example, in many cases, it is not easy to 

measure the real accrued components of income, so the 

law defines some components of taxable income on the 

basis of the receipts and outlays that the business actually 

realizes.

Box 2-1.

Data and Methods for CBO’s Analysis

For this paper, the Congressional Budget Office primarily used information from a database prepared by 

M. P. Devereux, R. Griffith, and A. Klemm for the 

publication “Corporate Income Tax Reforms and International Tax Competition,” Economic Policy, vol. 

35 (October 2002), pp. 451-495. Another publication—M.P. Devereux and R. Griffith, “Evaluating 

Tax Policy for Location Decisions,” International Tax 

and Public Finance, vol. 10, no. 2 (March 2003), pp. 

107-126—presents the methods that the authors 

used to calculate effective marginal corporate tax 

rates. The data that Devereux, Griffith, and Klemm 

prepared are available at www.ifs.org.uk, the Web 

site of London’s Institute for Fiscal Studies (IFS); the 

site also provides documentation for the data sources 

and economic assumptions. Additional data on statutory tax rates for selected member countries of the 

Organization for Economic Cooperation and Development (those shown in italic type in Figure 2-1) 

were drawn from KPMG’s “Corporate Tax Rate Survey—2003,” available at www.in.kpmg.com/pdf/

2003CorprorateTaxSurveyFINAL.pdf [sic].

The basic economic assumptions incorporated in the 

calculations by Devereux, Griffith, and Klemm for 

their 2002 publication are described in detail on the 

IFS Web site. Specifically, those authors assumed 

the following: rates of economic depreciation were 

12.25 percent and 3.61 percent for machinery and 

industrial structures, respectively; inflation was 3.5 

percent in all years for all countries; and the real 

(inflation-adjusted) interest rate was 10 percent.

2. Note that this measure covers only corporate-level taxes; however, 

individual-level taxes may also affect investment incentives. 

Although international comparisons that accounted for taxes at 

the level of the individual would be informative, full consideration 

of the taxes paid by equity or debt investors would be substantially 

more difficult because the equity or debt investors of a particular 

country may reside there or in any other country and may be 

either individuals or other businesses. Corporate-level taxes provide important information about how the differences across 

countries affect international investment incentives.
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 13

Table 2-1.

Taxes on Corporate Income in OECD 

Countries in 2002 as a Percentage of 

Gross Domestic Product

Source: Congressional Budget Office based on Organization for 

Economic Cooperation and Development, Revenue Statistics of OECD Member Countries (Paris: Organization for 

Economic Cooperation and Development, 2004), Table 12.

Notes: Percentages include both national and subnational taxes on 

corporate income.

* = data not available.

Two common differences between economic income and 

taxable income in many countries’ tax systems are the 

treatment of interest and the treatment of depreciation. 

(There are other differences as well, but the approaches to 

interest and depreciation are the most critical.) Interest 

payments on debt that a corporation uses to finance investment are part of the economic income that the investment generates. In contrast, in figuring their taxable corporate income, corporations subtract the interest payments as an expense. For that reason, the tax imposed at 

the corporate level on the income from an investment depends on the extent to which that investment has been financed by shareholders (equity investors) or creditors 

(debt investors). 

Economic depreciation is the decrease in the value of a 

productive asset that occurs because the asset provides less 

remaining productivity as it ages. Consequently, a key 

component of the cost of using capital equipment is the 

rate at which it depreciates. Accounting based on economic principles would permit each firm to deduct that 

depreciation as an expense as it accrues. However, for tax 

purposes, firms must use a rate of depreciation derived 

from tax rules that usually specify the length of time over 

which an asset may be fully depreciated and how the asset’s loss in value should be distributed over those years. 

“Tax depreciation” may thus differ substantially from 

economic depreciation. 

Ultimately, the sum of deductions for tax depreciation of 

an asset equals the cost of purchasing it, but the value of 

deductions to the taxpayer depends on their timing—the 

depreciation schedule—which is determined by law. The 

deductions are more valuable when the period for them is 

shorter or when they are more concentrated in the earlier 

years of an asset’s useful life. In addition, because deductions for tax depreciation are based only on an asset’s purchase price and are not adjusted for subsequent inflation, 

the deductions become less valuable to the taxpayer when 

inflation is higher. Consequently, the differences between 

tax depreciation and economic depreciation mean that 

taxable income differs from economic income, which 

leads to variation in effective marginal tax rates. The 

difference between tax depreciation and economic depreciation may depend on the type of asset purchased; for 

example, those depreciation values may differ for machinery and structures. And because depreciation schedules 

for assets vary substantially from country to country, international comparisons of effective marginal tax rates 

must account for differences among them.

2.3

5.3

3.5

3.4

4.6

2.9

4.3

2.9

1.0

3.8

2.4

1.1

3.7

3.2

3.1

3.1

8.6

*

3.5

4.2

8.2

2.0

3.6

2.7

3.2

2.4

2.7

2.2

2.9

1.8

Unweighted average 3.4

Weighted average 2.5

Turkey

United Kingdom

United States

Percentage of GDP

Slovak Republic

Spain

Sweden

Switzerland

New Zealand

Norway

Poland

Portugal

Republic of Korea

Luxembourg

Mexico

Netherlands

Iceland

Ireland

Italy

Japan

France

Germany

Greece

Hungary

Canada

Czech Republic

Denmark

Finland

Country

Austria

Australia

Belgium
14 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Statutory Corporate Tax Rates

Many countries, including the United States, apply statutory tax rates to taxable corporate income according to a 

schedule—that is, they tax different portions of taxable 

income at different rates. CBO has limited the comparisons it presents to the top corporate tax rates in those 

schedules. An international comparison of, for example, 

intermediate statutory corporate tax rates would add little 

information about investment incentives because most 

corporate investment is undertaken by corporations that 

face the highest statutory rates.

The top statutory corporate tax rates in 2003 among the 

30 members of the Organization for Economic Cooperation and Development (OECD) ranged from 12.5 percent to 40.9 percent (see Figure 2-1 on page 22). The 

statutory rate for each country combined the top national 

corporate income tax rate with any subnational top corporate tax rates averaged across regions.3

 Thus, in the 

case of the United States, the top statutory rate imposed 

in 2003 at the federal level on business income subject to 

the corporate income tax was 35 percent, and the average 

top statutory corporate income tax rate imposed by states 

in that year added just over 4 percent (after accounting 

for the fact that state taxes are deducted from federal taxable income)—for a combined top statutory rate of 39.3

percent.

Among all OECD countries in 2003, the United States’ 

top statutory corporate tax rate was the third highest;4

 it 

was also higher than the top statutory rates in approximately 90 percent of those countries. The United States’ 

top rate of 39.3 percent was 6.3 percentage points higher 

than the median for all OECD countries (33.0 percent) 

and 4.4 percentage points higher than the upper quartile 

(34.9 percent).5 With a few exceptions, tax rates did not 

vary substantially across countries. Fourteen of the 

OECD countries had top statutory rates between 29.2 

percent (the lower quartile) and 34.9 percent (the upper 

quartile). 

With the exception of the United Kingdom, top statutory 

corporate tax rates among the Group of Seven (G7)

countries were close to the top statutory tax rate in the 

United States.6

 Among the OECD members, the G7 

countries are the most similar to the United States in the 

size of their economies, level of industrialization, and, 

probably, the degree to which the overall supply of capital 

and the corporate tax base are sensitive to corporate tax 

rates. The United States’ top statutory tax rate (39.3 percent) was only about 2.4 percentage points higher than 

the median rate for all other G7 countries (36.9 percent). 

