Corporate income tax as a share of corporate profits

by on November 17, 2011 at 2:33 pm in Data Source, Economics, Law | Permalink

That is from Felix Salmon, or try this one, namely corporate income tax as a percentage of gdp:

I still think the corporate rate should be zero, but the corporate income tax is one of the most commonly over-villainized institutions by the intelligent Right.

Addendum: Kevin Drum offers up a related chart.

Scoop November 17, 2011 at 2:56 pm

The damage of the corporate income tax is less in the total that businesses pay in tax and more in the way it distorts their activities and in the way it advantages large companies (that can afford armies of tax lawyers and complex schemes for moving money around the world) over would-be competitors. The complexity of corporate tax law is a large barrier to entry in many, many fields and, apparently, something that you underrate as a driver of TGS.

kiwi dave November 17, 2011 at 2:58 pm

Exactly what I was going to say — in a sense, this proves the point against the corporate tax: the tax hardly brings in any revenue, so the justification for its distortionary effect on so many businesses is all the weaker.

Rahul November 17, 2011 at 3:04 pm

Could the tax code be reformed in a way that deters tax-evasive international money movements? Are the lawyers exploiting loopholes of a complicated tax code or is the difficulty fundamental.

Newt November 17, 2011 at 3:41 pm

You could coordinate corporate tax rates with the international average rates around 20% and then there would be little incentive to shift accounting profits overseas. That would be a pretty simple reform.

John Thacker November 17, 2011 at 4:00 pm

If our rate were closer to the international average, sure.

But our current tax system is built around heavily taxing the sort of companies that can’t do that easily– WalMart, insurance companies, car dealers, mom-and-pop’s– and not heavily taxing the true multinationals that can easily do their R&D or manufacturing or whatever overseas and figure out nice accounting tricks.

NAME REDACTED November 17, 2011 at 5:54 pm

WHich shifts R&D and manufacturing overseas.

Peter Schaeffer November 17, 2011 at 4:56 pm

Rahul,

“Could the tax code be reformed in a way that deters tax-evasive international money movements? Are the lawyers exploiting loopholes of a complicated tax code or is the difficulty fundamental.”

Yes, reforms are possible. The standard approach is “unitary taxation”. See http://taxjustice.blogspot.com/2009/06/another-step-towards-unitary-taxation.html for one concept.

Foobarista November 17, 2011 at 5:32 pm

Abolish corporate taxes and tax dividends as ordinary income. (I’m not 100% sure what to do with stock-related capital gains, but there’s definitely a part that should be taxed as ordinary income too, possibly inflation-indexed – but only if corporate taxes are abolished.)

For best results, this would have to be coordinated with similar state tax reforms.

TallDave November 17, 2011 at 4:14 pm

Yep. Massive deadweight losses in there.

Commentator November 19, 2011 at 12:15 am

First graph … in 1951 corporate income taxes were 96% of corporate profits? Is that what 0.96 means on the vertical axis? That can’t be right.

Vangel November 19, 2011 at 9:27 am

I agree. But there is another point that needs to be made. Corporate tax as a percentage of profits is as low as it is because much of what is being reported as ‘profit’ is just an accounting fiction, particularly in the financial services sector where mark to model rules allow both sides of the same zero-sum transaction to book a gain at the same time and other rules permit companies that are technically insolvent to report profits that are not real.

Ted November 17, 2011 at 2:59 pm

25% of corporate profits are paid in taxes (down from over 90% in the 1950s). What am I misreading?

Also: endorse Scoop’s point.

Peter Schaeffer November 17, 2011 at 4:14 pm

“25% of corporate profits are paid in taxes (down from over 90% in the 1950s). What am I misreading?”

A lot. The corporate profits tax rate was never 90%. In the early 1950s the corporate tax rate was around 50%. See http://www.bea.gov/national/nipaweb/SelectTable.asp for the source.

JWatts November 17, 2011 at 5:04 pm

The first graph agrees with Ted. The graph clearly shows corporate taxes were 90% of corporate profit during the early 1950′s & 75% in the late 50′s.

TallDave November 17, 2011 at 5:11 pm

That’s what you would THINK it shows, but no, it’s actually tax receipts over profits after taxes.

Peter Schaeffer November 17, 2011 at 9:02 pm

Jwatts,

Felix calls his chart “corporate income tax as a percentage of total corporate profits”

CP is “Corporate Profits After Tax”. FCTAX is “Tax Receipts on Corporate Income”.

Felix didn’t do his homework and (worse) has corrected his chart. Even worse, Tyler doesn’t appear to have noticed the error.

Scott Sumner November 17, 2011 at 3:02 pm

The problem with the corporate income tax is the tax rate, not the amount of revenue raised. The roughly 40% tax rate causes a lot of misallocation of resources. Indeed the low amount of revenue raised despite the tax rates being (tied with Japan) the highest in the developed world, shows just how inefficient the tax really is. If it raised far more revenue, its distorting effects might well be much smaller.

Replace the corporate tax with a payroll tax of x% on everyone making more than $100,000/year. Have x% be the tax rate that replaces the lost corporate tax revenue. That would help the poor, it would help the middle class, and it would help the rich. What’s not to like?

