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What is Corporations’ Fair Share of the U.S. Tax Burden?

2 min readBy: Andrew Chamberlain

Ask an economist the above question, and you’ll get a simple answer: zero percent.

That is, companies themselves are not individuals, so they can’t actually feel the loss of economic welfare from taxes. As Prof. John Mikesell explains brilliantly in his recent study, companies are just legal conduits that channel 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. es to individuals. So there’s no such thing as “companies'” fair share of anything. Only individuals can have a fair or unfair share.

We’ve posted a new commentary this morning exploring the issue. Specifically, it examines whether a progressive rate structure on a 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. can ever really be justified on equity grounds alone.

Given that the current federal corporate income tax has 8 progressive brackets — well, progressive over most ranges — that seems like an important question. Unfortunately, few lawmakers seem to realize that the ethical argument for progressive individual income tax rates — that those with higher incomes should pay higher tax rates — doesn’t apply to corporate taxes. Why? Because the “ability to pay” of workers, shareholders and customers who bear corporate tax burdens has no necessary relationship with the size of profits of the company being taxed.

Here’s a clip:

Conventional wisdom on taxes these days is that good taxes are progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. es. The more we earn, the higher our tax rate should be. And for nearly a century that logic has been etched into federal tax law, with progressive income tax rates rising along with Americans’ rising incomes…

So here’s a question. If graduated tax rates on people are fair, are they also fair for corporations?

I hope you’re sitting down, because the improbable answer is that they’re not fair.

Even if we enthusiastically embrace progressive income taxes on people, progressive taxes on corporations don’t follow at all. In fact, it turns out today’s steeply graduated corporate tax rates—eight brackets ranging from 15 percent to 39 percent—are unfair to a large number of low-income workers and consumers. And once you see why, you might find yourself whispering among friends that maybe, just maybe, the fairest corporate tax rate of all is zero percent. (Read the full piece here.)

By the way, you can find more authoritative version of this argument against progression in corporate tax rates on page 9 of this classic 1958 Tax Foundation study.