Again, with the exception of the United Kingdom, the 

G7 countries had the highest top statutory corporate tax 

rates within the OECD.

Countries with the lowest top statutory corporate tax 

rates all have much smaller economies than that of the 

United States and account for much smaller amounts of 

investment (see Figure 2-2 on page 23). In general, 

OECD countries that account for smaller amounts of investment have lower statutory corporate tax rates (see Figure 2-3 on page 24). In those countries, the supply of 

capital and the size of the corporate tax base are probably 

more sensitive to corporate tax rates than they are in the 

larger countries.7

Similar patterns of statutory rates appear among a smaller 

group of 19 OECD countries for which a long history 3. For each country in which subnational corporate taxes are deductible at the national level, such as in the United States, the combined statutory tax rate is the sum of the national and subnational 

tax rates minus the product of the national and subnational statutory tax rates—which is the value of the deduction.

4. CBO analyzed tax rates for 2003 because that is the latest year for 

which the necessary data are available for all of the OECD countries. More recently, the American Jobs Creation Act of 2004 

effectively reduced the United States’ highest federal statutory 

corporate tax rate for income from domestic production from 

35 percent to 31.85 percent through the allowance for a special 

deduction from taxable income. That reduction is phased in over 

several years. The deduction allowed under the law is 3 percent of 

income from domestic production in 2005 and 2006; 6 percent in 

2007, 2008, and 2009; and 9 percent thereafter. Other corporate 

income is still taxed in the United States at a top federal statutory 

rate of 35 percent.

5. The median is a value that divides the ranked countries in half. 

The upper quartile is a value that divides the upper quarter from 

the lower three-quarters of ranked countries. The lower quartile 

is a value that divides the lower quarter from the upper threequarters of countries. Those divisions are not always precise 

because a group of countries cannot always be divided exactly by 

two or four.

6. The G7 industrialized countries are Canada, France, Germany, 

Italy, Japan, the United Kingdom, and the United States.

7. The relationship between statutory corporate tax rates and investment appears to be essentially the same as the relationship 

between statutory corporate tax rates and gross domestic product 

when those factors are ranked in the same manner.
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 15

(since at least 1982) of combined national and subnational top statutory rates and other important data are 

available for analysis (see Figure 2-4 on page 25). (The remaining analysis presented in this report is based on the 

countries shown in that figure.) Although that subgroup 

of 19 countries excludes a few smaller nations that had 

the lowest top statutory tax rates among all countries in 

the OECD, distributions for the total group and the subgroup are very similar. Among both groups, the United 

States and most of the G7 countries had the highest top 

statutory tax rates, and Ireland had the lowest. 

For the subgroup of 19 OECD countries, the top statutory rates have changed significantly since 1982 (see 

Figure 2-5 on page 26). The Tax Reform Act of 1986 

substantially reduced the United States’ top statutory corporate tax rate; however, policymakers increased it in 

1993 by 1 percentage point. The median of the top statutory rates in the other 18 countries began falling before 

1986, primarily because of a reduction in the United 

Kingdom’s statutory rate—from 52 percent to 35 percent—between 1982 and 1986.8

 Top statutory rates in 

the other countries in the subgroup continued to decline 

steadily until the early 1990s; by 2003, the median of 

those rates had fallen from 50 percent in 1982 to 34 percent.

The variation across countries also lessened. In 1982, half 

of the countries had a top statutory rate between 43.8 

percent (the lower quartile) and 55.0 percent (the upper 

quartile), a range of 11.2 percentage points. That range 

had shrunk by more than half, to 5.3 percentage points, 

by 2003. The United States’ top statutory rate was near 

the median for other countries in 1982, briefly dropped 

below the lower quartile right after 1986, and has been 

near and finally above the upper quartile since the early 

1990s. Although the 1986 tax law substantially reduced 

the United States’ top corporate rate, other countries 

eventually reduced their rates even more.

The general historical patterns of change seen among the 

OECD nations were similar for the G7 countries when 

those countries were considered alone (see Figure 2-6 on 

page 27). The G7 nations reduced their top statutory 

rates over the period, although not by quite as much as 

many of the other OECD countries did: top rates of the 

G7 countries tended to be higher than those of non-G7 

countries throughout the period. Variation of the top 

statutory rates across the G7 countries was less in 2003 

than it had been in earlier years. In 1982, the United 

States’ top tax rate was just below the median of rates in 

other G7 countries. By 2003, the United States’ top rate 

equaled the upper quartile for other G7 countries. Variation across the G7 countries by 2003 was very small, 

however: tax rates at the lower and upper quartiles differed by just 4 percentage points.

To sum up, although the United States’ top statutory corporate rate is one of the highest among all OECD countries, it is comparable to the rates in other similar, large 

industrialized economies (members of the Group of 

Seven). That relatively high rate creates incentives for 

U.S. and foreign multinational companies to use international tax planning to reduce their U.S. taxable income 

by shifting it to low-tax countries. The rate also affects 

the incentives for business investment (discussed later). 

However, the countries most similar to the United States 

have made similar choices about their statutory rates.

Historical trends suggest that countries do not choose 

their tax rates independent of one another. After the 

United Kingdom and the United States reduced their 

corporate tax rates in the 1980s, other OECD countries 

reduced theirs, apparently in response and perhaps out of 

concern that they would otherwise lose investment or a 

portion of their tax base to other nations. Those other 

countries eventually reduced their own tax rates by even 

more than did the United States.9

Effective Marginal Corporate Tax Rates

Effective marginal corporate tax rates depend on a large 

number of factors. Although broad international comparisons ideally would account for those factors in a comprehensive manner, such studies are not currently available. 

Important differences among countries may nevertheless 

be distinguished through a relatively simpler assessment. 

Two factors—the treatment of depreciation and the treatment of different sources of financing—largely determine 

the difference between statutory and effective marginal 

8. During the same period, the United Kingdom eliminated full 

expensing for new investment in machinery.

9. M.P. Devereux, R. Griffith, and A. Klemm, in “Corporate Income 

Tax Reforms and International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495, relate the observed 

trends to recent studies on international tax competition. See also 

Rosanne Altshuler and Timothy J. Goodspeed, “Follow the 

Leader? Evidence on European and U.S. Tax Competition” 

(mimeo, Hunter College, 2003).
16 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

corporate tax rates and how that difference varies among 

countries. By factoring in the depreciation rules for representative types of assets, researchers can calculate countryspecific effective marginal corporate tax rates for investments in those assets—investments that may be financed 

by equity or debt. Such calculations reveal the basic differences and similarities in effective marginal corporate 

tax rates across countries. 

The Treatment of Depreciation

Researchers can determine whether the depreciation 

schedule for an asset is generous relative to economic depreciation by considering the value today of deductions 

for depreciation over the life of the asset—that is, the discounted present value. The depreciation schedule’s generosity influences the effective marginal corporate tax rate. 

For example, in the case of equity-financed investment:

B If the present value of deductions for depreciation exceeds the present value of economic depreciation, the 

effective marginal corporate tax rate will be less than 

the statutory tax rate.

B If the present value of deductions for depreciation is 

less than the present value of economic depreciation, 

the effective marginal rate will exceed the statutory 

rate.

B If the two depreciation values are equal, the effective 

marginal corporate tax rate will equal the statutory 

rate.

B If the present value of tax depreciation equals the full 

initial cost of the asset, the tax depreciation allowance 

is the economic equivalent of expensing. (Expensing is 

an allowance for immediate deduction of the full cost 

of an asset in the year that it is acquired.) Under a system that allows expensing, the effective marginal corporate tax rate for equity-financed investment is zero.

