A reader asks: You claimed that the United States has an average corporate tax rate of 13.4 percent, despite a statutory tax rate of 35 percent. How did you calculate the “average” corporate tax rate?
Actually, I didn’t calculate it. The Bush Treasury did. They divided corporate taxes by corporate capital income.
Another reader asks: Do small corporations pay the same “average” or “effective” tax rate as bigger corporations?
Technically, small corporations are supposed to pay less in taxes. Like individual income tax rates, statutory corporate tax rates are progressive: 15 percent on the first $50,000 of income, 25 percent on income from $50,001 to $75,000, 34 percent on income from $75,001 to $10 million, and 35 percent on income above $10 million. (It gets way more complicated, but the details aren’t relevant here.)
These rules only apply to “C corporations,” whose profits are taxed twice. First, the corporation pays corporate taxes. Then, the shareholders pay dividend taxes on any profits distributed to them (instead of reinvested in the company). Most large corporations are C corporations.
According to the U.S. Small Business Administration — which defines a small business as an entity with less than $10 million in assets — only 7.5 percent of small businesses are C corporations. 80 percent are sole proprietorships or partnerships. The remainder are “S corporations,” which don’t pay corporate taxes, and their owners don’t pay dividend taxes. Their profits are taxed as individual income for the owners.
According to the SBA, the effective tax rate for small C corporations is 17.5 percent, and the effective tax rate for small S corporations is 26.9 percent. For technical reasons, these rates aren’t directly comparable to each other, but we can conclude that small C corporations pay similar (if not higher) effective rates as large C corporations.
Clearly, statutory corporate tax rates are extremely misleading, and C corporations — large and small, but especially large — are benefitting from many loopholes.
A third reader asks: If most small businesses aren’t C corporations, then what really matters is individual income taxes. If you raise the tax rate for individuals making $200,000 or more, don’t you effectively increase taxes on most small businesses?
Yet another reader asks: Should we consider taxing individuals and corporations differently at high income levels, e.g. under $250,000 vs. over $250,000 for individuals, and under $2 million vs. over $2 million for corporations?
One of the most unsettling developments of the past few decades has been the divergence of income at the very top. It’s not simply the case that the top 10 percent have gained ground at the expense of the bottom 90 percent. The gains of most of the top decile have been slow and moderate. The top 1 percent of earners have driven most of this inequality all by themselves:
And among the top 1 percent, an outsized share of the growth is from the top 0.01 percent of earners:
The super-rich have broken away from the pack!
The tax code encourages this divergence by taxing the super-rich at the same rates as the rest of the rich. The top 1 percent and 0.01 percent are benefitting from the economy more and more and giving back less and less.
Similarly, as discussed earlier, although the tax code is supposed to go easier on small corporations, it’s large corporations that are paying less.
There should be more brackets at the top and higher taxes for those top brackets — which is why Warren Buffett and Barack Obama are pushing for a “millionaire tax.”
And finally, a reader asks the big question on everyone’s mind: How do corporations get from a 35 percent statutory tax rate to a 13.4 percent average rate? Why they can avail themselves of these deductions and credits?
Here’s a list of the major corporate tax subsidies, courtesy of Citizens for Tax Justice:
(Notice that the biggest C corporation subsidy is for foreign activities, which we talked about last month.)
The idealistic justification for these loopholes is that they have merit — and, indeed, some of them do. In fact, each one has some argument, no matter how thin, to support it. On the whole, though, there is no evidence to indicate that they improve economic performance.
The cynical answer is that corporations and their top executives are, by far, the biggest campaign contributors to politicians, as well as the best-funded lobbyists. As a result, they win more battles than they should, and they have access to the legislating process to such an extent that they can bend the details to their wishes.