Rahul November 17, 2011 at 3:07 pm

40%? The rate seems 20% from the first plot. Is the difference a result of deductions or am I missing a part of the story?

dirk November 17, 2011 at 3:33 pm

The tax is applied before profits.

dbeach November 17, 2011 at 3:41 pm

No, it is not. Unprofitable firms do not pay any corporate taxes at all.

dbeach November 17, 2011 at 3:48 pm

Yes, the effective tax rate is far lower than the statutory rate because of the deductions. And yes, Scott is quite right that the high marginal rate causes distortion as firms alter their behavior to obtain tax deductions. For example, because interest payments but not dividends are tax-deductible, firms will tend to be over-leveraged relative to a more neutral tax regime.

John Thacker November 17, 2011 at 4:02 pm

40%? The rate seems 20% from the first plot. Is the difference a result of deductions

Yes. The statutory rate is very high. The deductions are very high, particularly for multinationals.

Insurance companies, retailers like WalMart, utilities, car dealers, mom and pop stores, they all pay at high rates, though.

A high statutory rate but a low effective rate is pretty terrible. All the distortion, none of the revenue.

NAME REDACTED November 17, 2011 at 5:26 pm

bingo!

Peter Schaeffer November 17, 2011 at 9:04 pm

Rahul,

The U.S. Federal corporate tax rate is 35%. State and local corporate tax rates are in addition (though they may be deductions for Federal purposes).

dbeach November 17, 2011 at 3:52 pm

I like this idea a lot, but my sense is that even though this would be good for corporations, it would not be good for corporate executives, and most of what I’ve seen suggests that executives tend to lobby on behalf of their own rather than their shareholders’ interests.

Andrew November 17, 2011 at 4:23 pm

Yeah, but aren’t corporate executives also shareholders (and usually large ones)? Without doing any math, and completely pulling this from thin air, I would imagine that they would end up about the same, maybe a little bit ahead if they tweak their compensation to include more stock and less salary.

Silas Barta November 17, 2011 at 4:11 pm

I thought the problem was that income doesn’t exist?

TallDave November 17, 2011 at 5:26 pm

But C corps don’t have pass-through, so would people just keep profits there? In theory the best solution would be taxing it all as pass-through, but that’s impractical.

So I think the real reason we have corporate tax rates is because it’s too inefficient to calculate the pass-through tax rate of the owners — if I owned .000001423% of a Vanguard index fund that owns .243% of McDonald’s for to weeks this year, what is my pass-through tax liability? Easier just to have the corporation pay at some similar rate.

I do think maybe they should just fold the dividend tax into the corporate rate, since that’s double tax, and eliminate capital gains taxes on corporate stock.

Patrick November 19, 2011 at 2:32 pm

I don’t think it’s that impractical. In your hypothetical Vanaguard and McDonald’s pay no tax, and you get taxed personally for dividends and capital gains.

I don’t think eliminating capital gains is the way to go. Because then corporations would substitute share buybacks for dividends. Or legally restructure their dividends as stock splits coupled with automatic sales. In short, capital gains need to be taxed if dividends are to be taxed.

Jim November 17, 2011 at 3:06 pm

All that matters is whether corporations pay more to be in the USA than they would to be
elsewhere.

Saying “Sure, we charge corporations more than anyone else in the world, but look — we could charge even more!” is Yglesias Level Stupid.

R. Pointer November 17, 2011 at 3:08 pm

This doesn’t seem to be of the same quality of posts as is normal on MR. Why should the inference be that the CIT doesn’t matter because, LOOK, they pay so little.

Don’t they work really hard to find ways to not pay a lot? Doesn’t rent-seeking lobbying destroy our democratic institutions?

gwern November 17, 2011 at 3:10 pm

Wonder if the gaming of the corporate income tax is related to http://econerdfood.blogspot.com/2011/10/benfords-law-and-decreasing-reliability.html

Charlie November 17, 2011 at 3:30 pm

The first graph illustrates federal taxes paid by corporations as a percent of total after-tax corporate profits. Poorly done. Obviously corporations did not pay 90% of their profits to taxes in the 1950s. A better graph shows total corporate taxes paid as a percent of total before-tax corporate profits: http://research.stlouisfed.org/fredgraph.png?g=3pv

This shows, more realistically, that corporations used to pay about 50% of their before-tax profits to taxes and now pay about 22%.

John Thacker November 17, 2011 at 4:04 pm

This shows, more realistically, that corporations used to pay about 50% of their before-tax profits to taxes and now pay about 22%.

And it’s largely a result of multinationals, combined with rates having gone down in foreign countries as well.

David Wright November 17, 2011 at 4:13 pm

Thank you! This answers my question about the totally nonsensical behavior of the original graph for the 1950s.

Peter Schaeffer November 17, 2011 at 4:54 pm

DW,

“This answers my question about the totally nonsensical behavior of the original graph for the 1950s.”

No. The graph actually shows taxes divided by after tax profits. Felix screwed up.

Peter Schaeffer November 17, 2011 at 4:15 pm

Charlie,

Yes. You can also get the raw profits and taxes data from http://www.bea.gov/national/nipaweb/SelectTable.asp.

Thomas November 17, 2011 at 3:32 pm

The day that Drudge links to a report of GE’s 57,000 page corporate tax return is maybe not the best day to defend the corporate income tax. 57,000 pages to raise no revenues is the reason to get rid of the corporate income tax, not a defense of it. (If you want a nice chart, the length of the return has doubled in five years. Tax revenues from GE have not doubled.)

