Is the Corporate Tax Going Away?

By :: April 25th, 2011

Individuals who just filed their taxes this year might be wondering why they face high tax rates when big corporations apparently manage to escape the tax net. In the March 25, 2011 New York Times, David Kocieniewski reported that the nation’s largest corporation, General Electric, earned a profit of $14.2 billion in 2010, while claiming a tax benefit of $3.2 billion. He went on to note that the strategies GE and other corporations have followed to reduce their taxes, combined with tax law changes that have encouraged more businesses to file as individual taxpayers, have pushed down the corporate share of the nation’s tax receipts from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.

GE of course has its own defense of its tax position and Mr. Kocieniewksi was careful to attribute GE’s low reported taxes to aggressive tax minimization strategies and successful lobbying, not to any illegal tax evasion. And there are many reasons that taxes reported on financial statements may not provide a very accurate picture of a company’s effective tax burdens.

But what struck me more in the article was the apparent sharp decline in corporate receipts. Is the corporate tax really going away or was this just a cleverly constructed example?

Let’s start with the two time periods cited in the article, the 1950s and 2009. Corporate taxes were much higher in the 1950s than they are now, measured either as a share of all federal receipts or as a share of gross domestic product (GDP). High rates enacted during World War II were still in effect (from 1952 to 1963, the top corporate rate was 52 percent, compared with 35 percent today), globalization of corporate activity had barely begun, and U.S. corporations faced little competition from foreign-based multinationals. In contrast, in 2009, we were in the deepest economic slump since the Great Depression and corporate profits dropped sharply. Revenues from corporate taxes plummeted from 2.7 percent of GDP in 2007 to just 1 percent in 2009 (see TPC graph).

So, what has been the long-term trend in corporate revenues? Corporate receipts as a percentage of GDP were indeed much higher in the 1950s than today and were still higher than today in the 1970s. But in recent decades, including CBO’s projections for 2010-2019, corporate receipts have been remarkably stable as a share of GDP. Here are the figures:

Following a sharp dip after Congress enacted massive corporate tax breaks in 1981 (mostly reversed in the Tax Reform Act of 1986), corporate tax collections have stayed fairly constant at slightly under 2 percent of GDP and between 10 and 11 percent of federal receipts for most of the past thirty years. If the CBO projections are correct and Congress does not enact additional corporate tax cuts, they will remain in the same range in the next decade as well.

Within these broader trends, there have been some sharp annual ups and downs resulting from the economic cycle and enactment of temporary tax incentives. And we know there are ways that some large corporations can and do legally reduce their tax liability. Corporate tax receipts are a less important source of federal revenue than they were in the early post-war period. But the data simply don’t support a conclusion that the corporate tax is going away.

3Comments

  1. Vivian Darkbloom  ::  12:44 pm on April 25th, 2011:

    Mr. Toder misses perhaps the important development in the taxation of business income over the past 30 or 40 years. In 1979 the total number of returns filed by flow-through entities such as partnerships and C corporations was roughly the same. Today the number of flow-through returns is almost four times the number of C corporation returns. This is explained by the steady increase in the number of businesses conducted through S corporations, partnerhips and limited liability companies treated as partnerships for tax purposes. For example, the number of LLC partnerhship returns filed in 1993 was 17,000. In 2005 it was 1,450,000. This surge in C corporation business returns is matched by a surge in income for business vehicles not taxed as C corporations. This explains the significant effect failure to extend the “Bush tax cuts” on high income taxpayers is expected to have on business development. See the following JCT report from 2005 for some historical data on choice of business entity :

    http://www.jct.gov/publications.html?func=startdown&id=1291

    Given these developments, it is actually surprising that the amount of corporate tax revenue has remained relatively constant as a share of GDP. It also demonstrates the need for major corporate income tax reform to even the tax playing field between C corporations and other forms of doing business.

  2. Vivian Darkbloom  ::  12:45 pm on April 25th, 2011:

    The above post should have read “this surge in non-C corporation returns is matched by…”

  3. Michael Bindner  ::  4:14 pm on April 25th, 2011:

    Corporate taxes are just part of the picture – the other part is income tax and payroll tax. All are financed by customers for the most part, unless the firm is a Ponzi scheme where the chief source of revenue is an investment scheme (like Facebook).

    Passing a business receipts tax would make most corporate and personal income taxation unnecessary – although adding a value added tax to the mix would have at least some taxation be visible to consumers, where it is now mostly hidden by taxes on the factors of production.