The OECD estimates that U.S. corporations pay face an average statutory tax rate of 39%, the second highest rate in the developed world. This is based on a combination of the federal statutory rate and a weighted-average of state-level tax rates.
But thanks to various tax breaks and loopholes, corporations actually pay far less than that.
“The current S&P 500 median effective tax rate of 30% is almost 10 percentage points below the statutory rate,” estimates Goldman Sachs’ David Kostin in his latest note to clients. “Over the last 10 years, fewer than 10% of S&P 500 firms have paid the statutory rate or higher. This is not a new trend. For the last 45 years, the median S&P 500 firm has paid an average effective rate more than 5 pp below the statutory rate.”
With the debt ceiling debate making a comeback, Kostin warns that these tax rates could get attract the spotlight once again.
“If media attention is not enough of a catalyst, the next round of debt- ceiling debates in the fall may steer discussion back to tax reform,” he said. “This week Max Baucus (D, Montana), Chairman of the Senate Finance Committee, said the committee will consider making changes to the US tax code. However, Minority Leader Mitch McConnell (R, Kentucky) said his party was not willing to raise revenue through higher corporate tax rates.”
Tax reform would likely have an uneven impact in the market.
“As politicians focus on corporate taxes, companies paying the lowest effective tax rates may continue to underperform those with higher rates,” warned Kostin.
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