FORTUNE — The U.S. system for taxing corporate profits is outdated, ineffective at raising revenue, and creates perverse incentives for companies to shelter profits overseas. It is also, for most U.S. companies most of the time, a pretty good deal, which is one of the big reasons why any serious overhaul will be so difficult to achieve.
The quick opposition that greeted the ambitious reform plan released a month ago by Republican Ways & Means Committee chairman Dave Camp, who last week announced he would retire from Congress, was chalked up to the usual array of special interests. But the broader problem is that U.S. companies, particularly those that compete in international markets, have adapted remarkably well to the current tax system. Indeed, the tax burden on U.S. corporations has fallen over the three decades since the last major tax overhaul, in 1986, even as corporate profits have been rising to record levels.
This is contrary to most of what we hear in the tax debate. Much of the attention is on the U.S. statutory tax rate, which at 39% combined federal and state average, is now the highest in the advanced industrial world. Most other countries have been aggressively lowering their statutory rates in an effort to attract investments.
But 39% is a highly misleading number. The average U.S. corporation actually pays roughly 27%, on par with what other corporations pay in similarly sized advanced economies, and this effective rate has been steadily declining since the 1980s. Part of the reason is that Congress has sweetened corporate tax breaks for specific industries, including deductions or credits for domestic production, capital investments, and research and development.
The biggest reason most U.S. companies are not disadvantaged is the way in which the U.S. taxes — or mostly does not tax — the overseas earnings of its corporations. Foreign profits now account for more than 20% of total U.S. corporate profits — double the figure of two decades ago, and that percentage is much higher for big multinationals that drive the debate over corporate tax. In practice, U.S. corporations rarely pay much in U.S. taxes on foreign profits because they receive credit for taxes paid to foreign governments, and are allowed to avoid any U.S. tax payments as long as those profits are retained abroad. Companies are also increasingly adept at sheltering profits in tax havens that collect little or no tax on corporate profits.
The best available estimate suggests U.S. corporations face an effective tax rate (including all foreign and U.S. taxes) of just 15.7% on foreign profits. Of that, the U.S. Treasury actually collects only 3.3%, since most profits are never repatriated. U.S. companies are currently holding about $2 trillion offshore, in large part to avoid tax liabilities.
U.S.-based companies often complain that the U.S. system, which in theory requires companies to pay taxes on their profits “worldwide,” is a big competitive disadvantage. Most European countries have a “territorial” tax system, which taxes only domestically earned profits. But according to one study that calculated the global tax burden of the largest 200 European- and U.S.-based multinational corporations, U.S. corporations on average faced similar or lower effective tax rates than their European counterparts, though it varied by industry sector .
There are big problems in the corporate tax system, to be sure. Companies pay highly uneven effective tax rates depending on whether they qualify for tax breaks; research-intensive multinational companies like GE (GE), for example, usually face tax rates in the single digits, while retailers like Target (TGT) that depend on domestic sales pay close to the statutory rate. Companies with intangible assets like patents and trademarks, such as Apple (AAPL) or Pfizer (PFE), are more easily able to book profits in tax haven countries like Bermuda or Ireland. The largest tax havens account for 24% of reported foreign profits by U.S. multinationals, even though they represent just 1% of the global economy.
Deferral on foreign profits also creates incentives for companies to keep those profits offshore rather than re-invest them in the U.S., which is generating pressure in Congress for another “tax holiday” to encourage repatriation. Research suggests that deferral encourages corporations to invest more abroad than they otherwise would, though the effect is small. Other factors like lower wages, proximity to fast-growing markets, and government investment incentives matter much more for corporate investment decisions. Still, no country wants a tax system that in any way encourages foreign over domestic investments.
The prospects for a corporate tax reform that lowers the statutory rate and addresses some of these problems would seem brighter than they have in years. Both Republicans and Democrats have now developed comprehensive proposals that lay out the arithmetic for adopting different trade-off options in any agreement. But unfortunately the arithmetic may show that, for all their complaints, most U.S. companies — and particularly those competing in foreign markets — are doing pretty well under the current system. That is probably not a recipe for change.
Edward Alden is a senior fellow specializing in U.S. economic competitiveness at the Council on Foreign Relations. Rebecca Strauss is associate director of CFR’s Renewing America publications series. This article draws on research for the CFR report “Standard Deductions: U.S. Corporate Tax Policy.”