NCPA - National Center for Policy Analysis

Sifting Options on Corporate Tax Rates

January 3, 2011

Unlike income and payroll taxes, the corporate tax as a share of overall tax revenues has been shrinking.  From 3.8 percent of gross domestic product (GDP), it was down to 2 percent of GDP before the recession, says David Wessel. 

It is largely a big-company tax:

  • Half of all business profits are organized to be taxed at the individual level, a way to pay less in taxes.
  • Eighty-five percent of corporate income taxes are paid by 0.5 percent of companies.

Effective tax rates vary widely by industry:

  • The average effective corporate tax rate for publicly-traded U.S. companies is 16.53 percent.
  • But heavy construction industry firms pay an effective rate of 33.78 percent.
  • Whereas, private equity firms pay an average of 1.42 percent.

In short, the corporate tax rate has few defenders.  But changing it without losing revenue is challenging.  Each percentage point cut in the existing corporate tax reduces revenue by about $120 billion over 10 years, says Wessel.

To make this worth doing the rate needs to fall to 25 percent.  That means big changes in current loopholes:

  • If the tax break for "domestic production" (so broadly defined that it covers hamburger making) were eliminated, the corporate tax rate for all companies -- from Wall Street to the rust belt --could be reduced by 1.4 percentage points.
  • But for the one-third of companies that get the tax break today, the savings are the equivalent of shaving the tax rate by 3.5 percentage points.
  • So if the tax break were wiped out, their taxes would increase unless some other popular deductions are eliminated, such as accelerated depreciation.

Basically, there is a trade-off:  Fewer tax breaks for companies to do what Congress has been convinced they should do, versus a lower tax rate.

Source:  David Wessel, "Sifting Options on Corporate Tax Rates," Wall Street Journal, December 30, 2010


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