As discussed later, the generosity of depreciation deductions also influences the effective marginal corporate tax 

rates for debt-financed investment but in a slightly more 

complicated way.

CBO examined cross-country differences in tax depreciation rules for two representative classes of tangible assets.10 It considered machinery, which Devereux, Griffith, and Klemm assume will depreciate in real economic 

terms at an average rate of 12.25 percent a year; and industrial structures, which those authors assume will depreciate at an average real rate of 3.61 percent annually.11

Because depreciable assets may generally be divided into 

those whose useful lives are relatively short (such as machinery) and those whose lives are relatively long (such as 

structures), the two categories represent key classes of tangible assets and provide a useful basis for exploring international differences in marginal corporate tax rates.

Machinery. For the 19 OECD countries in 2003, the 

present value of depreciation deductions for an investment in machinery, measured as a percentage of the initial cost of the investment, ranged from 66.4 percent to 

87.1 percent (see Figure 2-7 on page 28). For the United 

States, the present value under the tax code in 2003 was 

78.5 percent of the asset’s initial cost, which is higher 

than the present value of such deductions in more than 

80 percent of the other OECD countries.12 In contrast, 

the present value of economic depreciation for machinery, under an assumption of economic depreciation of an 

estimated 12.25 percent, equals 55.1 percent of the value 

of an investment.13 Every country that CBO examined 

allowed depreciation deductions for machinery that

were more generous than they would have been if they 

had been based on the estimated value of economic

depreciation.

10. There many types of tangible assets—and intangible assets as 

well—with varying depreciation rates.

11. Devereux, Griffith, and Klemm, in “Corporate Income Tax 

Reforms and International Tax Competition,” employed those 

depreciation rates to prepare the data used in this report. The rates 

correspond to estimates by Charles R. Hulten and Frank C. 

Wykoff, “The Measurement of Economic Depreciation,” in 

Charles R. Hulten, ed., Inflation and the Taxation of Income from 

Capital (Washington, D.C.: Urban Institute Press, 1981), pp. 81-

125. Hulten and Wykoff estimated that annual average depreciation rates for metalworking machinery and industrial structures 

were 12.25 percent and 3.61 percent, respectively. 

12. In their calculations, Devereux, Griffith, and Klemm assumed 

that the real annual discount rate was 10 percent and that 

expected annual inflation was fixed for all years and all countries 

at 3.5 percent. The authors also provided calculations that used 

actual inflation in each country in each year (see the later discussion).

13. The computation of economic value shown in Figure 2-7 is based 

on the estimated real economic depreciation rate of 12.25 percent, 

discounted at a real interest rate of 10 percent. Thus, the present 

value is 55.1 percent = 12.25 percent/ (10 percent + 12.25 percent).
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 17

Some of the countries whose statutory tax rates were 

among the highest also had some of the largest tax depreciation deductions for machinery. For example, the 

United States and Italy, which had top statutory corporate tax rates that were some of the highest among the 19 

countries, each allowed depreciation deductions for machinery that were some of the most generous. Ireland, 

which had the lowest top statutory tax rate, was among 

the countries with the least generous depreciation deductions. Overall, according to the data, countries with 

higher statutory tax rates tend to have larger tax depreciation allowances (see Figure 2-8 on page 29). Notwithstanding, depreciation deductions vary widely, regardless 

of the level of the statutory tax rate. Such variation indicates the need, when measuring effective marginal tax 

rates, to combine depreciation deductions and statutory 

rates.14

Depreciation deductions for investment in machinery 

have generally declined in the 19 OECD countries since 

1982 (see Figure 2-9 on page 30). In the United States, 

the Tax Reform Act of 1986 reduced those deductions, 

which have not been altered since then. Among the 18 

other countries, the most significant changes occurred in 

the early to mid-1980s, when the United Kingdom and 

Ireland eliminated expensing for investments in machinery and Canada reduced its allowable depreciation deductions for machinery. Another noticeable change occurred 

in 2001, when Germany reduced the value of such deductions.

The depreciation deductions discussed thus far incorporated the assumption that annual inflation was 3.5 percent in every country in all years. That approach of keeping inflation constant highlights the effects of changes 

that countries made in their depreciation rules rather 

than capturing the changes that might have occurred coincidentally with alterations in other economic conditions.

When actual annual levels of inflation in each country are 

taken into account, the patterns of cross-country differences in depreciation deductions change very little. Thus, 

for 2003, although minor changes occur in the ranking of 

countries, the most obvious change is that depreciation is 

slightly more generous, on average, because actual annual 

inflation in most of the countries during that year was 

slightly less than 3.5 percent (see Figure 2-10 on 

page 31). If actual inflation had been higher, the present 

value of depreciation deductions would be lower—because countries do not allow the deductions to be adjusted upward for the effect that inflation has on the cost 

of replacing an asset. In contrast, economic depreciation 

incorporates upward adjustments for inflation. But even 

without those adjustments, the value of depreciation deductions for machinery in all of the countries in 2003 

was higher than the estimated value of economic depreciation.

Historical patterns of depreciation deductions also 

change only slightly when actual inflation is taken into 

account (see Figure 2-11 on page 32). Because inflation 

generally declined over the 1982-2003 period, depreciation deductions for machinery tended to become somewhat larger. Although changes in many countries’ tax 

rules for machinery tended to make such deductions 

slightly smaller, as Figure 2-9 shows, inflation declined by 

enough to more than offset that trend. In the United 

States, however, the drop in inflation was not sufficient to 

offset the effects of changes under the Tax Reform Act of 

1986.15

Industrial Structures. The present values of depreciation 

deductions for buildings among the 19 OECD countries 

in 2003 were substantially smaller than those for machinery (see Figure 2-12 on page 33). That difference stems 

mainly from a lower rate of economic depreciation for 

buildings than for machinery. In further contrast to the 

case of machinery, the value of depreciation deductions 

for structures was relatively smaller in many countries 

when compared with the value of economic depreciation: 

in 2003, nearly one-third of the countries allowed depreciation deductions whose value was less than the estimated value of economic depreciation. 

The United States’ tax rules provide one of the clearest 

examples of depreciation deductions that are lower in 

value for industrial structures than for machinery. Its depreciation rules for machinery were among the most generous of those in all countries examined; they resulted in 

deductions whose value was substantially greater than the 

14. Depreciation deductions for industrial structures are even more 

variable and are generally unrelated to statutory tax rates.

15. Devereux, Griffith, and Klemm provide computations based on 

actual inflation only for equity-financed investment in machinery. 

However, the effects that actual inflation would have on the computations for industrial structures and for debt-financed investment are also likely to be minor. 
18 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

estimated value of the asset’s economic depreciation. In 

contrast, the United States’ depreciation rules for industrial structures were among the least generous of those in 

all countries, resulting in deductions whose value was 

slightly less than that of estimated economic depreciation.

In general, the depreciation schedules for industrial structures have fallen in value since 1982 (see Figure 2-13 on 

page 34). The history of the United States’ tax rules provides a striking pattern of change. Between 1982 and 

1986, the tax depreciation rules for structures represented 

substantially larger deductions than would have been 

available using the estimated value of economic depreciation; those deductions were also substantially larger than 

those typically available under the depreciation rules for 

industrial structures in the other 18 OECD countries. 

