How much tax should corporations pay?
That’s a more complicated question than it sounds. To a large degree, how a government how one raises the raises revenue is a matter of values and priorities.
And practicality. Willie Sutton is said to have robbed banks because that’s where the money is. Jean Baptiste Colbert, finance minister to King Louis XIV in the 1600s, said “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”
Like it or not, there’s truth to that. Governments get the money where they can. Corporations spend heavily on public relations and campaign contributions. Corporate feather-plucking tends to be accompanied by considerable hissing.
There also are economic arguments to be made against corporate taxation. Corporate profits are taxed twice – once when the corporation earns them, and again when shareholders receive the profits as dividends or as capital gains. This double taxation is economically inefficient and distorts capital markets, at least to some degree.
In addition, corporations that feel over-burdened by taxes have the option of taking their ball and playing in a different field, i.e. moving to a country with lower taxes. According to the Wall Street Journal, “10 companies in the last three years” have moved from the U.S. to other countries such as Ireland, Switzerland, the U.K., and the Netherlands. The Journal repeats the mantra that U.S. corporate tax rates are the “highest in the developed world”.
How rampant this trend is, whether it really is increasing, and how much of an impact this has had on the U.S. economy is unclear. Regardless, companies moving to other countries is hardly something that we’d want to encourage, particularly when the U.S. unemployment rate is at 7.8 percent.
At the same time, there are reports of companies “re-shoring” jobs back to the U.S. after having previously off-shored jobs to other countries. The specific reasons vary, but companies have been finding that there are advantages to the U.S. and disadvantages to other countries that they hadn’t realized before.
But at the end of the day, of course corporations are going to say corporate taxes are too high. No company wants to pay more taxes, any more than individuals do. Everyone wants someone else to pay. But the implicit threat is always there: if corporate tax rates are too high, companies can and will move, as the Journal puts it, to “friendlier climes”.
But individuals hear about corporations making billions of dollars in profits, and numbers like that tend to set off alarms. “They’re making that kind of money? They should be paying lots of taxes.” And who’s to say they’re wrong? The word is that corporations are “people”, and people pay taxes.
While the U.S. corporate tax rate is often listed as 35 percent, or even an “effective tax rate” of 39.2 percent, this is misleading at best and a lie at worst. The U.S. tax code is so riddled with exceptions and exemptions and loopholes that corporations usually don’t pay anything close to this.
The fact is that the federal tax rate the corporations actually pay has been decreasing for decades and is now close to 20 percent. This isn’t some biased analysis coming from a left-wing think-tank. This is coming straight from the Bureau of Economic Analysis’ data. A simple calculation – divide corporate federal income taxes paid by before-tax corporate profits. There’s not much room for biases to creep in there.
An ironic point that this graph shows is that the last big increase in corporate tax rates occurred in 1986, under President Reagan’s administration. People forget that Reagan had to raise corporate taxes in order to offset some of the deficit increases caused by cutting individual income taxes and increasing defense spending.
What’s driving this decrease in effective corporate tax rates, at the same time corporate profits are increasing? That is much harder to determine. The byzantine complexity U.S. tax code is legendary, and Congress has a habit of tucking exemptions and credits into many bills. What’s clear, however, if that the rates that tax corporations are actually paying are decreasing substantially.
The question, however, is whether this decrease in corporate taxes is a good thing that we as a country want to embrace and encourage, or if this creeping de-taxation goes against our collective values and priorities.
With the U.S. public debt soaring to nearly unprecedented levels, we need to consider all revenue sources. Larger corporate profits mean there are lots feathers there, ripe for the plucking. Whether politicians be opt to avoid the hissing is yet to be seen.