November 14, 2003
WASHINGTON—A new report from the Tax Foundation documents the course of corporate income tax collections, which have generally trended up in inflation-adjusted dollars but down as a percentage of total federal receipts.
The report is No. 126 in the Foundation’s Special Report series, "The Corporate Tax Burden," by Senior Economist Stephen Slivinski. It will be available at the Tax Foundation’s 66th National Conference, where Treasury Secretary Snow and a host of policymakers and tax scholars discussed the nation’s tax and job creation climate.
As during every recession, corporate tax collections fell during Fiscal 2001 to $151 billion, and they fell again during 2002 to $141 billion. Those collections constituted 7.6 and 8.0 percent of total federal receipts, prompting some policymakers in Washington to accuse corporations of not paying a "fair share" of taxes.
Slivinski points out that the percentage of total federal receipts provided by the corporate income tax declined from a wartime high of 39.8 percent in 1943 to 17 percent of total receipts by 1970. The trend continued through the 1970s (averaging 15.0 percent of receipts) and 1980s (9.2 percent of receipts). The 1990s did see corporate tax collections rise to an average of 11.2 percent of receipts due to remarkable economic growth and a corporate tax rate hike in 1993, which raised the top statutory corporate income tax rate from 34 to 35 percent. Since then, the long-term decline has resumed.
Slivinski also charts statutory and effective tax rates, the tax base, and other measures of corporate taxation.
Reforming Corporate Taxes
The report concludes that while rates and collections that apply to most corporations, known as C Corporations, have fallen and risen repeatedly, the basic problems with the corporate income tax have not been addressed. It remains one of the most economically inefficient and burdensome taxes on the books. Individual workers, consumers, and owners bear the economic cost of the corporate income tax, not corporations, which are merely legal entities.
Although most U.S. business activity occurs in C corporations, which file corporate income tax returns, S corporations and sole proprietorships have proliferated rapidly, in part because they do not file corporate returns. In 2001, there were 3 million S corporations and 18.3 million sole proprietorships in the United States, up 4.7 percent and 2.4 percent respectively in just one year. Income earned by S Corps and sole proprietorships is taxed through the personal income tax code, eliminating the double taxation of earnings. Naturally, this trend depresses corporate income tax collections, and it has the potential to eventually transform the business tax landscape.
For example, if S Corps were permitted to expand the number and diversity of their shareholders, or to issue difference classes of stock, they could grow exponentially. Of course, huge publicly held firms could never benefit from these reforms, so only a piecemeal improvement of corporate taxation could be achieved this way.
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
# # #
Media Contact: Bill Ahern (202) 464-6200