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Government Takes a Greater Share than Shareholders

By: William McBride

While the corporate income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code – like the personal income tax code – is complicated by too many credits and deductions that benefit a narrow set of taxpayers at the expense of the many, it is wrong to conclude that corporations in general pay little or no tax. Besides paying corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es to the U.S. federal government and foreign governments, corporations pay a litany of other taxes, including state and local corporate income taxes, sales, property, and payroll and social security taxes.

The graph below tells the story. It shows 15 years of IRS data, 1994 to 2008, on all corporate income tax returns. It indicates that on average, and in all but three of those years, total taxes paid by corporations exceeded after-tax profits.

After-tax profits peaked in 2006 at $780 billion, and then collapsed with the recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. to $607 billion in 2008.

In blue are federal income taxes, which also peaked in 2006 at $315 billion and fell to $208 billion in 2008. That’s an effective tax rate of 26 percent of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. (pre-tax profits), averaged over 15 years (see this report for more).

In red are foreign taxes paid on the foreign income of U.S. corporations, which continued to climb through the recession, amounting to $98 billion in 2008. (This is an underestimate of foreign taxes paid, based on the foreign tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , as discussed in detail here.) Including these taxes on foreign income yields an effective rate of about 33 percent of taxable income, over 15 years.

Finally, in green are all other taxes* paid by corporations that are deducted as business expenses. This number peaked at $357 billion in 2007 and fell to $331 billion in 2008. Adding this to corporate income taxes, both domestic and foreign, brings the total taxes paid by U.S. corporations to $740 billion in the peak year of 2006, and $637 billion in 2008.

That means in 2008, as in most years, taxes paid exceeded after-tax profits, or in other words, government took a greater share than shareholders.

*Details on other taxes: This includes state and local corporate income taxes, property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es, social security and payroll, unemployment insurance, excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es, import and tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. duties, business, license, and privilege taxes, and income and profit taxes paid to foreign countries or U.S. possessions unless claimed as a credit against income tax. This does not include state and local taxes paid in connection with an acquisition or disposition of property. Additionally, not all corporations include sales taxes.

More about corporate taxes here.

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