Measuring and characterizing the domestic effective tax rate of U.S. companies

While most research on effective corporate tax rates focus on the entire tax burden paid by corporations, we measure only the domestic effective tax rate, which is the ratio of the accounting measure of U.S. taxes and domestic pre-tax income of U.S. companies. This measure is the domestic tax burden on U.S. corporations. Using data on almost 5,000 companies between 2003-2010, we find that the domestic effective tax rate is affected by the company size (as measured by sales, total assets or PP&E), leverage, but also by the corporations’ level of internationality. The latter implies that surprisingly, the more the company is involved internationally, the less taxes it pays for every dollar of U.S. income. Additional findings show that U.S. corporations pay less tax domestically for each dollar earned during recessions (compared to expansions). This last finding contradicts the claims of some corporations that the tax policy does not take into account the financial damage that companies bear as a result of the last economic downturn. The importance of this research is with its contribution to the ongoing debate between policy makers, tax professionals and academia regarding the way tax policy in the U.S. should be shaped in view of changes and adjustments to tax policies around the world. The objectives of this research are primarily to understand what drives corporate taxes collected domestically in the U.S. and how it affects the tax burden. Results can be used by policy makers who sick to improve the existing corporate tax policy.