The Tax Reform Act of 1986 reduced the value of depreciation deductions for U.S. industrial structures to 

roughly the level of the estimated value of economic depreciation. A further change in the law made tax depreciation after 1992 in the United States slightly less generous 

than economic depreciation.16

The value of depreciation deductions for industrial structures in other countries also declined over the roughly 20-

year period and moved toward the estimated value of economic depreciation. In addition, the variation across 

countries lessened, as shown by a gradually narrowing 

difference between 1982 and 2003 between the lower 

and upper quartiles. 

Summing Up. Compared with the value represented by 

the tax depreciation rules in the 18 other OECD countries that CBO examined and the estimated value of economic depreciation, the value that the United States’ 

rules represent tends to be more valuable for investments 

in machinery and significantly less valuable for investments in industrial structures. That pattern, combined 

with the United States’ relatively high statutory tax rates, 

implies that the corporate income tax in the United States 

distorts, to a greater degree than in most of the other 

countries, the marginal investment incentives associated 

with the choice between the two types of assets. 

Effective Marginal Corporate Tax Rates and the

Type of Investment Financing

The present value of depreciation may be used to compute effective marginal corporate tax rates on investments 

in machinery and structures. Those computations show 

how the top statutory rates and depreciation rules work 

together to affect the incentives for investment in the two 

types of assets. They also show the effect on those incentives of whether the investments are financed by equity or 

debt. 

Equity-Financed Investments in Machinery. For the 19 

OECD countries that CBO examined, effective marginal 

corporate tax rates for equity-financed investments in 

machinery in 2003 were considerably lower than top statutory tax rates (compare Figure 2-14 on page 35 with 

Figure 2-4 on page 25). The median effective marginal 

corporate rate was only 20.6 percent, considerably below 

the median top statutory rate of 34.0 percent. The finding of lower effective marginal corporate rates held true 

for all 19 countries because the value of tax depreciation 

deductions for structures and equipment was higher than 

the value of economic depreciation.

The United States’ effective marginal corporate tax rate 

for machinery in 2003 (23.6 percent) was only slightly 

higher than the median rate for the 18 other OECD 

countries (20.6 percent) and about the same as the median rate for the other G7 countries (23.2 percent). Although the United States had one of the highest top statutory corporate tax rates among the 19 countries, its 

relatively larger depreciation deductions for machinery 

helped lower its effective marginal tax rate relative to the 

median for the other OECD nations. 

Over the past two decades, the United States’ effective 

marginal corporate tax rates for equity-financed investment in machinery have remained relatively constant, 

whereas those rates for the 18 other OECD countries 

have generally declined (see Figure 2-15 on page 36). 

Even though the Tax Reform Act of 1986 substantially 

reduced the top statutory corporate tax rate in the United 

States, the law also reduced the value of depreciation deductions for machinery, leaving the effective marginal 

corporate tax rate relatively unchanged. The lower top 

statutory corporate rate and smaller depreciation deduc16. The history of depreciation deductions since 1982 does not tell 

the whole story; an important factor is that in 1981, the United 

States’ depreciation rules were made more generous. Before that 

change, the value of the depreciation rule for buildings was about 

equal to the 1982 median value for the other 18 OECD countries.
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 19

tions had offsetting effects on effective marginal corporate tax rates for investments in machinery.17

In contrast to the United States’ relatively unchanged effective marginal rates for such investments, effective rates 

in the 18 other OECD countries declined between 1982 

and 2003, with the median falling from 31.8 percent in 

1982 to 20.6 percent in 2003. The primary force behind 

that decline—given that tax depreciation deductions for 

machinery over the period became only slightly less generous—was the drop in top statutory corporate tax rates 

in those countries. The combined effect was a significant 

reduction in those nations’ effective marginal corporate 

rates.

Because the United States’ effective marginal rates remained fairly constant and the other countries’ rates declined, the United States’ rates climbed from the first 

quartile for other countries in 1982 (21.2 percent) to the 

third quartile in 2003 (23.4 percent). In 1982, the 

United States’ effective marginal rate was low in comparison with the widely varying cross-country distribution of 

effective marginal rates—the lower and upper quartiles 

for other countries differed by 19.0 percentage points—

but in 2003, it was high relative to the much less dispersed cross-country distribution. 

Effective marginal corporate rates for equity-financed investment in machinery in the other G7 countries, like 

rates in the United States, actually increased slightly between 1982 and 2003 (see Figure 2-16 on page 37). The 

United States’ marginal rate almost matched the median 

rate for other G7 countries in both those years. Because 

the median top statutory rate for the other G7 countries 

declined by more than the United States’ top statutory 

rate did, the relative movement of rates compared with 

the other G7 countries resulted from the fact that the 

other G7 countries reduced their depreciation deductions 

for machinery by even more than the United States did. 

The increase in the lowest quartile for other G7 countries 

in the early 1980s reflects the United Kingdom’s elimination of expensing and Canada’s significant reduction of its 

depreciation deductions for machinery.

When calculations were based on the actual inflation experienced in each country rather than on a fixed rate of 

3.5 percent, effective marginal corporate tax rates for 

equity-financed investment in machinery were slightly 

lower for 2003 (see Figure 2-17 on page 38). The lower 

rates were the outcome of actual inflation that was 

slightly lower than 3.5 percent in 2003, on average, for 

the countries that CBO examined. As discussed earlier, 

depreciation deductions are worth more when inflation is 

lower than when it is higher. Those more valuable depreciation deductions reduced countries’ effective marginal 

corporate tax rates.

The historical patterns of effective marginal rates for each 

of the 19 OECD countries in each year also changed 

slightly when actual inflation was used in calculating rates 

(compare Figure 2-18 on page 39 with Figure 2-15 on 

page 36). Because actual inflation was lower than 3.5 percent, effective marginal rates in the early to mid-1980s 

declined more rapidly than they did when inflation was 

held constant. For G7 countries other than the United 

States, the fall in inflation made effective marginal rates 

decline between 1982 and 2003 (see Figure 2-19 on 

page 40). For those countries, lower inflation offset reductions in depreciation deductions for machinery.

Equity-Financed Investments in Industrial Structures.

Among the 19 OECD countries that CBO examined, effective marginal corporate tax rates for equity-financed 

investments in industrial structures differed less from top 

statutory rates than did effective marginal rates for machinery (see Figure 2-20 on page 41 and Figure 2-14 on 

page 35). The median effective marginal rate for structures among those countries was 28.7 percent, compared 

with the median top statutory rate of 34.0 percent. The 

G7 countries had some of the highest effective marginal 

tax rates for investments in industrial structures, reflecting the pattern of top statutory tax rates in those nations. 

The reason that effective marginal rates for industrial 

structures bear a closer resemblance to the top statutory 

rates is that the depreciation allowed for tax purposes 

tends to be closer to economic depreciation than is the 

case for machinery. In fact, several countries’ effective 

marginal tax rates for equity-financed investments in 

industrial structures—specifically, those of Canada, Germany, Japan, Spain, and the United States—exceed their 

top statutory rates. Those countries all allow deductions 

of depreciation for tax purposes that are smaller than the 

estimated economic depreciation occurring for industrial 

structures.