Tom November 18, 2011 at 9:23 am

It’s probably doubled from all the bs green deductions they get. I’m sure they are happy for the extra paperwork and saved taxes it brings. File under crony capitalism.

anon November 19, 2011 at 10:10 am

+1

Miloslav November 17, 2011 at 3:35 pm

How would these graphs look like if they didn’t start just when the US started to pay down the massive war debt? Say since 1900?

dbeach November 17, 2011 at 3:40 pm

The only reason for keeping the corporate tax is to avoid tax evasion by wealthy individuals who incorporate themselves. But surely there’s a way to get around that, right?

My preferred policy option continues to be to eliminate the corporate tax and replace it with a carbon tax.

RP November 17, 2011 at 3:44 pm

Also the tax deductibility of interest payments vs dividend payments (ie tax shield) encourages businesses to lever up instead of paying dividends – which are doubly taxed anyway – having the two fold effect of growing massive through reinvestment and encouraging risk.

NAME REDACTED November 17, 2011 at 3:53 pm

Yep, which increases systematic risk in the economy.

JWatts November 17, 2011 at 5:10 pm

+1

NAME REDACTED November 17, 2011 at 3:48 pm

These graphs are a /really/ strong incentive to get rid of the corporate income tax.

dbeach November 17, 2011 at 3:54 pm

I’m tentatively in favor of it. Any ideas on how to prevent massive tax evasion as a result?

John Thacker November 17, 2011 at 4:07 pm

Any ideas on how to prevent massive tax evasion as a result?

Don’t forget that people, especially freelancers, already have the option of declaring everything a business expense, including personal expenditures. The IRS has some way of dealing with that. Plenty of people have already tried the corporation route. The IRS is used to dealing with it.

Heck, we’d save enough on enforcement of the confusing corporate income tax code that we could easily raise the audit rate enough to catch any extra people doing this.

Patrick November 19, 2011 at 2:35 pm

Yeah, eliminating the corporate income tax would reduce evasion attempts, not increase them.

Silas Barta November 17, 2011 at 4:05 pm

What am I missing? The corporate tax rate is 35% of profits. So the line should be at .35 back till when that was last changed.

If it’s lower than .35, then some corporations are losing money and paying no taxes … which they shouldn’t be. So I don’t see what the point of the comparison is. Except to play the usual game of “omg GE carried a loss forward and it was big enough to cancel what would otherwise be profits! They’re cheating the government out of revenue!!! How dare a corporation with no net income pay no net income tax!!!”

John Thacker November 17, 2011 at 4:09 pm

Only profits that are brought home are taxed. This may include profits that never re-enter the US, as our system encourages.

Of course, changing the system in one obvious way would just cause multinationals to divest foreign subsidiaries or else change their HQs to outside the USA.

Silas Barta November 17, 2011 at 4:11 pm

Ah, so it’s a *deliberately* misleading graph to post then. I thought it was just accidental.

TallDave November 17, 2011 at 4:48 pm

It’s not actually a graph of rates, it’s tax receipts over profits after taxes.

Peter Schaeffer November 17, 2011 at 4:53 pm

TD,

“It’s not actually a graph of rates, it’s tax receipts over profits after taxes.”

Yes, but Tyler and Felix don’t seem to understand that.

Silas Barta November 17, 2011 at 5:16 pm

I know it’s not a graph of rates, but it should approach the rate to the extent that all businesses are profitable and diverge to the extent they are not.

TallDave November 17, 2011 at 5:35 pm

No, I mean it’s not a graph of effective rates either.

At a 50% effective rate it actually equals 1 (50 over 100 – 50) and over 50% it exceeds 1.

It’s an odd graph.

I assumed they were not netting losses against profits, but I don’t really know, that’s an interesting point.

Silas Barta November 17, 2011 at 6:06 pm

No, I mean it’s not a graph of effective rates either.

I know it’s not; I thought I made clear that the thing they’re measuring should nevertheless *approach* the corporate tax rate. If it doesn’t do so, but only because these profits are actually earned offshore, that’s misleading. If it’s because they’re not actually making taxable profits, also misleading.

TallDave November 19, 2011 at 12:37 pm

If you play with the tax rate, you find the y-axis approaches the tax rate as it tends towards zero.

So, basically what this graph does is exaggerate the drop. Drum’s was a little better in that respect.

Patrick November 19, 2011 at 2:40 pm

The graph isn’t misleading- the tax code is. The reason why the receipts don’t approach 35% is because the tax code is littered with deductions so that almost no corporations actually pay 35%. 35% is a fiction. Canada has a similarly misleading rate that’s supposed to be 36%, but then right off the bat everyone gets a 10% rate reduction (called the General Rate Reduction). I’m not sure why it is structure like that, but it’s probably politics (i.e. the populace might anger if they perceive the corporate rates as too low).

Andrew' November 17, 2011 at 4:10 pm

Okay, show of hands, first who wants smaller corprations? Okay, next, who just wants control of big corporations?

Bill November 17, 2011 at 4:14 pm

The reality is the multinationals, who compete with domestic corporations that manufacture in the US, are able to reduce their tax exposure by some artful transfer pricing, and intellectual property licensing that reduce their taxes dramatically by offshoring value to low tax jurisdictions like Ireland. I am in favor of lower rates and cleaning up some of the MNC games.

