Is the Corporate Tax Going Away?
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.