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Corporate Income Tax

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Federal corporate income taxes, which are levied on corporations’ profits, have declined significantly over the last few decades. Corporate tax receipts accounted for approximately 32 percent of total federal revenues in 1952 but fell to 12 percent of total federal revenue as of 2008 and to just 6.5 percent in 2009.

Revenue raised from corporate income has also fallen relative to the size of the U.S. economy as a whole. Corporate taxes fell from about 5 percent of U.S. gross domestic product in the early 1950s to 2.1 percent of GDP in 2008.

If you look at the corporate tax rate, you might be tempted to conclude that U.S. corporations pay more taxes than corporations in other countries. But you would be mistaken. Corporate income tax collections in the United States ranked 19th lowest as a percentage of GDP out of 24 economically advanced companies surveyed in 2008. How can that be?

Bush Treasury Department officials explained it this way: “The contrast between [the U.S.] high statutory CIT rate and low average corporate tax rate implies a relatively narrow corporate tax base, due to accelerated depreciation allowances, corporate tax preferences, and tax-planning incentives created by its high statutory rate.”

In other words, the big difference between the corporate tax rate and what corporations actually pay is due to tax loopholes. Many corporations are eligible for generous depreciation rules, exemptions, deductions, and credits that lower their effective tax rates, or the share of profits they actually pay in taxes.

The number of tax loopholes has increased dramatically since Congress last reformed the tax code in 1986. The amount of untaxed business income increased by 75 percent between 1987 and 2004. This is the equivalent of giving these
corporations a cash subsidy. Assorted corporate subsidies and incentives in the tax code have increased from about $60 billion in 1987 to about $130 billion in 2008.

Some tax subsidies serve legitimate public purposes such as those that support desirable investments in sectors such as renewable energy. But many benefit narrow special interests that do little or nothing to contribute to public well-being
such as tax breaks for timber and real estate companies and those that subsidize already profitable oil and gas companies.

Reducing unwarranted tax breaks for corporations is a responsible approach to reducing the federal deficits and debt. Closing tax loopholes would broaden the tax base, improving efficiency and leveling the playing field among corporations, strengthening competition and ultimately the economy as a whole.

The savings from eliminating wasteful tax loopholes can be significant. A tax break for paper producers that was eliminated during health care reform, for example, will save about $40 billion over the next five years. Eliminating the tax breaks for oil and gas companies as the president has proposed would save about $20 billion over the same time period.

The president has also proposed ending tax breaks for multinational corporations that allow them to avoid billions of dollars in taxes even as they ship jobs overseas. Eighty-three of the 100 largest U.S. corporations have subsidiaries in tax havens. The administration’s proposals would limit corporations’ ability to avoid taxes and discourage the use of tax havens.

The corporate income tax is an important element of the federal tax system. It raises money to support services that the taxed companies rely on, and it provides needed revenue for valuable public services in difficult fiscal times.

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