You are seeing a focus now on corporate taxes because MNCs have money sitting abroad which, if they repatriate, they will have to pay taxes on. In addition, if you can cut some entitlements, you free up some money for corporate tax reduction. So, in effect, not unless the supercommittee acts will there be some money to play with.

Final note of caution as well: expect some looney economists that will say we can cut corporate taxes even morebecause this will cause x amount of growth, even though the tax cut would be scored by the CBO as adding to the deficit. Already you are hearing claims from conservatives that CBO should alter its scoring and do hyped up dynamic scoring.

dan1111 November 18, 2011 at 6:03 am

I agree with your first two paragraphs.

However, it is hardly “looney” to suggest that cutting corporate tax rates would cause growth. In fact, it seems rather obvious that it would do so. What implications this should have for tax rates and CBO scoring is a complex debate in which there is more than one non-crazy position.

Tom November 18, 2011 at 11:14 am

I’m not a ‘Laffer tax cuts will pay for themselves’ guy, but then again neither was Laffer.
That said, corporate taxes is probably the one example of a tax cut that could pay for itself.

BTW, dynamic scoring is the correct way to score unless you believe people never change the way the way they act in response to changed environment. And Obamacare killed any credibility CBO scoring had, no matter which side of the issue you may be on.

TallDave November 17, 2011 at 4:15 pm

Wait, wait… does this chart really say that the corporate income tax in the early 1950s was over 90% of corporate profits?

No wonder the country boomed as they were reduced from that level. Not even Communists would do that today.

Peter Schaeffer November 17, 2011 at 4:52 pm

TD,

See many other comments. Felix screwed up. The remarkable thing is that Tyler didn’t catch it.

TallDave November 17, 2011 at 5:36 pm

Yep, I figured that out a bit later.

dbeach November 17, 2011 at 6:28 pm

It’s funny. Kevin Drum looked at the chart from Felix and then created the correct one, showing corporate taxes as a percentage of pre-tax profit. It is weird that Tyler didn’t pick it up, because the 90% looks so obviously wrong.

As others have pointed out, and Drum’s chart shows, corporate taxes have gone from about 50% effective rate in the 1950s to around 20% now.

http://motherjones.com/kevin-drum/2011/11/chart-day-corporate-taxation-america

Bill November 17, 2011 at 9:09 pm

Here is the analysis done by CBO on relative taxes on corporations in OECD countries: http://www.cbo.gov/ftpdocs/69xx/doc6902/11-28-CorporateTax.pdf

Eric Falkenstein November 17, 2011 at 4:19 pm

TC: ‘I think it should be zero…but it’s over villainized.’ So everyone’s right…or wrong.

Floccina November 17, 2011 at 4:23 pm

Is the decline due to more S-corps?

Alex November 18, 2011 at 10:08 am

Yes, it’s due, in part, to greater use of all pass-through entities – S-corps, LLCs, partnerships. This is most clearly shown in the taxes/GDP chart, but may also be shown in the taxes/profits chart, as we don’t know whether “corporate profits” includes profits in S-corps and other pass-through entities (I suspect it does).

Any analysis that does not account for the change in prevalence of pass-through entities over time is highly misleading. (I already have a very, very low opinion of Felix Salmon, and this is just another data point in that direction.)

Claudia Sahm November 17, 2011 at 4:24 pm

OP: “I still think the corporate rate should be zero, but the corporate income tax is one of the most commonly over-villainized institutions by the intelligent Right.”

Am I missing something? But I thought the point was not to celebrate the CIT, but to ask if this institution is a useful focus for conservatives? We have limited political capital and time…so are their bigger problems, like long-term fiscal imbalance, more sensible immigration policies, or improving the labor market, that deserve more attention?

PS. I am curious what the “unintelligent Right” villianizes :)

Peter Schaeffer November 17, 2011 at 5:10 pm

“Am I missing something? But I thought the point was not to celebrate the CIT, but to ask if this institution is a useful focus for conservatives? We have limited political capital and time…so are their bigger problems, like long-term fiscal imbalance, more sensible immigration policies, or improving the labor market, that deserve more attention? ”

All true. However, much of the right, particularly “supply-siders” have abandoned all other issues to the point where it amounts to “tax cuts, tax cuts all the time, more tax cuts”.

Claudia Sahm November 17, 2011 at 5:25 pm

Maybe that’s my problem…I don’t see (and haven’t seen in my empirical research) that tax cuts can solve all our problems in the economy. I understand that the incentives issues are important, but at least in recent fiscal policy, there has been some questionable bang-for-the buck from tax cuts: http://www.businessweek.com/magazine/behavioral-economics-foils-an-obama-tax-cut-11102011.html

Peter Schaeffer November 17, 2011 at 7:04 pm

+1

D November 17, 2011 at 6:13 pm

Don’t forget “excessive regulation” and “waste, fraud and abuse” as the magical cures for creating jobs and decreasing spending.

Norm November 17, 2011 at 5:55 pm

Evolution.

Peter Schaeffer November 17, 2011 at 10:08 pm

Norm,

The left hates evolution … Far more than the right …

Remember the Larry Summers affair at Harvard? It can only be understood as a left-wing revolt against science in general, and human evolution in particular.

dbeach November 17, 2011 at 11:27 pm

What is this I don’t even…. All I can say is this is absurd. Nobody on the left is trying to teach “Intelligent Design” in schools.