17. The 1986 tax reform law also eliminated the investment tax 

credit, which CBO did not examine in this analysis. If the effects 

of the tax credit had been taken into account, effective marginal 

corporate tax rates in the United States would have been lower in 

the period before 1987. 
20 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

The United States substantially increased tax depreciation 

in 1981, but then, when it reduced its top statutory rate 

in 1987, it cut depreciation as well. Those changes in the 

depreciation that the law allowed caused the United 

States’ effective marginal corporate tax rate for industrial 

structures to decline in 1981 and then rise slightly in 

1987, despite the drop in the top statutory rate (see Figure 2-21 on page 42). In 1993, the United States’ effective marginal rate increased again, this time by a slightly 

larger amount because of an increase in the top statutory 

rate and a reduction in allowed tax depreciation. By the 

mid-1990s, the United States’ effective marginal rate exceeded its value in the early 1980s but was lower than it 

had been before 1981. The United States’ effective marginal rate for industrial structures before 1981 roughly 

equaled the median for other countries in 1982, was 

somewhat below the median in the early to mid-1980s, 

and rose substantially above the upper quartile in the 

early 1990s. Those relative changes reflect the fact that in 

the other countries, top statutory rates declined by more 

and depreciation deductions for industrial structures declined by less than they did in the United States.

Effective marginal corporate rates among the G7 countries decreased by less than they did in the non-G7 countries. In 1979, the United States’ effective marginal rate 

was about the same as the median rate for the other G7 

countries; it fell below that median in 1981, roughly 

equaled it between 1987 and 1997, and was above the 

upper quartile by 2003 (see Figure 2-22 on page 43). 

Nevertheless, at 41 percent, the United States’ effective 

marginal rate in 2003 was somewhat closer to the median 

for other G7 countries (34.7 percent) than it was to the 

median for non-G7 countries (27.1 percent).

Debt-Financed Investments in Machinery. Effective marginal corporate tax rates for debt-financed investment 

may be negative if inflation is positive or if tax depreciation is more generous than economic depreciation. If the 

value of deductions based on tax depreciation equaled the 

value of economic depreciation and there was no inflation, the effective marginal corporate tax rate would be 

zero for debt-financed investment. In that case, the rate 

of return on a marginal investment (that is, the cost of 

capital) would equal the interest rate, resulting in no taxable income at the corporate level. In other words, because there was no corporate tax wedge, a corporate investment would be worthwhile as long as the investment 

paid a rate of return that was no smaller than the interest 

rate the company paid to finance the investment. Alternatively, if inflation was positive or tax depreciation 

exceeded economic depreciation, the cost of capital 

would be less than the real interest rate, and the effective 

marginal corporate tax rate would be negative for debtfinanced investment. Under such conditions, an investment might be worthwhile to a corporation even if the 

investment paid a real rate of return that was less than the 

real rate of interest.18

Among the 19 OECD countries that CBO examined, the 

United States and most of the other G7 countries had 

some of the lowest (most negative) effective marginal corporate tax rates on debt-financed investments in machinery in 2003 (see Figure 2-23 on page 44). Those countries (the United States and most of the G7 nations) also 

were among the countries that had the highest top statutory tax rates. When tax depreciation is greater than economic depreciation and inflation is positive, countries 

with the highest statutory tax rates will tend to have the 

lowest (most negative) effective marginal tax rates on 

debt-financed investment. That pattern is most pronounced for the United States and Italy, because their 

statutory tax rates in 2003 were among the highest and 

their tax depreciation deductions for machinery were 

among the largest. The (tax-exclusive) effective marginal 

corporate tax rate of -45.9 percent for the United States 

implies that a corporation will find an investment in machinery financed by debt at a real interest rate of 10 percent worth undertaking as long as the investment is expected to pay a real rate of return that exceeds 5.41 

percent (the cost of capital), which is 45.9 percent below 

the real interest rate.

The G7 countries had some of the lowest effective marginal corporate tax rates on debt-financed investment 

among the 19 countries CBO studied because they provided substantial deductions for tax depreciation and had 

top statutory tax rates that were among the highest levied 

by the 19 countries. Ireland had the highest effective marginal corporate tax rate on debt-financed investment in 

machinery because it had the lowest top statutory rate 

and the least generous tax depreciation deductions.

18. If the value of deductions for tax depreciation equaled the value of 

economic depreciation but inflation was positive, the effective 

marginal tax rate on debt-financed investment would still be negative because the corporation could deduct nominal interest (real 

interest plus inflation), even though its taxable income, before 

deductions for interest, included only the real economic return to 

an investment.
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 21

The United States’ effective marginal rate increased substantially in 1987 because the Tax Reform Act of 1986 reduced both the top statutory tax rate and deductions for 

tax depreciation (see Figure 2-24 on page 45). Because effective marginal rates for equity-financed investment in 

machinery changed very little, the 1986 law substantially 

reduced the corporate-level bias toward debt-financed 

investment in machinery in the United States. That 

trend is also evident among the 18 other OECD countries in CBO’s analysis: effective marginal rates for equityfinanced investment declined substantially while the 

(negative) effective marginal rate for debt-financed investment substantially increased. CBO found similar patterns among the G7 countries when they were considered 

as a separate group (see Figure 2-25 on page 46).

The overall patterns for effective marginal corporate tax 

rates on debt-financed investment imply that, compared 

with the corporate income tax in the 18 other OECD 

countries, the United States’ levy induces a stronger bias 

toward the use of debt financing for investments in machinery. For all 19 countries, including the United States, 

that bias diminished between 1982 and 2003.19

Summing Up. Compared with effective marginal corporate tax rates among the broad group of the 18 other 

OECD countries, rates in the United States in 2003 were 

close to the group’s average for equity-financed investments in machinery, substantially above the average for 

equity-financed investments in industrial structures, and 

substantially below the average for debt-financed investments in machinery. 

Compared with the average effective marginal corporate 

tax rate for equity-financed investment in machinery 

among other members of the G7, the rate in the United 

States was about the same. For equity-financed investments in industrial structures, the United States’ marginal 

rate exceeded the average for the other G7 countries but 

by only half as much as it exceeded the average for the 

broader group of 18 OECD countries. For debt-financed 

investments in machinery, the United States’ effective 

marginal rate was below the average for the other G7 

countries but not by as much as it was when compared 

with the broader group of OECD countries.

The United States’ effective marginal corporate tax rate is 

relatively high for equity-financed investments but relatively low for debt-financed investments. Thus, the extent to which effective marginal tax rates distort decisions 

about international investments depends on how the investments are financed. For example, although the 

United States’ effective marginal corporate tax rates for 

equity-financed investments are higher than the average 

for the other OECD countries, rates for investments financed by a combination of debt and equity may be 

lower than the average if a sufficient fraction of the investment is financed by debt.

19. CBO does not present computations of effective marginal corporate tax rates for debt-financed investment in industrial structures 

because those computations are not available from Devereux, 

Griffith, and Klemm. If those rates had been computed, they 

would have been negative and exhibited patterns very similar to 

those evident among the effective marginal rates for debt-financed 

investment in machinery. The marginal tax rates for debt-financed 

investment in industrial structures would not be quite as negative 

as the corresponding rates for machinery because depreciation 

deductions for industrial structures are generally less generous (relative to economic depreciation) than they are for machinery.
22 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-1.

Top Statutory Corporate Tax Rates in All OECD Countries, 2003

(Ranking, by tax rate, as a percentage of countries)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495; and KPMG, “Corporate Tax Rate Survey—

2003,” available at www.in.kpmg.com/pdf/2003CorprorateTaxSurveyFINAL.pdf [sic].

Notes: The position of the vertical bars shows the countries’ top statutory tax rates, which include both national and subnational taxes; the 

exact value of the tax rate appears next to each name. The height of each vertical bar indicates a country’s percentage ranking by its 

top statutory rate relative to all OECD countries displayed. The Group of Seven industrialized countries appear in boldface type; the 

subgroup of OECD countries that CBO examined in its analysis appear in roman type. Italic type indicates the remaining members of 

the OECD.

