I am about as anti-tax as is possible, but this sure does stick in my craw for some reason:
More than 60% of U.S. corporations didn’t pay any federal taxes for 1996 through 2000, years when the economy boomed and corporate profits soared, Tuesday’s Wall Street Journal reported, citing the investigative arm of Congress.
The disclosures from the General Accounting Office are certain to fuel the debate over corporate tax payments in the presidential campaign. Corporate tax receipts have shrunk markedly as a share of overall federal revenue in recent years, and were particularly depressed when the economy soured. By 2003, they had fallen to just 7.4% of overall federal receipts, the lowest rate since 1983, and the second-lowest rate since 1934, federal budget officials say.
Fix the damned tax code. Pronto. If I am way off base here- explain to me why these corporations shouldn’t have to pay SOMETHING.
Hucklebuck
I own a small corporation which has never paid a dime in income tax. Why? The business it operates has never made a profit. Profits are taxed, not corporations. The stat cited to in your post might mean something if it was limited to corporations showing a profit; otherwise, it’s just put out there to provoke the response you had.
Francis W. Porretto
No corporation should pay ANY tax. Corporations don’t really pay taxes in the first place; it’s just a layer of added cost they have to pass along to their customers, as elevated prices.
John Cole
That is all I needed.
Slartibartfast
Just what I was going to say, Francis. I’d just love to hear what DeLong has to say on this, though. I think he’d be economo-politically conflicted to the point of immobility.
OdysseusInRTP
I am a small business owner also. It would be interesting to see the number of small businesses that are represented in that statistic. I think most of the companies in the U.S. are considered small business.
I didn’t pay any taxes either the last couple of years. Didn’t make much money either.
The stat doesn’t mean much to me without some more info.
OdysseusInRTP
Let me rephrase that…
My business didn’t pay any income taxes…
I still paid alot of taxes… just in payroll
A fine scotch
Plus, a LOT of corporations or other business entities (FLPs, LLCs, S Corps) by their very nature do not pay taxes. Their owners will pay personal tax on any income generated, but there is no corporate tax.
Jon Henke
I’ll agree with Francis. Any “corporate tax” will just be passed on to the consumer in the form of “higher prices”.
So, the question isn’t really “should corporations pay taxes”, but “should we impose higher prices on the consumer” and pretend it’s not a tax on consumers?
frontinus
http://www.gao.gov/new.items/d04358.pdf
Always best to go to the source.
One thing to keep in mind. When an economy is booming corporations generally are much better able to do things that depress taxable income. Like investing in plant, property, equipment, R&D, and writing off goodwill from mergers. So while gross income might increase with the economy, payable taxes as a ratio might drop.
frontinus
Also, if you look at the actual GAO report their data seems to show that the LARGER a corporation is the MORE likely it is to pay taxes. Kind of curious as to why that little tidbit was left out of the “news” articles.
Terry
Another factor at play in all of this relates to the fact that the data relate to “cash taxes” paid. Many companies can defer cash payments through such tax accounting methods as the use of “accelerated depreciation” methods for assets, such as factories; these methods serve to reduce taxable income (and thereby cash taxes) in the near term when the assets are relatively new, but such payments have to be made later when the depreciation is used up.
Probably as much, or more than you care to know.
Joe Schmoe
I have heard that something like 50% of all businesses fail, so that could account for a large portion of this statistic.
Andrew J. Lazarus
Even supposing that all corporate income taxes could be recovered from customers dollar-for-dollar (which I very much doubt, since I likewise doubt that all of the SAVINGS from reductions in corporate taxes were converted into LOWER prices for end-customers, which would have to be the case), why is that a problem?
ANY tax makes for a distortion like this. If the PERSONAL income tax were repealed, I would have much less need of a raise. So what?
cthulhu
When you look at a corporation, you are looking at the embodiment of an idea — literally, for the word corporation comes from corpus, latin for body and anglicized to the word corpse. Under our law, corporations are business entities that are treated in certain respects as persons — able to sue and be sued, hold property, and pay taxes.
Just because the law says something, however, doesn’t make it so. Corporations cannot be jailed, don’t vote, and there is no prohibition about owning them. In fact, by law, they are entirely owned by their shareholders.
A “balance sheet” reflects this ownership — it says that everything owned by a corporation is pledged to creditors or is owned by the shareholders. That’s why it balances: assets equals liabilities plus equity.
And that’s why taxation of corporations is a non-starter. Who are these owners — martians?? More likely, a large part of these owners are you and I (particularly in our pension funds).
Further, let’s invent an example. Philips and GE are both international diversified conglomerates that make light bulbs. Each is going to make 100 light bulbs for about $20, and sell them to make a $4 profit net of taxes. Because of sweetheart deals in the EU, Philips will pay no taxes on their sale, but populist “soak-the-rich” rhetoric has left GE with a 20% effective tax rate. If I go to the store, I can buy a Philips bulb for $0.24 or a GE bulb for $0.25.
