Progressive Corporate Taxes Make No Sense, Even Progressively Speaking — Rangel’s Bill Holds Out Hope for Simplification

October 25, 2007

The ridiculous bubble-filled bracket structure of the federal corporate income tax may be on the way out (see rate table below). At least we hope so.

Ways and Means Chairman Rangel has proposed lowering the 35% corporate tax rate to 30.5%. While it’s haggling over the details, Congress should reduce the table below to one rate or two at the most. At the very least, it should abolish the 34% bracket, not lower it to 29.5%. Here’s why.

Federal Corporate Income Tax Rates and Brackets

First $50,000

15%

$50,000 to $75,000

25%

$75,000 to $100,000

34%

$100,000 to $335,000

39%

$335,000 to $10,000,000

34%

$10,000,000 to $15,000,000

35%

$15,000,000 to $18,333,333

38%

Over $18,333,333

35%

As we’ve explained here, progressivity in a corporate tax code is unlike progressivity in personal income taxes. The reason is that the burden of personal income taxes falls entirely on the person who files the tax return and forks over the money. That’s not how corporate income taxes work. Instead, the corporation (which is just a stack of legal documents) passes on the burden of the payment to three groups of people — customers, employees and investors — and that pass-along occurs no matter what the size of the firm.

Take for example a small high-brow firm with $1,000,000 in taxable income on which it pays 34% instead of 35%. It pays its employees high salaries, sells its product to rich people, and its investors might be a group of wealthy venture capitalists. Does such a firm deserve a lower tax rate on progressive grounds? No. Contrast that small, high-brow firm with a large discount retailer: its employees are modestly paid, its customers are low-income workers, and its investors include not just corporate titans but pension funds and other large pools of middle-class savings. Does that large firm deserve a higher tax rate on progressive grounds? No.

In short, progressive rate structures in the corporate tax accomplish nothing. If Congress adopts a 30.5% top rate, it should just throw out the intermediate brackets.


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