Sunday, October 16, 2016

The Corporate Income Tax

Take the taxes paid on corporate income. Divide by corporate profits before tax. This gives a measure of the effective corporate income tax rate.

 Graph #1: The Effective Corporate Income Tax Rate
This graph is comparable to the one at Wikipedia. Both show, for example, the rise during the first half of the 1980s and the fall around 2000.

The effective rate runs from a high around 50% in 1951 to a low around 25% today. You want to remember, though, that the corporate income tax is a tax on profits, not gross income. Corporate profits, essentially, are the part of gross income that is not spent. Corporations don't pay income tax on the income they spend. That's why businesses always collect receipts for their spending: They document that spending so they can subtract it from their taxable.

The corporate income tax only applies to corporate income that is not sunk back into the business. I'm probably making tax accounts' heads explode by saying this, because it's a crude generalization. But it gives you the idea.

The spending corporations do is about twice the size of GDP.

The gross income of U.S. corporations is the total of the income they spend plus the income they don't spend. We can estimate this gross income by taking GDP, multiplying by two, and adding corporate profits. Roughly, then, this graph shows taxes paid on corporate income as a percent of gross corporate income:

 Graph #2: The Effective Income Tax Rate on Gross Corporate Income
Roughly, 1% of gross income since the 1980s.

Suppose we make it easier to compare Graphs #1 and #2 by putting the two lines together on one graph:

 Graph #3: Corporate Income Tax as a Percent of Profit (blue) and Gross Income (red)
The red line shows the tax as a percent of gross corporate income. The blue line shows the tax as a percent of taxable corporate income.