Chris November 17, 2011 at 11:35 pm

Agree. Everyone hate evolution.

NAME REDACTED November 18, 2011 at 2:39 am

What do you think Keynesian economics is?

Peter Schaeffer November 18, 2011 at 11:21 am

The “Intelligent Design” of the left is the unquestioned assumption that all men and women are equal and that “we” “know” this as a matter of faith. People don’t just try to teach this in our schools, they shriek it everyday. Summers was ejected for tentatively trying to challenge this religion in private closed door meeting.

msgkings November 17, 2011 at 6:25 pm

@ Claudia:

They villainize gays, darker-skinned folk, liberals, and Warren Buffett.

msgkings November 17, 2011 at 6:28 pm

And yes, evolution. Thank you Norm.

And science in general, frankly.

Peter Schaeffer November 17, 2011 at 7:13 pm

msgkings,

The left loves evolution … Unless it is human evolution … or vaccines … or GMOs

Peter Schaeffer November 17, 2011 at 8:57 pm

The party of Al Sharpton, Jesse Jackson, La Raza, and racial quotas wants to condemn Republicans for villainizing “dark-skinned folk” …

Big pot and kettle problems …

Thoma Hawk November 17, 2011 at 4:33 pm

Nice try. Now show us corporate taxes as a percent of PRE-TAX earnings.

There are also loss carry forwards to consider. Offshoring distorts the picture further.

And saying that corporate taxes are lower now than they were before is like saying we’ve reduced your torture from stretching you on a rack to confinement in a sweatbox.

The Felix Salmons of the world know they are misusing statistics. I expect better here.

dbeach November 17, 2011 at 7:45 pm

Here: http://motherjones.com/kevin-drum/2011/11/chart-day-corporate-taxation-america

Effective tax rates have fallen from around 50% in the 1950s to about 20% now.

And, geez, melodramatic much? Corporate taxation is equivalent to torture?

G.L. Piggy November 17, 2011 at 4:34 pm

Come on Tyler, you think that the corporate income tax should be zero but then you think that the Right over-villainizes it? Can we ever get a straight critique out of you? Please? I wonder how the Right makes too much of corporate tax rates. Do they talk about them too often, or do they attribute too much economic woe to the high rates of corporate income taxes? Personally, I perceive *too little* discussion of the importance of lowering corporate tax rates in order to boost the economy. What amount of villification should be attributed to corporate tax rates rather than other plausible critiques of our economic regime?

Laserlight November 17, 2011 at 4:45 pm

“Can we ever get a straight critique out of you”

Ah, you’re looking for Tyler the Ethnic Foods Critic. He’s down the hall to the left.

G.L. Piggy November 17, 2011 at 4:51 pm

lol, this is good.

Tyler Cowen November 17, 2011 at 4:39 pm

Piggy wants mood affiliation!

G.L. Piggy November 17, 2011 at 4:44 pm

Yes, I do. Just once!

Peter Schaeffer November 17, 2011 at 4:51 pm

I don’t care about mood affiliation. However, Felix’s first chart is simply wrong. CP is “Corporate Profits After Tax”. FCTAX is “Tax Receipts on Corporate Income”. Felix thinks his chart shows “corporate income tax as a percentage of total corporate profits”.

It doesn’t.

G.L. Piggy November 17, 2011 at 4:58 pm

But just to be a little pedantic here, the frustrating thing – the part which spurred my need for mood affiliation – is that your position on corporate tax rates was brought up out of nowhere and then quickly qualified.

TallDave November 17, 2011 at 4:45 pm

OK, looking at the title of the actual Fed graph, I’ve decided this graph is a bit strange:

“Tax Receipts on Corporate Income (FCTAX)/Corporate Profits After Tax (CP)”

So, if corporations made 100, and paid 35%, the graph wouldn’t say .35, it would say .53 because it’s 35 / (100 – 35).

At a tax rate of over 50%, it exceeds 1.

All in all, an odd way to look at tax rates.

TallDave November 17, 2011 at 5:05 pm

Also, I think a much more meaningful graph would be (personal tax receipts + corporate tax receipts) / (personal income + corporate income).

Corporations can no more pay taxes than they can eat a cheeseburger. All they do is pay taxes on behalf of the people that own the company.

dbeach November 17, 2011 at 7:48 pm

Actually, for the most part they pay taxes on the part of their customers, not their owners. Corporate tax incidence appears to be tough to get a handle on, but the studies I’ve seen tend to show that the majority of corporate taxes are paid by consumers.

TallDave November 18, 2011 at 1:10 pm

They may be passed on to consumers, but they are paid on behalf of the owners.

Falstaff November 17, 2011 at 4:54 pm

Personal income tax rates over the period show a roughly similar decline, but we know actual revenue collected remained much more constant, indicating income was sheltered or delayed. I’d guess we would see similar results in revenues from corporate taxes.

joan November 17, 2011 at 4:59 pm

If you look at all tax rates for high incomes http://visualizingeconomics.com/2011/04/14/top-marginal-tax-rates-1916-2010/ you can see that they amount of revenue from corporations vary more with the individual tax rate that it does with the corporate tax rate, A large number of business have a choice about how to file with the IRS and If the corporate tax were zero we would not only lose the revenue from corporate taxes but also from individual income taxes as people switch to filing as a corporation.

Bill November 17, 2011 at 5:05 pm

+1

Choice of corporate form as well–S v. C, and also choice of partnership or LLC.

