Tuesday, April 22, 2014

A History of American Corporate Taxation - Who Wins and Who Loses?

Updated July 2014

America's corporate income tax is one of the most poorly understood aspects of the nation's tax system.  With the constant rumblings emanating from Washington about a revamping of the corporate tax system, I thought that it was a good time for a background look at the history of the current system.

While stumbling around the Federal Reserve Bank of St. Louis economic data website (also known as FRED), I found this rather interesting graph showing the ratio between federal tax receipts on corporate income and corporate after tax profits:

Back in 1951, the aforementioned ratio of corporate income tax receipts to corporate after tax profits peaked at 95.2 percent.  This dropped steadily, hitting a six decade low of 16.7 percent in 2009.  For 2011, the ratio stood at 19.97 percent, the second lowest ratio in the past sixty-two years.   The current ratio is also well below the 62 year average of 47.5 percent.  This got me to thinking about the history of corporate taxes and their importance in the overall scheme of taxation in the United States.

Corporate taxes have been around for more than a century.  The first corporate taxes were enacted by Congress in 1909 at a rate of 1 percent on all corporate income.  This rose to 12.5 percent a decade later and hit a peak rate of 52.8 percent during the 1960s and further cut to 34 percent by the Tax Reform Act of 1986.  In 1993, the top corporate rate was raised to 35 percent, however, as we know, this "headline rate" is paid by very few major American corporations, many of whom hold overseas assets.  Unlike individuals who pay tax on gross income, corporations (remember, they are people too!) pay taxes on net income or profits.  Corporations are allowed to deduct just about every cost of doing business from their incomes. 

Here is a graph showing the history of corporate tax remittances as a percentage of GDP:

As a percentage of the entire economy, corporate taxes peaked at 7.1 percent in 1945 when surtaxes on corporate income were added for excessive war profits during World War II.  Between the mid-1940s and the early 1980s, corporate taxes as a share of the economy dropped slowly, hitting a low of 1.0 percent in 1983.  Since then, corporate taxes have ranged between 1 percent and just over 2 percent of the economy, quite a bit lower than the levels seen during the 1950s and 1960s. 

By way of comparison, here is a look at the share of individual income taxes as a percentage of the entire economy:

In contrast to federal corporate tax remittances, the share of individual income taxes as a percentage of GDP has remained quite stable at around 8 percent of the economy since the middle of World War II.

Here is a graph showing how the share of corporate taxes as a percentage of total federal receipts has changed since the end of World War II:

During the 1950s, corporate income tax revenue provided around 30 percent of Washington's total revenue.  This began to drop during the 1960s and 1970s, in part, because Congress cut the top corporate tax rate from 52.8 percent in 1969 to 46 percent in 1979 on top of changes to tax laws that allowed accelerated depreciation for capital expenditures.  By 1982, corporate taxes were only making up 7.9 percent of Washington's total receipts.  Over the past three and a half decades, corporate taxes have contributed between 8.0 percent and 15.6 percent of federal government receipts.  In 2013, corporate taxes made up only 10.8 percent of total federal receipts.

In contrast, here's what has happened to personal income tax revenue as a percentage of total federal tax receipts since 1947:

Basically, since World War II, taxes on individuals have contributed an average of 43.7 percent of Washington's total revenue, ranging from a low of 35.7 percent in 1950 to a high of 48 percent in 1970.  In 2013, individual taxes made up 42.2 percent of Washington's revenue, nearly four times the contribution made by Corporate America which made total after tax profits of $1.9045 trillion in the fourth quarter of 2013, a new record.

If you should happen to think that Washington may be able to increase revenues through increased corporate taxation, you might want to rethink that.  Unfortunately for individuals, a 2009 study by the Tax Foundation found that states that have higher levels of corporate taxation have lower wages for workers.  A one percent increase in the average tax rate led to a 0.014 percent decrease in real wages or a $2.50 wage loss for every one dollar increase in corporate income taxes over a five year period.  This means that the burden of corporate income taxes falls predominantly on labor since tax increases are generally not transferred to consumers because of price competition.

Either way, it looks like Main Street loses at the expense of Corporate America.   


  1. Beyond the fact that corporations already own the political process due to moneys influence during the campaign to get elected what is their end game by holding onto the insane amounts of money pooling in their bank accounts?

  2. It is long been happening that the individual tax base is shrinking, which is of course the source of the bulk of government revenues. Therefore, there is a concerted effort to raise the wage scale to stem this shrinkage, however, I don't believe there will be enough domestic corporate revenue to support this, and the many that would receive any such increase already are in the forty something percent that don't pay any federal tax.

  3. Erroneous analysis.

    You have to concurrently analyze the tax law changes over time.

    For example, during the Carter years, to stimulate the economy, the Investment Tax Credit [ITC] was implemented. This allowed business to deduct off the bottom line, before tax.

    In reality only individuals pay tax.