OECD = Organization for Economic Cooperation and Development.

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45

Ireland, 12.5

Slovak Republic, 25.0

Poland, 27.0

Norway, Sweden, 28.0

Finland, 29.0

Republic of Korea, 29.7

Australia, Denmark, United Kingdom, 30.0

New Zealand, Portugal, Turkey, 33 .0

Luxembourg, 30.4

Switzerland, 33.7

Czech Republic, 31.0

Austria, Belgium, Mexico, 34.0

Netherlands, 34.5

Greece, Spain, 35.0

France, 35.4

Canada, 35.6

Italy, 38.3

Top Statutory Corporate Tax Rate

United States, 39.3

Japan, 40.9

Germany, 39.6

Hungary, Iceland, 18.0
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 23

Figure 2-2.

Gross Fixed-Capital Formation in OECD Countries, 2003

(Billions of dollars)

Source: Congressional Budget Office based on Organization for Economic Cooperation and Development, Main Economic Indicators (Paris: 

Organization for Economic Cooperation and Development, 2005).

Note: Fixed capital is any kind of real or physical capital that is not used up in the production of a product—for example, structures or 

machinery.

Iceland

Luxembourg

Slovak Rep.

New Zealand

Hungary

Czech Rep.

Finland

Ireland

Portugal

Turkey

Norway

Poland

Denmark

Greece

Sweden

Austria

Belgium

Switzerland

Netherlands

Australia

Mexico

Canada

Rep. of Korea

Spain

Italy

United Kingdom

France

Germany

Japan

United States

0 500 1,000 1,500 2,000 2,500

2

5

8

19

21

26

30

34

35

38

38

40

45

46

49

57

60

70

105

108

126

173

182

237

288

309

345

459

1,047

2,037
24 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-3.

OECD Countries’ Top Statutory Corporate Tax Rates Relative to

Total Investment, 2003

(Ranking by top statutory corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495; and Organization for Economic Cooperation 

and Development, Main Economic Indicators (Paris: Organization for Economic Cooperation and Development, 2005).

Note: Top statutory corporate tax rates include both national and subnational taxes.

0

5

10

15

20

25

30

35

0 5 10 15 20 25 30 35

Iceland

Luxembourg

Slovak Rep.

New Zealand

Hungary

Czech Rep.

Finland

Ireland

Portugal

Turkey

Norway

Poland

Denmark

Greece

Sweden

Austria

Belgium

Switzerland

Netherlands

Australia

Mexico

Canada

Rep. of Korea

Spain

Italy

United Kingdom

France

Germany

Japan

United States

Ranking by Gross Fixed-Capital Formation
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 25

Figure 2-4.

Top Statutory Corporate Tax Rates in Selected OECD Countries, 2003

(Ranking, by tax rate, as a percentage of countries)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: The position of the vertical bars shows the countries’ top statutory tax rates, which include both national and subnational taxes; the 

exact value of the tax rate appears next to each name. The height of each vertical bar indicates a country’s percentage ranking by its 

top statutory rate relative to the selected OECD countries displayed. The Group of Seven industrialized countries appear in boldface 

type. 

OECD = Organization for Economic Cooperation and Development.

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45

Ireland, 12.5

Norway, Sweden, 28.0

Finland, 29.0

Germany, 39.6

Australia, United Kingdom, 30.0

Portugal, 33 .0

Switzerland, 33.7

Austria, Belgium , 34.0

Netherlands, 34.5

Greece, Spain, 35.0

France, 35.4

Canada, 35.6

Italy, 38.3

Japan, 40.9

United States, 39.3

Top Statutory Corporate Tax Rate
26 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-5.

Top Statutory Corporate Tax Rates in the United States Compared with Summary 

Measures of Top Statutory Rates for Selected OECD Countries

(Top statutory corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: For this analysis, selected members of the Organization for Economic Cooperation and Development are Australia, Austria, Belgium, 

Canada, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and 

the United Kingdom.

Top statutory corporate tax rates include both national and subnational taxes.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

0

10

20

30

40

50

60

United States

Upper Quartile, OECD

Lower Quartile, OECD

Median, OECD
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 27

Figure 2-6.

Top Statutory Corporate Tax Rates in the United States Compared with Summary 

Measures of Top Statutory Rates for the Other G7 Industrialized Countries

(Top statutory corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: The G7 industrialized countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

Top statutory corporate tax rates include both national and subnational taxes.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

0

10

20

30

40

50

60

United States

Median, G7

Lower Quartile, G7

Upper Quartile, G7
28 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-7.

Present Value of Depreciation Deductions for Investments in Machinery in 

Selected OECD Countries, 2003

(Ranking, by present value of deductions, as a percentage of countries)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: The position of the vertical bars shows the present value of the depreciation deductions that each country provides as a percentage of 

initial investment value; the exact value appears next to each name. The height of each vertical bar indicates a country’s percentage 

ranking by the value of its deductions relative to the selected OECD countries displayed. The Group of Seven industrialized countries 

appear in boldface type. 

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and an annual rate of inflation of 3.5 percent.

Economic depreciation is the decrease in value of a productive asset that occurs because the asset provides less remaining productivity as it ages.

OECD = Organization for Economic Cooperation and Development.

0

10

20

30

40

50

60

70

80

90

100

50 60 70 80 90 100

Australia, Austria, Ireland, 66.4

Norway, 67.3

Greece, 87.1

Germany, 71.0

Spain, Sweden, Switzerland, 77.9

Belgium, 75.1

France, 77.5

Canada, 73.2

Italy, 82.2

Finland, Japan, Netherlands, United Kingdom, 73.3

United States, 78.5

Estimated Economic

Depreciation, 55.1

Portugal, 78.9

Present Value of Deductions as a Percentage of Initial Investment Value
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 29

Figure 2-8.

Relationship Between Top Statutory Corporate Tax Rates and Depreciation 

Deductions for Investments in Machinery in Selected OECD Countries, 2003

(Present value of depreciation deductions)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Note: For this analysis, selected members of the Organization for Economic Cooperation and Development are Australia, Austria, Belgium, 

Canada, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and 

the United Kingdom.

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and an annual rate of inflation of 3.5 percent.

0

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45

Ireland

Greece

United States

Italy

Top Statutory Corporate Tax Rate
30 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-9.

Depreciation Deductions for Investments in Machinery in the United States 

Compared with Summary Measures of Depreciation Deductions for Selected 

OECD Countries

(Present value of deductions as a percentage of initial investment value)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: For this analysis, selected members of the Organization for Economic Cooperation and Development are Australia, Austria, Belgium, 

Canada, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and 

the United Kingdom.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and an annual rate of inflation of 3.5 percent.

Economic depreciation is the decrease in value of a productive asset that occurs because the asset provides less remaining productivity as it ages.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

0

50

60

70

80

90

100

United States

Estimated Economic Depreciation

Upper Quartile, OECD

Median, OECD

Lower Quartile, OECD
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 31

Figure 2-10.

Present Value of Depreciation Deductions for Investments in Machinery in 

Selected OECD Countries Based on Actual Inflation, 2003

(Ranking, by present value of deductions, as a percentage of countries)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: The position of the vertical bars shows the present value of the depreciation deductions that each country provides as a percentage of 

initial investment value; the exact value appears next to each name. The height of each vertical bar indicates a country’s percentage 

ranking by the value of its deductions relative to the selected OECD countries displayed. The Group of Seven industrialized countries 

appear in boldface type. 