TallDave November 17, 2011 at 5:14 pm

No, you still have to pay tax on any income that is actually distributed to you. And for sole LLCs, you pay taxes on all income, distributed or not.

D November 17, 2011 at 6:16 pm

+1

The one gray area is using corporations to pay for personal expenses i.e. a “business” dinner or “company” car.

Bill November 17, 2011 at 8:40 pm

TallDave, If you have ordinary income dividends taxed at 15% rate, your statement is not true, or if you fashion a distribution so as to make it capital gains, that is not true either. One of the points for initially selling the Bush rates for OI and Cap gains was that there was going to be this procedure that if the corp paid taxes, that would be a reduction of the dividend that would be taxable, until they figured out that many corps didn’t pay much taxes, meaning that the OI would be taxed at the higher marginal rate (ie, in the 30′s).

LLC is a pass through, which is what my comment stated, as is a partnership. Choice of business form can be manipulated if the corporate tax rate driven to 0, as as the point of joans comment. In fact, one of the reasons that they are unlikely to do tax reform in the supercommittee is because of this complexity; otherwise, you would have corporate form taking even more importance than it does today, and see more ways to hide income or converting income than today.

Bill November 17, 2011 at 9:10 pm

TallDave, Look in the CBO study on corporate taxes compared to other OECD countries re discussion of corporate form and effects. http://www.cbo.gov/ftpdocs/69xx/doc6902/11-28-CorporateTax.pdf

dan1111 November 18, 2011 at 6:11 am

I’m not an expert in this debate, but at most it is an argument that eliminating corporate taxes would require other compensatory changes in the tax code. Closing loopholes is good anyway.

Cliff November 18, 2011 at 10:21 am

So just tax dividends at the normal rate and tax capital gains as ordinary too, after adjusting for inflation. Isn’t the justification for the different rates the double taxation?

TallDave November 18, 2011 at 1:15 pm

The primary reason some dividend and cap gains taxes are lower is precisely because the income is already taxed at the corporate level. Presumably a zero corp tax would reflect changes to those.

mark November 17, 2011 at 5:17 pm

All organizations should be treated as pass throughs, as REITSs, mututal funds, partnerships etc are. Their annual income and other attributes should be calculated and dispersed to the holders based on how much ownership interest they had and and how long it was held in the course of the year.

TallDave November 17, 2011 at 5:39 pm

Daytraders.

NAME REDACTED November 17, 2011 at 5:53 pm

no, that increases systematic risk because the corp can’t hold cash then.

Bill November 17, 2011 at 8:42 pm

It would raise your taxes, but go for it.

TallDave November 18, 2011 at 5:00 pm

Only if your marginal personal rate is higher than the corporate rate you’re already paying.

This is where people tend to get confused — if you own stocks in a profitable companies or mutual funds, you are already paying corporate taxes on your piece of the company. If you weren’t paying those taxes, your stock would be worth more, or they could send you the money instead of giving it to the gov’t.

Jim November 17, 2011 at 5:30 pm

Drum is a dope:

“But whatever we do, don’t ever fall for the complaint that corporate tax rates in the U.S. are high. They aren’t.”

Right. They are the highest on Earth, but they are not high. Got it, Kev.

dbeach November 17, 2011 at 7:52 pm

No, they are not “the highest on earth”. In terms of effective tax rates, US corporate taxes are on the low end of OECD countries. Yes, the statutory rate is high, and yes, the code is enormously complex, but US corporations do not pay higher taxes than corporations in other developed countries.

Jay November 17, 2011 at 8:36 pm

When you say “effective tax rates” are you calculating….
A) Taxes paid (cash basis) / GAAP profits
B) Taxes paid (cash basis) / IRS profits
C) Taxes paid (accrual basis) / GAAP profits
D) Taxes paid (accrual basis) / IRS profits

It makes a HUGE difference which one you choose. And if you don’t know the difference you should learn basic accounting before ignorantly speaking on this subject.

Bill November 17, 2011 at 8:43 pm

Jay, You can go to the OECD website where they make the comparisons and normalize them.

rachelle November 17, 2011 at 6:39 pm

The Federal Corporate Income Tax is such a small problem when it comes to the taxation of business. I threw together this graph: http://research.stlouisfed.org/fred2/graph/?g=3pT

It attempts to approximate the actual tax burden on businesses. Not only does it include state corporate taxes, but it also includes percentage of property and sales tax owed by businesses. Property Tax, Sales Tax and Corporate Income tax make up about 70% of the taxes Businesses pay, so it’s still understated. Those percentages were very loosely based on COST’s State and Local Business Tax Burden Study found here: http://www.cost.org/StateTaxLibrary.aspx?id=17768

I know that it doesn’t use the “before tax” profits. But not all taxes are based on profits, so a company still owes taxes even if they don’t make a profit. An effective rate based on profits doesn’t make sense. The important relationship is between what a company nets and what a company pays to the government. Yes, it still shows the general trend that taxes have gone down for businesses. But not to the extent we pretend it has.

Crenellations November 17, 2011 at 6:54 pm

Strange, when personal taxes astronomical people sheltered income in corporate shells. When the situation reversed, and when retained earnings lost tax favor, they stopped.

