The Truth on Corporate Tax Payments

There is a lot of frustration out there about corporate taxation. You could sense it in the jobs speech, and the coming rhetoric about everyone needing to pay a fair share. It should be obvious that double taxation of individuals by hitting their income and then their stake in ownership of companies (all corporations are owned by people) that corporate taxes are not fair in the first place. But in setting that aside, the Tax Foundation has a very helpful new study articulating what corporations actually pay in taxes. Contrary to the popular talking points, it is not zero. Here are the highlights from the study:

  • While the corporate tax code—like the individual tax code—is complicated by too many credits and deductions that benefit a narrow set of taxpayers at the expense of the many, recent reports of large corporations avoiding their “fair share” of taxes are misleading.
  • IRS data on millions of actual corporate tax returns shows that the effective U.S. federal corporate tax rate has averaged 26 percent between 1994 and 2008.
  • The effective U.S. federal corporate tax rate differs considerably across sectors, but much of this variance is explained by the mixture of U.S. and foreign income, foreign taxes paid, and foreign tax credits claimed, which merely prevents double taxation of foreign profits.
  • Foreign taxes explain most of the difference between U.S. statutory and effective rates. The overall effective corporate income tax rate on the worldwide income of U.S. corporations, inclusive of foreign taxes paid on foreign income, is between 32.1 and 33 percent, which is close to the statutory rate of 35 percent.
  • The largest corporations pay the lion’s share of taxes. In 2008, the 1,937 largest companies were responsible for 68 percent of corporate tax revenue.

So companies are paying, on average, 26 percent of their revenue as taxes, and if you consider the taxes they pay to foreign nations, an average between 32 and 33 percent. Set fairness aside, that is simply not competitive. That is not a tax environment that attracts companies to our shores or encourages expansion. And that hurts employment. The President’s job plan should at the very least be adjusted to consider this reality.

See the whole Tax Foundation study by William McBride here.