Corporate Taxes: Who Pays? What’s the Rate? How Much is Raised?
Corporate income taxes are levied by federal and state governments on business profits. The taxes, and more specifically, the tax rate, have become another contention point. Under President Trump, the Tax Cuts and Jobs Act of 2017 (TCJA) lowered the corporate tax rate from 35% to 21%, while some related business deductions and credits were reduced or eliminated. Prior to the 2017 legislation, the headline corporate tax rate had been at 35% since 1993 and had been on a downward trajectory since hitting 52% in 1952. Democratic Presidential nominee Joe Biden has stated that his administration “will ensure that corporate America finally pays their fair share in taxes.”
The Rate
Although the Federal headline rate is 21% today, when including the average state and local taxes, the statutory corporate income tax rate in the United States is 25.7%. This rate puts the United States in line with the average amongst the Organisation for Economic Co-operation and Development (OECD) member nations, according to the Tax Foundation. Notably, the Tax Foundation notes that before the TCJA passed, the United States had the highest combined statutory corporate income tax rate among the OECD nations at 38.9%, approximately 15 percentage points higher than the OECD average, which could have put U.S. corporations at a significant competitive disadvantage to their international peers.
Finding a true effective tax rate for business is elusive, however, since many U.S. businesses are not subject to the corporate income tax but are taxed as “pass-through” entities. Pass-through businesses do not face an entity-level tax. But their owners must include their allocated share of the businesses’ profits in their taxable income under the individual income tax. Pass-through entities include sole proprietorships, partnerships, limited liability companies (LLCs), and S-corporations.
The Amount
So how much revenue does the corporate income tax actually raise? The corporate income tax is the third-largest source of federal revenue, although substantially smaller than the individual income tax and payroll taxes. It raised $230.2 billion in the fiscal year 2019, 6.6% of all federal revenue, and 1.1% of gross domestic product (GDP). The relative importance of the corporate tax as a source of revenue declined sharply from the 1940s when the corporate tax raised 7% of federal revenues to the mid-1980s when it raised 1% of revenue. Since that time, it has averaged less than 2% of GDP, according to the Tax Policy Center. On a dollar basis, in 1952, corporate taxes raised $21.2 billion in 1993, $117.5 billion, hit a high of $370 billion in 2007 and $299.6 billion in 2016 before the TCJA was enacted.
The Burdened
So who really pays corporate taxes? On the face, the corporation that writes the check pays the tax. But if corporations seek to hit specific profitability levels, if taxes are raised, what actions do the corporation take to protect its profitability level? Some economists, such as Gregory Mankiw, suggest when the government levies a tax on a corporation, the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people—the owners, customers, or workers of the corporation. The corporate income tax reduces shareholders’ after-tax returns, causing them to shift some of their investments out of the corporate sector. Shareholders will shift some investments to non-corporate (“pass-through”) businesses and some to foreign businesses not subject to the U.S. corporate income tax. The shift to these other sectors lowers the after-tax return on investments in these sectors. The shifting of investment out of the corporate sector continues until after-tax returns—adjusted for risk—are equalized in the corporate and non-corporate sectors. Thus, the corporate income tax reduces investment returns in all sectors, according to The Tax Policy Center.
While the overall tax rate grabs the headlines, the subject of corporate taxation is significantly more multifaceted than a single number.
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