Kevin November 17, 2011 at 7:20 pm

How is an effective tax of 30% of profits ‘no big deal’?? How many deals would get done if their positive cash flows could be raised 43% (30/70)! Of course 30% is better than 100%, but it hardly qualifies as innocuous.

Jay November 17, 2011 at 7:31 pm

Two words render this chart meaningless “tax incidence”.

MSG November 17, 2011 at 8:01 pm

What is the point in conveying this information in such a confusing way? The purpose of a chart is to make information easier to understand.

David Wright November 17, 2011 at 8:28 pm

I’ve got to agree with Peter Schaeffer, et al. It’s not that Drum’s chart is “related”, it’s that Drum’s chart is right and Felix’s chart is wrong. The relevant statistic here is r, and Felix’s chart graphs r/(1-r). Tyler and Felix should update their posts to reflect this, not just settle for calling the correct chart “related”.

lxm November 17, 2011 at 8:30 pm

You all are looking at this problem backwards.

I used to work for a corporation as I am sure most of you also do or did. Since 100% of my income came from the corporation, then the corporation has paid my income taxes one way or the other. Might just as well bill the corporation direct and cut out me, the middle man. There is no point in my doing the tax accounting. It should be done by the corporation I worked for. Tax them, don’t tax me. I am just a pass through.

This argument is as strong as the don’t tax the corporation because their customers pay argument since it is the same argument. Corporations never pay taxes because their customers pay. I never pay taxes because the corporation that pays me pays my taxes.

If you abolish the corporate income tax then how will you defend charging corporations sale tax and property tax since these taxes are pass through as well?

The best argument I have seen for not taxing corporations is that they are too good at avoiding taxes so we might just as well give up getting anything from them directly. This is about the same argument as if you are going to be raped why not just relax and enjoy it. Bad bad bad.

What I don’t understand is why so many of you are volunteering to be raped.

NAME REDACTED November 17, 2011 at 9:34 pm

“The best argument I have seen for not taxing corporations is that they are too good at avoiding taxes so we might just as well give up getting anything from them directly. This is about the same argument as if you are going to be raped why not just relax and enjoy it. Bad bad bad.”

Nonsense its a good argument, you can tax people that are less bad at avoiding the taxes.

Furthermore you are looking at this wrong. The money extracted is inconsequential, what matters are the behaviors changed because the money is being extracted.

dbeach November 18, 2011 at 12:07 am

Why? Corporate income taxes are bad policy.

The corporate income tax has massive compliance and administrative costs.

The complex nature of the corporate tax code causes inefficient business investment.

The existence of corporate taxes causes massive lobbying and low-level corruption that undermines our democracy.

Corporate taxes are mostly paid by consumers, not shareholders, so the incidence of the tax is most likely regressive — at any rate, it’s almost certainly less progressive than individual income taxes. Even if corporate taxes are progressive, the degree to which they are is extremely difficult to divine.

Finally, there’s the simple reason that corporations shouldn’t be taxed at all: profit retained by corporations is investment capital that should not be taxed, while corporate income that is paid out is eventually some individual’s income and can be taxed at that time.

In order to tax the wealthy, if that’s what you think corporate taxes are doing, the best thing to do is… tax the wealthy.

lxm November 19, 2011 at 7:08 pm

Let’s see the corporate income tax has existed since 1909 according to the IRS. Now, all of a sudden, it’s a good thing to get rid of?

dbeach says “Corporate taxes are mostly paid by consumers.” So what’s the problem? The customers of the corporation pay the taxes. Fine, that means that the consumers of child pornography or tobacco pay the taxes of the corporations they buy from.

It’s better they pay, than I do. I have no interest in subsidizing either one or subsidizing any corporation that I do not do business with.

Name Redacted argues :”Furthermore you are looking at this wrong. The money extracted is inconsequential, what matters are the behaviors changed because the money is being extracted.”

First, the money extracted does not have to be inconsequential. Second, behavior is changed only because corporations have been successful in bending the tax code to their interests.

Fix it, don’t abolish it.

Why does the policy of the United States of America have to favor corporate interests over citizens interests?

Andrew' November 18, 2011 at 2:52 am

Whatever it is, we are doing it wrong.

Andrew' November 18, 2011 at 3:07 am

I don’t read a lot of intelligent right, but not that I wouldn’t be open to it. But I’ve only ever heard it stated thus: “I still think the corporate rate should be zero, but…”

Isn’t it kind of mood affiliation to look at a dropping rate and say that has some bearing on the correct level?

Andrew' November 18, 2011 at 3:25 am

What most people call the right is by definition dumb, to me, because they aren’t talking about how I would call the intelligent right. Here is who I call the intelligent right.

http://lewrockwell.com/bonner/bonner519.html

I’ve always thought the bigger half was the costs associated with regulation and such rather than direct taxation. And since this is much more of a fixed-cost thing it adds to corporate bigness. Since corporations are about transaction costs, they are plausibly incented to grow even if it means buying something just to have an offsetting loss.

anon November 19, 2011 at 10:22 am

+1

http://lewrockwell.com/bonner/bonner519.html

Survivors of concentration camps report that the secret to staying alive was often simple: those who were near the kitchen made it; those who were not didn’t.

In our modern, degenerate form of capitalism the secret is the same: you want to be near the kitchen…the place where the food is handed out. You want to be near the government. That’s why there are so many lobbyists in Washington. And why the only city in America where property prices are going up is Washington, DC.

