Corporate Tax Facts
Corporate income tax (CIT) is simply a tax levied on a corporation’s profits. CITs are the third largest source of revenue for the federal government (after individual income tax and payroll tax) accounting for about $340 billion in 2015. The US federal corporate tax rate is practically the highest in the world at 35%. Effective tax rate is the amount paid by the corporation after tax loopholes, tax-breaks, and tax deferrals are taken into consideration. The average US Fortune 500 company pays about a 29% Effective Tax Rate. The money paid in taxes does not account for the expenses incurred by a company finding and exploiting these loopholes. These additional expenses will be addressed more later.
CITs apply to larger corporations where the owners and shareholders are not liable for issues like bankruptcies. With these companies, Profits are double-taxed (both before and after shareholders are paid). Smaller business will usually be considered “pass-through” companies where owners would be directly liable for financial issues and are only taxed based on the profits payed to owners and shareholders. There are many ways the government has an impact on the viability of small businesses, but for the purpose of this discussion I will try to focus on companies affected by corporate income taxes.
How Corporate Taxes Are Used
Federal corporate income taxes made up about 10% of the total federal revenue in 2015. CITs are not ear-marked for any specific cause, so it can be assumed that the money is spent proportionately with the rest of the government’s $3.8 trillion annual budget.
Many who are in favor of corporate taxes would argue that the money is put to good use on things like roads and education and communities. The truth is that those three things combined account for less than 7% of total federal spending and any corruption, inefficient spending, or “missing funds” prevalent in government spending would be an inherent cost hidden within these figures.
More than three quarters of the money is divided between social security (isn’t that a separate category on my pay-stub?), medicare, and the military. The debate on whether CITs are spent effectively is the same as the debate on whether any federal revenue is spent effectively and is a topic better tackled separately.
What If We Eliminated Corporate Income Tax?
If you don’t get anything else from this article, I want you to understand this…
Corporations do NOT pay taxes.
Any money paid by a corporation to the government is paid by the consumer. According to an article on Airlines.org, more than 20% of the cost of a typical plane ticket goes toward government fees and expenses. Meanwhile, Economist.com reports airline profit margins are around 1%. In this case the government gets to keep twenty times more of the cost of your ticket than the company you bought it from. Does that seem right?
The cost of the goods and services you pay for is increased by the amount necessary to cover the taxes the company must pay. That means that if a company is taxed at a rate of 35%, then you are spending 35% more on that product than you might otherwise need to spend. In other words, your dollar is 35% less valuable with a 35% corporate tax. Remember those additional expenses mentioned earlier? Any time or money spent navigating the ins and outs of corporate taxes also adds to the price paid by the consumer. For now let’s just say it’s only 30%.
So, what if we got rid of corporate income tax? There would be 30% more money to be distributed between the company, the shareholders, and the consumers. Considering the small profit margins companies are willing to accept to stay competitive, it’s reasonable to assume at least a 25% increase in consumer buying power. That means we would get to buy 25% more stuff. But what about the 10% cut in federal tax revenue? Well, if the remaining federal tax revenue is suddenly able to buy 25% more, wouldn’t the government come out ahead in that deal?
Obviously, having a dollar worth 25% more is going to have a big positive impact on our economy. But there is an even bigger economic impact associated with eliminating corporate taxes. Remember when I said the US federal income tax was one of the highest in the world? If the US suddenly became a corporate tax haven, imagine how many companies would be flocking to the US. Unemployment would practically disappear. Wages would go up (without having to artificially inflate the minimum wage) as workers would be in high demand all over the country. GDP would skyrocket and the national debt would probably disappear over a short period of time.
So, are corporate taxes a good thing?
What do you think?
Sources:
http://www.taxpolicycenter.org/briefing-book/how-does-corporate-income-tax-work
https://www.nationalpriorities.org/budget-basics/federal-budget-101/spending/
http://www.nytimes.com/interactive/2013/05/25/sunday-review/corporate-taxes.html?_r=1&
https://www.economist.com/blogs/economist-explains/2014/02/economist-explains-5