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and on each country’s actual 

annual rate of inflation in 2003.

Economic depreciation is the decrease in value of a productive asset that occurs because the asset provides less remaining productivity as it ages.

OECD = Organization for Economic Cooperation and Development.

0

10

20

30

40

50

60

70

80

90

100

50 60 70 80 90 100

 Ireland, 65.5

Australia, 67.5

Greece, 86.8

Germany, 75.2

Sweden, 80.4

Netherlands, 74.5

Japan, 79.1

Canada, United Kingdom, 74.2

Italy, 82.9

United States, 80.3

Estimated Economic Depreciation, 55.1

Norway, 68.5

Austria, 70.6

Finland, 75.7

Belgium, 78.2

Spain, 78.4

Portugal, 79.4

Switzerland, 81.9

France, 79.6

Present Value of Deductions as a Percentage of Initial Investment Value
32 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-11.

Depreciation Deductions for Investments in Machinery in the United States 

Based on Actual Inflation Compared with Summary Measures of Depreciation 

Deductions for Selected OECD Countries

(Present value of depreciation deductions)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: For this analysis, selected members of the Organization for Economic Cooperation and Development are Australia, Austria, Belgium, 

Canada, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and 

the United Kingdom.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and on each country’s actual 

annual rate of inflation in each year.

Economic depreciation is the decrease in value of a productive asset that occurs because the asset provides less remaining productivity as it ages.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

0

50

60

70

80

90

100

Estimated Economic Depreciation

United States

Upper Quartile, OECD

Lower Quartile, OECD

Median, OECD
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 33

Figure 2-12.

Present Value of Depreciation Deductions for Investments in Industrial 

Structures in Selected OECD Countries, 2003

(Ranking, by present value of deductions, as a percentage of countries)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: The position of the vertical bars shows the present value of the depreciation deductions that each country provides as a percentage of 

initial investment value; the exact value appears next to each name. The height of each vertical bar indicates a country’s percentage 

ranking by the value of its deductions relative to the selected OECD countries displayed. The Group of Seven industrialized countries 

appear in boldface type. 

For this comparison, calculations are based on an annual rate of economic depreciation of 3.61 percent and an annual rate of inflation 

of 3.5 percent.

Economic depreciation is the decrease in value of a productive asset that occurs because the asset provides less remaining productivity as it ages.

OECD = Organization for Economic Cooperation and Development.

0

10

20

30

40

50

60

70

80

90

100

10 20 30 40 50 60

Greece, 52.7

Germany, Spain, 24.3

Australia, Ireland, Netherlands, United Kingdom, 31.6

Japan, 16.4

Canada, 24.0

Italy, 41.6

United States, 21.2

Estimated Economic

Depreciation, 26.5

Austria, 31.3

Finland, 38.2

Belgium, 50.3

Switzerland, 41.7

France, Portugal, Sweden, 38.0

Present Value of Deductions as a Percentage of Initial Investment Value

Norway, 25.5
34 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-13.

Depreciation Deductions for Investments in Industrial Structures in the United 

States Compared with Summary Measures of Depreciation Deductions for 

Selected OECD Countries

(Present value of depreciation deductions)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: For this analysis, selected members of the Organization for Economic Cooperation and Development are Australia, Austria, Belgium, 

Canada, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and 

the United Kingdom.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 3.61 percent and an annual rate of inflation 

of 3.5 percent.

Economic depreciation is the decrease in value of a productive asset that occurs because the asset provides less remaining productivity as it ages.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

0

10

20

30

40

50

60

United States

Estimated Economic

Depreciation

Upper Quartile, OECD

Median, OECD

Lower Quartile, OECD
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 35

Figure 2-14.

Effective Marginal Corporate Tax Rates for Equity-Financed Investments in 

Machinery in Selected OECD Countries, 2003

(Ranking, by tax rate, as a percentage of countries)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

The position of the vertical bars shows the countries’ effective marginal tax rates, which include both national and subnational taxes; 

the exact value of the tax rate appears next to each name. The height of each vertical bar indicates a country’s percentage ranking by 

its effective marginal rate relative to all OECD countries displayed. The Group of Seven industrialized countries appear in boldface 

type. 

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and an annual rate of inflation of 3.5 percent.

OECD = Organization for Economic Cooperation and Development.

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45

Ireland, 9.7

Sweden, 16.1

Finland, 19.5

United States, 23.6

United Kingdom, 20.3

Portugal, 18.8

Switzerland, 20.0

Austria, 17.4

Netherlands, 23.9

Greece, 13.4

France, 21.6

Canada, 24.8

Italy, 19.7

Japan, 29.2

Spain, 20.9

Norway, 22.1

Belgium, 22.2

Australia, 24.3

Germany, 29.7

Effective Marginal Corporate Tax Rate
36 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-15.

Effective Marginal Corporate Tax Rates for Equity-Financed Investments in 

Machinery in the United States Compared with Summary Measures of Effective 

Marginal Tax Rates for Selected OECD Countries

(Effective marginal corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

For this analysis, selected members of the Organization for Economic Cooperation and Development are Australia, Austria, Belgium, 

Canada, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and 

the United Kingdom.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and an annual rate of inflation of 3.5 percent.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

0

5

10

15

20

25

30

35

40

45

50

55

60

Upper Quartile, OECD

Lower Quartile, OECD

United States

Median, OECD
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 37

Figure 2-16.

Effective Marginal Corporate Tax Rates for Equity-Financed Investments in 

Machinery in the United States Compared with Summary Measures of Effective 

Marginal Tax Rates for the Other G7 Industrialized Countries

(Effective marginal corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

The G7 industrialized countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and an annual rate of inflation of 3.5 percent.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

0

5

10

15

20

25

30

35

40

45

50

55

60

Upper Quartile, G7

Lower Quartile, G7

United States

Median, G7
38 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-17.

Effective Marginal Corporate Tax Rates for Equity-Financed Investments in 

Machinery in Selected OECD Countries Based on Actual Inflation, 2003

(Ranking, by tax rate, as a percentage of countries)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

The position of the vertical bars shows the countries’ effective marginal tax rates, which include both national and subnational taxes; 

the exact value of the tax rate appears next to each name. The height of each vertical bar indicates a country’s percentage ranking by 

its effective marginal rate relative to all OECD countries displayed. The Group of Seven industrialized countries appear in boldface 

type. 

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and on each country’s actual 

annual rate of inflation in 2003.

OECD = Organization for Economic Cooperation and Development.

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45

Ireland, 9.9

Sweden, 14.5

Finland, 18.1

United States, 22.1

United Kingdom, 19.7

Portugal, 18.4

Switzerland, 16.9

Austria, 15.9

Netherlands, 23.0

Greece, 13.6

France, 19.9

Canada, 24.1

Italy, 19.0

Japan, 24.4

Spain, 20.6

Norway, 21.4

Belgium, 20.0

Australia, 23.7

Germany, 26.6

Effective Marginal Corporate Tax Rate
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 39

Figure 2-18.

Effective Marginal Corporate Tax Rates for Equity-Financed Investments in 

Machinery in the United States Based on Actual Inflation Compared with 

Summary Measures of Effective Marginal Tax Rates for Selected OECD Countries 

(Effective marginal corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

For this analysis, selected members of the Organization for Economic Cooperation and Development are Australia, Austria, Belgium, 

Canada, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and 

the United Kingdom.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and on each country’s actual 

annual rate of inflation in each year.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

0

10

20

30

40

50

60

Upper Quartile, OECD

Lower Quartile, OECD

United States

Median, OECD
40 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-19.