The politicians collect money from all over the country. They give much of it away in the Washington, DC metropolitan area. Montgomery County, Maryland and Fairfax County, Virginia are two of the richest counties in the country. Why? They’re right next to the kitchen.

TheNumeraire November 18, 2011 at 3:57 am

Corporations, in their role as employers, also pay the employer portion of FICA taxes. Therefore, Salmon’s second chart (corp. receipts/GDP) is also meaningless.

Corporate receipts expressed as a percentage of GDP have trended in near mirror image to social insurance taxes as a percentage of GDP — from the 1950′s through to the early 1980′s, the level of corporate receipts shrunk in unison with rising levels of social insurance tax. From the early 1980′s to the present there is a trendless range in both series, still maintaining the mirror image or inverted correlation.

It becomes very easy to understand why the level of corp receipts/GDP would shrink as the payroll tax rises, when you consider that employer FICA contributions are a deductible business expense. The employer pays the tax and it shows up statistically in gov’t revenue as social insurance taxes paid — but the employer deducts the cost of FICA contributions from taxes owed on profits.

Peter Schaeffer November 18, 2011 at 11:06 am

TN,

No. FCTAX is Tax Receipts on Corporate Income. It does not include payroll taxes. In 2010 total receipts from the corporate income tax were $191.437 billion. Receipts from “Social Insurance and Retirement” were $864.914 billion.

Clearly FCTAX does not include FICA.

TheNumeraire November 18, 2011 at 12:50 pm

Please read again why I wrote. I did not suggest that employer payroll contributions were include in corporate tax receipts. I specifically said;

“The employer pays the tax and it shows up statistically in gov’t revenue as social insurance taxes paid — but the employer deducts the cost of FICA contributions from taxes owed on profits.”

Do you have a better explanation as to why the level of FCTAX/GDP and FICA/GDP move largely inversely with one another throughout the entire post-war data series?

TallDave November 18, 2011 at 5:04 pm

Very good point. You should make some graphs.

Even better would be to show the growth in social spending on a (real) absolute basis.

Tom Grey November 18, 2011 at 4:43 am

Exactly — the distortions are the problem.
And the idea of “doing away with loopholes” is historically silly — it doesn’t happen.

Tax writers of the details in the Tax Code have been and are inevitably subject to “tax-lobby capture”, just as regulatory agencies are captured by those they regulate.

Tho I believe it’s politically unfeasible to get rid of it, getting rid of it would be better.

An alternative would be a “minimum revenue tax” — for companies making over $10 million/ year, a minimum 1% of total revenue as income tax would reduce some of the worst loophole shopping. Of course, this path may lead towards … VAT. Which is also terrible.

The real problem remains Unsustainable Government Spending.

Ryan Stambaugh November 18, 2011 at 10:06 am

Does anyone know where the raw data comes from? Yes, I know it’s FRED pulling from BEA, but part of the issue with, say, GE is folks confuse GAAP (applied to a multi-national firm) and tax accounting for its U.S. operations.

Are these numbers purely from IRS filings?

What about the rise in LLC’s and such (Chrysler is an LLC now). LLC’s wouldn’t change the fact that C-corps are paying less in taxes as a percentage of pre-tax income, but the rise of LLC’s would help explain why corporate taxes as a percentage of GDP are lower.

spencer November 18, 2011 at 10:59 am

The profits data is from profit as reported in the GDP accounts, not profits as they are reported to shareholders.

spencer November 18, 2011 at 11:11 am

Treasury has reportedly done a study comparing the US effective tax rates to the effective tax rates in other countries but they have not published. The Treasury studly found that the US effective tax rate was about average for OECD countries.

I did not download the CBO study, but if I remember correctly it compared statutory rates, not effective
rates.

Foreign earnings are one reason that the effective tax rate is lower than the statutory rate, but it is only one of many factors.

The US has a very effective industrial that picks winners an losers, it just that we call it the Federal Tax Code. The effective tax rate on the oil industry, for example is about 10%-12% while for most IT firms it is over 30%.

I would be in favor of either eliminating the corporate tax or taxing corporation on their GAAP earnings that they report to shareholders. But I want to do it this way to reduce the incentives Corporation have to bribe their congressmen. The primary driving force behind the existence of the Washington lobbying industry is the corporate tax code.

Peter Schaeffer November 18, 2011 at 11:28 am

Spencer,

Check out Corporate Taxes: More Winners and Losers (http://economix.blogs.nytimes.com/2011/01/27/corporate-taxes-more-winners-and-losers/)

The tax rate on Tech is 10.85% or lower. Oil production is taxes at 11.27%. Oil integrated (the big oil companies) pay 33%. Oil field services pay 22.05%.

Quote

“There are some striking patterns. High-tech industries pay relatively little in taxes. Utilities and other infrastructure providers pay some of the highest rates.

There are also extreme variations within industrial sectors, as between petroleum producers and integrated petroleum companies.”

libertarian_adi November 18, 2011 at 9:13 pm

90% of the corporate income tax is paid by labor in the form of lower wages.

Steve Roth November 19, 2011 at 1:53 pm

Why does nobody ever talk about Milton Friedman’s brilliant proposal (note that that adjective is being written here by a wild-eyed liberal…):

Eradicate the corporate tax, and tax all corporate profits like S-Corp profits — on individual returns of shareholders, whether or not those profits are distributed.

Capitalism and Freedom page 174

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