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 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. 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 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. 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 taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
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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