Surge in Corporate Income Tax Collections Offers Opportunity for Tax Reform

May 08, 2006

Fiscal Fact No. 57

As the House Ways and Means Committee prepares to hold a series of hearings on corporate tax reform and international competitiveness, they will be confronted by recent data that show a precipitous increase in corporate tax collections over the past two years. These increasing corporate tax receipts give lawmakers a window of opportunity to invest in tax code improvements for the long term: lowering the corporate income tax rate, broadening the tax base and integrating the corporate income tax with the individual income tax system.

In February, the Office of Management and Budget (OMB) released the final revenue figures for Fiscal Year 2005. Corporate tax collections totaled $278 billion, up from $195 billion in 2004 and $139 billion in 2003 (all in real 2005 dollars). That represents a real rate of growth of over 100 percent over two years. A new study by the Congressional Budget Office (CBO) shows this trend has continued into 2006. As of April 2006, corporate income tax receipts are up nearly 30 percent over receipts during the same period in 2005.

The recent surge in corporate income tax collections has substantially increased corporate tax collections as a percentage of Gross Domestic Product (GDP) from 1.2 percent of GDP in FY 2003 to 1.6 percent in FY 2004 and, most recently, 2.3 percent in 2005. By this measure, corporate tax collections in 2005 were higher than in any year since 1980.

Figure 1. Rising Corporate Income Tax Collections as a Percentage of GDP (Click to enlarge)

Source: Office of Management and Budget

Corporate income tax collections have also become a more important revenue source for the federal treasury in recent years. During the 1990s, corporate tax collections ticked upward to an average of 10.5 percent of federal receipts. This was due to remarkably strong economic activity and President Clinton’s 1993 tax package, which raised the top statutory corporate income tax rate from 34 percent to 35 percent.

The recession that began in 2001 forced down corporate tax collections along with the larger economy. Corporate income taxes accounted for just 7.6 percent of federal revenues in 2001. Revenues remained low for three years, and in 2003 corporate income taxes raised 7.4 percent of total federal revenue. As the economy rebounded, corporate income taxes rose to 10.1 percent of federal revenue in 2004, and 12.9 percent of federal revenue in 2005—their highest share of total receipts since 1979.

As this roller coaster of corporate collections shows, economic conditions are the main determinants of corporate tax revenue. Because corporate profits are volatile—rising sharply in booms and falling steeply in recessions—so too are government receipts from the corporate income tax. Over the long term, however, the trend of federal corporate tax receipts is steadily upward.

Growth in S-Corporations
During the 1990s, a trend began toward companies organizing as S corporations rather than traditional C corporations. Because the income of S corporations is taxed through the individual income tax rather than the corporate tax, this resulted in a sharp increase in the amount of business income that was channeled into the individual income tax system. (Please see related “Fiscal Fact” at http://www.taxfoundation.org/legacy/show/1477.html.)

Considering the rapid growth of S corporations since the individual income tax cuts in 2003, the dramatic growth of corporate tax collections from traditional C corporations in the past two years is remarkable. These surging collections place U.S. lawmakers in a unique position to compete with the corporate tax rate reductions recently enacted by many of the U.S.’s major trading partners in the OECD. (Please see related “Fiscal Fact” at http://www.taxfoundation.org/legacy/show/1466.html.)

Table 1. U.S. Corporate Income Tax Collections, 1976-2005

Year

Corporate Income Tax Collections ($millions)

Percentage of Total Federal Receipts

Percentage of GDP

1976

41,409

13.9%

2.4%

1977

54,892

15.4%

2.8%

1978

59,952

15.0%

2.7%

1979

65,677

14.2%

2.6%

1980

64,600

12.5%

2.4%

1981

61,137

10.2%

2.0%

1982

49,207

8.0%

1.5%

1983

37,022

6.2%

1.1%

1984

56,893

8.5%

1.5%

1985

61,331

8.4%

1.5%

1986

63,143

8.2%

1.4%

Top statutory rate lowered from 46% to 34% as part of the Tax Reform Act of 1986 (an overall tax increase on corporations)

1987

83,926

9.8%

1.8%

1988

94,508

10.4%

1.9%

1989

103,291

10.4%

1.9%

1990

93,507

9.1%

1.6%

1991

98,086

9.3%

1.7%

1992

100,270

9.2%

1.6%

1993

117,520

10.2%

1.8%

Top statutory rate raised from 34% to 35% as part of the Omnibus Budget Reconciliation Act of 1993 (an overall tax increase on corporations)

1994

140,385

11.2%

2.0%

1995

157,004

11.6%

2.1%

1996

171,824

11.8%

2.2%

1997

182,293

11.5%

2.2%

1998

188,677

11.0%

2.2%

1999

184,680

10.1%

2.0%

2000

207,289

10.2%

2.1%

2001

151,075

7.6%

1.5%

2002

148,044

8.0%

1.4%

2003

131,778

7.4%

1.2%

2004

189,371

10.1%

1.6%

2005

278,282

12.9%

2.3%

Source: Office of Management and Budget, Tax Foundation 

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