A Confused Report on Corporate Taxes

November 19, 2014

This week, a new report from the Center for Effective Government claims that a number of corporations paid their CEOs more than they paid in federal income taxes. They claim that this reflects the fact that corporations are not paying their fair share and the corporate tax system is broken.

Leaving aside that their measure of corporate profits and taxes paid is flawed (see their FAQ #3 on page 18), the report seems confused about how the corporate income tax works.

When a corporation calculates its taxable profits, it takes its revenues (what it made in sales) and subtracts its costs (cost of labor, raw materials, taxes it paid to state and local governments). From this, the corporation calculates its tax bill.

Part of the corporation’s labor costs is CEO pay. The higher the CEO pay, the lower the profits of the corporation and vice-versa. If the corporation decides to pay the CEO all of the profits of the corporation in a year, the corporation would pay zero tax, since it would have zero profits.

However, the larger the CEO’s pay, the higher the CEO’s tax bill would be. This is a huge omission in the report. The author’s seem to think that if the corporation pays the CEO more, more money becomes untaxed. In fact, these CEO’s were probably paying more taxes than their corporations did in 2013.

But does any of that even matter? No. Because at the end of the day, the income is taxed either way: on the corporate tax return, or on the CEO’s individual tax return.

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