Great news, I save a penny on every Philips bulb I buy. Too bad I’ve got mutual funds holding GE in my retirement plan, and they won’t sell ten million bulbs that should have earned them $400,000.
Of course, they won’t pay taxes on that money either, so it seems that the tax rate should be increased, right?
Remember that “the power to tax is the power to destroy.” Somehow, I don’t see the US remaining an economic powerhouse if we tax our businesses into oblivion.
Just my $0.02 — and, yes, I’m a CPA with over 20 years of experience with corporate tax.
Spoons
“Even supposing that all corporate income taxes could be recovered from customers dollar-for-dollar (which I very much doubt….)”
Andrew, where, pray tell, do you think the money comes from? A currency tree? All corporate income taxes are ‘recovered’ from customers — by definition.
Jon H
It’s not all little companies that pay no taxes.
If I’m not mistaken, Enron didn’t pay any taxes for 4 years in the late 90s.
Not only did they not pay any taxes, they were eligible for $382 million in refunds.
They did this through byzantine strategies of sheltering profits.
http://www.chron.com/cs/CDA/story.hts/special/enron/1215266
Jon H
“All corporate income taxes are ‘recovered’ from customers — by definition”
No, some income comes from investments, especially if they have spare cash in short term instruments.
I doubt Microsoft is keeping their $50 billion cash hoard in Bill Gates’ mattress.
Jon H
“Corporations don’t really pay taxes in the first place; it’s just a layer of added cost they have to pass along to their customers, as elevated prices.”
And if it doesn’t appear in the prices, the taxpayer gets in in the shorts anyway.
At least, if it’s passed on in the prices, it’s passed on to more people than just taxpayers.
If it’s reflected in prices, the tax is still paid by those Lucky Duckies who don’t pay Federal taxes because they don’t earn enough (or don’t report enough) income.
JayR
“No corporation should pay ANY tax. Corporations don’t really pay taxes in the first place; it’s just a layer of added cost they have to pass along to their customers, as elevated prices.”
As Jon H pointed out above, this is one of the dumbest things said, ever. Corporations receive benefits from taxpayers. Taxpayers provide them with roads and airports to move their employees and goods. Taxpayers provide them with a relatively educated workforce (at least relative to, say, Bangladesh). Taxpayers provided them with the internet (partially privately funded now but originally completely funded by the DoD and NSF) by which they are able to more easily outsource all these jobs to India.
To not tax corporate profits means *all* of us have to pick up this cost, even if we don’t use the goods or services provided. If the companies are taxed, at least some of this cost will be passed on to the consumers themselves.
Andrew J. Lazarus
Spoons: do you wish to argue that when corporate taxes are reduced the corporations pass the discount through dollar-for-dollar? Then they can’t pass increases through, either; just as with any other cost, the amount the end-customers have to pay depends on the elasticity of demand for the company’s products.
That’s pretty obvious when you think about it (although there may be OTHER arguments against corporate taxes), but when it gets to a religious issue common sense goes away.
Would you make this claim about PROPERTY taxes paid by a corporation? Effluent discharge fees? Required insurance and bonds? Why are these mandated expenses going to be any different???
cthulhu
OK, let’s try this again.
That corporations can be taxed at all is a legal convention. Corporations exist by legal fiat and have been granted the right to act in certain circumstances as if they were a separate entity — but in their internal records it is recognized that all they own belongs to shareholders.
Taxing corporations is exactly the same as taxing shareholders for doing business in certain ways. Since only American corporations are subject to American income tax, US Corporate Income tax is a cost of doing business as a US corporation.
I hear a lot of stuff about outsourcing jobs, companies fleeing overseas, and non-core tasks being exported or subcontracted. If this decreases costs while maintaining benefits, it is as inevitable as rocks rolling downhill.
If you are in favor of corporate tax increases, you’d better be doing most of your investing overseas. How tough is this to comprehend?
Chris
Cthulhu,
Thank you for your insightful and clearly well-informed input on this issue. Like John, I’m about as anti-tax as they get but even my original reaction was “What?! Of course corporations should be taxed!” However, after reading your posts and thinking about it, I’ve changed my mind.
Like you said, shareholders are the owners of any corporation and therefore the only people affected by corporate taxation are the shareholders. And contrary to popular opinion, the average investor is not some fabulously wealthy, old-money socialite – it’s the everyday working middle class American. (Anyone who doesn’t think so should look in their 401(k), 403(b), or mutual/index fund portfolio). So a tax on corporations is, in essence, yet another tax on American citizens.
To quote Abe Lincoln: “You cannot help the poor by destroying the rich. You cannot lift the wage earner by pulling down the wage-payer.”
By the way, I dig the Lovecraftian username!
Slartibartfast
“Taxing corporations is exactly the same as taxing shareholders for doing business in certain ways.”
Which makes it all that much more incomprehensible that the government’s doing both.
But I think your point is off-target. Taxing corporate income (or profit, more accurately) amounts to a flat tax on consumers, whereas taxing the shareholders is decidedly not flat. I’d think liberals in general would be against corporate taxation for this very reason.
