Tuesday, May 3, 2016

Corporate Taxes - Who Pays and Who Doesn't?

Updated April 2017

A report by the Government Accountability Office (GAO) took a close look at corporate income tax in America and how many of those corporations actually paid the statutory corporate tax rate.  As we have heard repeatedly over the past few years, Corporate America claims that the 35 percent corporate income tax rate is punitive and that it is preventing American companies from being competitive.  Let's take a closer look at the issue.

Here is a graph from FRED showing how much corporate tax is remitted on an annual basis:

In 2016, the IRS collected $444.1 billion dollars in corporate tax revenue.  This is up 121.6 percent from the 2009 low of $200.4 billion but is up only 12.4 percent from the $395 billion that was remitted in 2006.

Just for fun, let's overlay corporate tax receipts and personal tax receipts:

As you can easily see, at $1.52 trillion in 2016, personal tax receipts dwarf corporate tax receipts.

Here is a figure showing federal tax revenues from both individuals and corporations as a percentage of gross domestic product:

As we can see, in the new millennium, corporate income taxes form a much smaller part of Washington's overall revenue when measured in terms of GDP than they did back in the 1950s and 1960s.

Now, let's look at the GAO report which was commissioned by the Honorable Bernard Sanders, the Ranking Member of the Committee on the Budget.  Let's look at a couple of definitions:

Federal statutory corporate income tax rate - the rate at which U.S. corporations' income should be taxed - currently ranges from a minimum of 15 percent to a maximum of 35 percent depending on the amount of income earned.  

Effective tax rate (ETR) - the amount of income tax paid by corporations divided by their pre-tax income.  

There are a couple of things that impact corporate taxes.  Corporate losses will have an impact on corporate taxes owing since they may be carried forward into future tax years to reduce tax owing or backward into prior years to reduce tax already paid.  Income earned by foreign subsidiaries is not taxed until it is distributed to the U.S. parent corporation  

The study by the GAO looked at corporate tax filings for the years between 2006 and 2012 inclusive to see what percentage of American corporations paid no federal income tax and the average corporate effective tax rates for large corporations with $10 million or more in assets that filed a Schedule M-3.  The Schedule M-3 reconciles worldwide income and expense amounts that corporations report in their financial statements with the amounts that they report for tax purposes.  In tax year 2012, 42,301 corporations filed a Schedule M-3 return compared to a total of 1.62 million active corporations (including M-3 filers).  The data used by the GAO also breaks large corporations down into two populations; all large corporations and profitable large corporations.  In 2008 and 2009, 56 and 57 percent of large corporations were profitable, this rose to between 64 and 65 percent over the tax years from 2010 to 2012.

Here is a graphic showing the percentage of active U.S. corporations that had no tax liability between 2006 and 2012 broken down by size and profitability:

In tax year 2012, of the 1.62 million active corporations, 70.1 percent had no federal income tax liability.  In the same tax year, among all large corporations (greater than $10 million in assets), 42.3 percent had no federal income tax liability after accounting for tax credits and among large profitable corporations, 19.5 percent had no federal income tax liability.    Between 2008 and 2012, between 34.9 and 44.2 percent of large corporations had negative net income tax, thanks to federal accounting rules and 15 to 19 percent of all active corporations had their income completely offset by net operating loss deductions.

Now, let's look at the average effective tax rate (ETR) paid by Corporate America between 2008 and 2012 both federally and on a worldwide basis: 

For tax year 2012, the actual amount of federal income taxes paid (ETR) by large profitable corporations averaged 16.1 percent of their reported income, up from an average of 14 percent for the years between 2008 and 2012.  You'll note that this is well below the top federal statutory tax rate of 35 percent.  The ETR which included the worldwide taxes (right panel) of entities with foreign operations is between 3.5 and 8.7 percentage points higher than the federal ETR, averaging 22.2 percent over the tax years between 2008 and 2012 or 8.2 percentage points higher that the federal ETR.  In any case, as I noted above, this is still well below the 35 percent rate that we consistently hear about.

It is interesting to see how reforming the American corporate tax system will be a complex issue.  Simply lowering the headline corporate tax rate is not the solution unless it is accompanied with a complete overhaul of the system that allows corporations to write-off or write-down income.  Without  substantial changes, Corporate America will continue to pay less than their fair share simply because they can influence tax policy through both lobbying and campaign donations.


  1. Two crucial technical details:

    1. Corporate profits include the profits of the Fed turned over to the US Treasury. This amount is now about $100B/year. The NIPA treat the Fed as if it were a private firm, when in fact it is a nationalised firm subject to a 100% corporate income tax rate.

    2. Look at corporate cash flows, not profits. Cash flows = profits + depreciation + net capital transfers to corporations. Depreciation is simply an arbitrary amount of firm profits that is not subject to tax.

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