For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...
Nov. 25 — U.S. taxes on big business made up less than 10 percent of overall federal revenue in 2016, their lowest level since 2011, potentially raising questions about the effort to overhaul the complex corporate tax system ahead.
Prospects for a tax revamp received a boost from the election of Donald Trump, as the issue is a high priority for congressional Republicans who have awaited a GOP White House to push for an overhaul. In the past, efforts have often foundered on divisions over whether a revamp should be phased in, with changes for individuals and companies made separately, and a rivalry between large corporations focused on easing international taxation eased and smaller domestic businesses who pay taxes at individual tax rates, so-called pass-through entities.
According to Treasury Department data, corporate tax revenue totaled $299.6 billion in fiscal year 2016, which ended Sept. 30, while overall revenue amounted to $3.267 trillion, making the share of revenue 9.17 percent, by Bloomberg BNA calculations. That was down from 10.58 percent in fiscal 2015 and the lowest since 7.86 percent in fiscal 2011.
Historically, corporate tax receipts have been only the third-largest source of income for the government, trailing well behind individual income taxes and payroll taxes for Social Security and Medicare. However, they can vary widely as a share of revenue, depending on the health of the economy, companies’ bottom lines and the tax code. In 2009, they fell to 6.57 percent, reflecting the impact of the 2007-09 recession. On the other hand, in 2006, they hit 14.70 percent, the highest since the late 1970s.
The Treasury figures have a significant limitation, though: they count only taxes paid by C corporations, traditional large companies that are usually publicly traded and subject to federal accounting oversight. They don’t count taxes from businesses organized as passthroughs that pay taxes at individual rates, such as S corporations, limited liability corporations and partnerships—and those make up more than half of U.S. business income, some estimates show.
Matthew Gardner, a senior fellow with liberal-leaning Center for Tax Justice, said the Treasury data showing the focus on the 35 percent tax rate for C corporations in the tax overhaul debate is misguided. While Trump on the campaign trail pointed to the rate as evidence the U.S. tax system isn’t competitive internationally, Gardner said the declining share of federal taxes paid by C corporations and their ability to often avoid taxes by shifting assets on paper overseas show that the more important rate is the effective tax rate for all businesses, not the statutory rate.
“It say particularly clearly that the statutory tax rate is not really the rate that matters,” Gardner said. “There’s a huge gap between what they ought to be paying and what they are paying.”
“Business in the United States: Who Owns It and How Much Tax Do They Pay?”—a paper published in September as part of the National Bureau for Economic Research’s “Tax Policy and the Economy” book series—estimated the rise in non-C corporations since the 1980s meant the overall federal tax rate on all types U.S. taxable businesses was 24.3 percent in 2011. That included an estimated 15.9 percent average tax rate on partnerships, a 25 percent rate on S corporations, a 13.6 percent tax rate on sole proprietorships as well as a 31.6 percent rate on C corporations, and was adjusted for the share of each type of company in the business sector.
“We estimate that, if 2011 business income had instead been earned along 1980-sector income shares, the average tax rate on US business income would have been 28.0%. Total business income in 2011 was $2.6 trillion, so an additional 3.8 percentage points would have generated an additional $100 billion in tax revenue,” wrote the authors, who included five Treasury Department staffers, two professors from the University of Chicago and an assistant professor from the University of California at Berkeley.
The trajectory of C corporate tax receipts is projected to continue downward. While they were almost 23 percent of federal revenue in 1966, the nonpartisan Congressional Budget Office projects them to fall to about 8.5 percent by 2026.
Joseph Rosenberg, a senior research associate with the centrist Urban-Brookings Tax Policy Center at the Urban Institute, said the decline was due not only to the shift away from organizing as C corporations, but also to the ability of multinational companies to shift profits outside the U.S. and legislative changes, such as making some previously temporary tax breaks permanent.
“There has been a shift in terms of the feasibility of how you tax multinationals, where capital is increasingly mobile, globally speaking,” Rosenberg said.
Whether the U.S. should continue its effort to tax business profits globally or instead move to a more territorial system is one of the central questions in the corporate tax overhaul debate. But neither Rosenberg or Gardner said resolving that long-running debate would necessarily increase collections.
“You need to make changes in how we tax,” Rosenberg said. “The policies need to adapt to shifting realities.”
Gardner said a more pure form of a worldwide taxation would help with future revenue, but do little to resolve the question of profits that companies are now holding offshore in hopes of bringing home should U.S. lawmakers agree to tax them at a rate lower than the current 35 percent. “A move to worldwide would shut the barn door,” he said.
Gardner said C corporations’ ability to lower their tax bills by shifting assets means the tax burden is being shifted away from them over the long term. “Every million dollars that C corporations avoid is $1 million someone else will have to pay,” he said.
To contact the reporter on this story: Jonathan Nicholson in Washington at email@example.com
To contact the editor responsible for this story: Paul Hendrie at pHendrie@bna.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)