Unless I’m completely wrong, which is certainly a possibility.
poormedicalstudent
kerry’s entire plan has already been crapped on by the Economist of all places, and they did a thorough job. it’s severely lacking and in the long term will amount to far worse repercussions than the ‘problem’ it’s supposed to fix.
on another note, go here for more proof that there is NO tax break for the rich.
Jon H
“Like you said, shareholders are the owners of any corporation and therefore the only people affected by corporate taxation are the shareholders.”
This would be true if more, or all, companies declared dividends.
Most public companies don’t, so corporate profits don’t pass on to the shareholders.
If you want to exempt businesses from taxes, then require all profits to be passed on to shareholders within, say, 5 years rather than sitting in the vault.
Slartibartfast
All that proves is the highest quintile is paying more of a share of taxes, not that the actual tax rates are higher. Probably what’s happened is the highest quintile is now earning a higher percentage of national income, and is therefore paying more taxes than in previous years because of that. Not exactly a shocking result. If you look at the census data, the percentage of total income in the upper quintile has increased roughly six percent since the mid ’70s, which is just about equal to the shift in tax burden.
HH
Corporations don’t pay taxes so the premise is false.
Chris
Jon H,
I’d like to see more companies pay out dividends myself. That being said, because the shareholders own the company, and as such are granted voting rights, aren’t they responsible for keeping the company’s board of directors in power to make executive decisions like paying out dividends or not? I’m asking here, I don’t know myself. Maybe paying out a dividend is not in the best interest of the company at any given point in time, be it 5 years, 10 years, or whatever. If so, then reinvesting money in the company that otherwise would’ve been paid out in dividends would be a direct benefit to shareholders’ future earnings and therefore, I argue, that corporate taxation would still negatively affect shareholders. To be perfectly honest, I’m not sure this argument holds water. I’m kind of just thinking out loud.
Slartibartfast
Saying companies ought to pay dividends is nice, but has no force. Making it mandatory is another thing altogether. Think about what you’re putting out there. Can you really make a law that requires this, that’s effective? And do you really think this is a good idea?
nomanisanisland
What do you care, baloon juice, you left-leaning Kerry-lover!
van
Actually, corporations pay taxes: Mediscare and Social Insecurity. Any independent contractor will tell that they are hit hard with taxes, because they pay all of the above taxes.
IXLNXS
Who lost in the Enron thing?
Tax payers?
Investors?
Anybody gained?
Same thing as the tax codes. It’s all designed to evade, and to basically steal. Buisness ethics has lost it’s meaning.
Slartibartfast
“Who lost in the Enron thing?”
The ones who bought low and sold high. I’d have thought that would be obvious.
Ken Hahn
Corperate income taxes are paid by consumers. The tax code is written by politicians. Combine those facts and you have a multithousand page tax code that will be unfair to everyone. Corperate incomes taxes, like other complexities in the tax law, are unfair to the poor and powerless. Abolishing corperate income taxes is a good idea. Simplifying the tax code is a better one.
Steverino
This would be true if more, or all, companies declared dividends.
Not quite true. Another way of rewarding investors is growth of stock price (increase in the value of the corporation). The stock price is based on the present value of the after-tax profits for the foreseeable future of the corporation.
I don’t know the exact figure on how many publicly traded corporations pay dividends, but I am virtually certain that 28 of the 30 DJIA stocks pay dividends.
Corporations would indeed decrease the cost of their products if they didn’t have to pay taxes. And they’d lower the price to the point where they’d still be making the same profit. Because if they didn’t lower the price, then their competitors would, and they’d lose customers. No corporation operates in an absolute monopoly, so they all have to consider what their competitors would do.
Hipocrite
I call “Pretend Economics BULL” on every one of you that has said that corporate taxes are paid only by consumers.
If there is an upward sloping supply and downward sloping demand curve, taxes on profits act to push down the supply curve.
The total utility lost by the consumer is
(1/2*sqrt(t^2*PESPED)
The net income from the tax is (t*(q-t*PED).
Those two things are not equal by definition.
Chris
Hipocrite,
Not everyone who posts here has an Economics degree. Could you please define the variables in your equations so they are easily understood? Also, given an upward-sloping supply curve and a downward sloping demand curve, couldn’t suppliers simply scale back on supply until the point of intersection between the two curves was reached?
Slartibartfast
“If there is an upward sloping supply and downward sloping demand curve, taxes on profits act to push down the supply curve.”
Yeah, I’d appreciate an English translation of that, myself.
Wooly Bugger
Just remember what President Reagan said:
Corporations don’t pay taxes. People pay the taxes—ALL of them.
Toren
No, they don’t pay those taxes, either. They subtract them from the wages of the workers and hand them over to the government. They are merely unpaid tax collectors.
As you say, when the worker is the corporation (so to speak) they pay them directly.
college drunk girls
Nihil tam munitum quod non expugnari pecunia possit – No fort is so strong that it cannot be taken with money. (Cicero)