Vox.com is Confused about Corporate Taxes

July 29, 2014

This weekend, Danielle Kurtzleben at Vox.com was puzzled by corporations shouldering what appears to be a declining portion of the federal tax burden, despite the high US corporate rate.

The source of this paradox is a peculiarity of our tax code: some corporations, called S-corporations, file their taxes through the individuals that own them, not through the corporate income tax. In fact, a vast and growing majority of corporations file their taxes this way. For example, the sole proprietor of a small landscaping business would file a schedule C and report it on line 12 of his 1040. A farm owner would file a schedule F and report it on line 18 of his 1040. A law firm’s partners would file a schedule E and report it on line 17 of their 1040s. Even some very large businesses are structured this way. Bechtel, a multi-billion dollar business with over fifty thousand employees, is an S-corporation that files its taxes through its owners.

These businesses are also sometimes called “pass-throughs,” because the corporate income passes through to the individual return. The US Treasury has been tracking the trend of an increasing number of these businesses. As they put it in a 2012 report:

Pass-through businesses represented less than one quarter of net business income in 1980, but more than 70 percent of net business income in 2008—the most recent year for which data are available (see Table 4). While the pattern from year-to-year can be volatile, the overall trend is clear.

Kurtzleben measured the tax burden by the type of tax – corporate taxes against individual taxes – which is a reasonable thing to do if you’re interested in revenue sorted by tax forms filed. However, it is not the right way to measure the tax burden of corporations on the whole. The measure she chose accounts for less than a tenth of America’s businesses, and less than a half of America’s business income. Her title – “Corporations used to pay almost one-third of federal taxes. Now it's one-tenth.” – is inaccurate.

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