Effective Marginal Corporate Tax Rates for Equity-Financed Investments in 

Machinery in the United States Based on Actual Inflation Compared with 

Summary Measures of Effective Marginal Tax Rates for the Other G7 

Industrialized Countries

(Effective marginal corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

The G7 industrialized countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and on each country’s actual 

annual rate of inflation in each year.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

0

10

20

30

40

50

60

United States Lower Quartile, G7

Upper Quartile, G7

Median, G7
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 41

Figure 2-20.

Effective Marginal Corporate Tax Rates for Equity-Financed Investments in 

Industrial Structures in Selected OECD Countries, 2003

(Ranking, by tax rate, as a percentage of countries)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

The position of the vertical bars shows the countries’ effective marginal tax rates, which include both national and subnational taxes; 

the exact value of the tax rate appears next to each name. The height of each vertical bar indicates a country’s percentage ranking by 

its effective marginal rate relative to all OECD countries displayed. The Group of Seven industrialized countries appear in boldface 

type. 

For this comparison, calculations are based on an annual rate of economic depreciation of 3.61 percent and an annual rate of inflation 

of 3.5 percent.

OECD = Organization for Economic Cooperation and Development.

0

10

20

30

40

50

60

70

80

90

100

0 5 10 15 20 25 30 35 40 45

Ireland, 11.7

Sweden, 24.7

Finland, 25.6

United States, 41.0

Australia, United Kingdom, 28.5

Portugal, 29.3

Switzerland, 28.7

Austria, 23.1

Netherlands, 32.9

Greece, 25.7

France, 31.6

Canada, 36.4

Italy, 33.0

Japan, 44.0

Spain, 35.7

Belgium, 25.8

Germany, 40.3

Effective Marginal Corporate Tax Rate

Norway, 28.3
42 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-21.

Effective Marginal Corporate Tax Rates for Equity-Financed Investments in 

Industrial Structures in the United States Compared with Summary Measures of 

Effective Marginal Tax Rates for Selected OECD Countries

(Effective marginal corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: Marginal tax rates before 1982 are presented only for the United States because data were not available for all of the other countries.

An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

For this analysis, selected members of the Organization for Economic Cooperation and Development are Australia, Austria, Belgium, 

Canada, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and 

the United Kingdom.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 3.61 percent and an annual rate of inflation 

of 3.5 percent.

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

0

10

20

30

40

50

60

Upper Quartile, OECD

United States

Lower Quartile, OECD

Median, OECD
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 43

Figure 2-22.

Effective Marginal Corporate Tax Rates for Equity-Financed Investments in 

Industrial Structures in the United States Compared with Summary Measures of 

Effective Marginal Tax Rates for the Other G7 Industrialized Countries

(Effective marginal corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

The G7 industrialized countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 3.61 percent and an annual rate of inflation 

of 3.5 percent.

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

0

10

20

30

40

50

60

Upper Quartile, G7

Lower Quartile, G7

United States

Median, G7
44 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-23.

Tax-Exclusive Effective Marginal Corporate Tax Rates for Debt-Financed 

Investments in Machinery in Selected OECD Countries, 2003

(Ranking, by tax rate, as a percentage of countries)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

The rates presented here are “tax-exclusive” rates, which means that the effective marginal tax rate is expressed as a percentage of 

the real rate of return (the real rate of interest) paid by a corporation to its investors after corporate taxes are paid. Tax-exclusive 

effective marginal rates are reported for debt-financed investment because some of the denominators for tax-inclusive rates (the tax 

rate is measured as a percentage of the rate of return before taxes—that is, the cost of capital) are close to zero.

The position of the vertical bars shows the countries’ effective marginal tax rates, which include both national and subnational taxes; 

the exact value of the tax rate appears next to each name. The height of each vertical bar indicates a country’s percentage ranking by 

its effective marginal rate relative to all OECD countries displayed. The Group of Seven industrialized countries appear in boldface 

type.

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and an annual rate of inflation of 3.5 percent.

OECD = Organization for Economic Cooperation and Development.

0

10

20

30

40

50

60

70

80

90

100

-60 -55 -50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0

Ireland, -8.1

Sweden, -28.5

Finland, -26.4

United States, -45.9

United Kingdom, -27.6

Portugal, -36.0

Switzerland, -36.1

Austria, -27.4

Netherlands, -33.1

Greece, -45.2

France, -38.6

Canada, -37.0

Italy, -50.4

Japan, -42.0

Spain, -38.0

Norway, -20.8

Belgium, -34.6

Australia, -23.1

Germany, -38.5

Effective Marginal Corporate Tax Rate
CHAPTER TWO COMPARING THE UNITED STATES’ CORPORATE INCOME TAX RATES WITH THOSE OF OTHER COUNTRIES 45

Figure 2-24.

Tax-Exclusive Effective Marginal Corporate Tax Rates for Debt-Financed 

Investments in Machinery in the United States Compared with Summary 

Measures of Effective Marginal Tax Rates for Selected OECD Countries

(Effective marginal corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

The rates presented here are “tax-exclusive” rates, which means that the effective marginal tax rate is expressed as a percentage of 

the real rate of return (the real rate of interest) paid by a corporation to its investors after corporate taxes are paid. Tax-exclusive 

effective marginal rates are reported for debt-financed investment because some of the denominators for tax-inclusive rates (the tax 

rate is measured as a percentage of the rate of return before taxes—that is, the cost of capital) are close to zero.

For this analysis, selected members of the Organization for Economic Cooperation and Development are Australia, Austria, Belgium, 

Canada, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and 

the United Kingdom.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and an annual rate of inflation of 3.5 percent.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

-110

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

Median, OECD

Upper Quartile, OECD

United States

Lower Quartile, OECD
46 CORPORATE INCOME TAX RATES: INTERNATIONAL COMPARISONS

Figure 2-25.

Tax-Exclusive Effective Marginal Corporate Tax Rates for Debt-Financed 

Investments in Machinery in the United States Compared with Summary 

Measures of Effective Marginal Tax Rates for the Other G7 Industrialized 

Countries

(Effective marginal corporate tax rate)

Source: Congressional Budget Office based on data from M.P. Devereux, R. Griffith, and A. Klemm, “Corporate Income Tax Reforms and 

International Tax Competition,” Economic Policy, vol. 35 (October 2002), pp. 451-495.

Notes: An effective marginal corporate tax rate is the percentage of the income from a marginal investment that must be paid as corporate 

income taxes. An investment is considered marginal when it pays just enough income to make the investment worthwhile.

The rates presented here are “tax-exclusive” rates, which means that the effective marginal tax rate is expressed as a percentage of 

the real rate of return (the real rate of interest) paid by a corporation to its investors after corporate taxes are paid. Tax-exclusive 

effective marginal rates are reported for debt-financed investment because some of the denominators for tax-inclusive rates (the tax 

rate is measured as a percentage of the rate of return before taxes—that is, the cost of capital) are close to zero.

The G7 industrialized countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

The median is a value that divides the ranked countries in half. The upper quartile is a value that divides the upper quarter from the 

lower three-quarters of ranked countries. The lower quartile is a value that divides the lower quarter from the upper three-quarters of 

countries. Those divisions are not always precise because a group of countries cannot always be divided exactly by two or four.

For this comparison, calculations are based on an annual rate of economic depreciation of 12.25 percent and an annual rate of inflation of 3.5 percent.

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

-110

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

Upper Quartile, G7

Median, G7 Lower Quartile, G7

United States