The voices of Tax Policy Center's researchers and staff
The leading Democratic presidential candidates all want to raise income taxes on corporations. It is not surprising. According to a 2019 Gallup poll, about 7 out of 10 Americans believe corporations are not paying their fair share in federal taxes.
To better understand how Americans think about the issue, I conducted an unscientific poll among my friends to see what they thought about taxing corporations. In my poll, 11 out of 12 agreed that corporations should pay their fair share.
But what’s “fair?” Do taxpayers have a sense of what major corporations pay in taxes? (Hint: It’s not really “zero.”) And when corporations pay income taxes, do we understand who ultimately bears that tax burden?
What share of federal tax revenue comes from corporations?
Two of my friends guessed that corporate taxes generate about 5 percent of federal revenue. Seven guessed 10 percent; three said 20 percent.
The reality: the federal government collected about $230 billion in corporate taxes in 2019, about 6.5 percent of federal revenues in 2019. That’s down from 9 percent of federal revenue in 2017, before passage of the Tax Cuts and Jobs Act (TCJA). The share of federal tax revenues from the corporate income tax has been dropping for decades – it was about one-third in the early 1950s.
What tax rate do corporations face?
Most of my friends underestimated the corporate tax rate. The TCJA lowered the rate from 35 percent to 21 percent. Three of my friends knew that current rate, but eight thought it was 15 percent.
Large US firms generally pay effective tax rates far below 21 percent. That’s because multinational firms can book profits in lower-tax jurisdictions around the globe. And domestic businesses can take advantage of substantial tax incentives for investments. I asked my friends whether corporations should be allowed to reduce their taxes, legally, as much as possible. Eight said no, four said yes.
While most didn’t know the actual corporate income tax rate, 11 out of 12 of said it should be higher. Eleven also said that corporations should pay some minimum amount of taxes (and never be allowed to avoid taxes completely in any year).
Who bears the cost of corporate taxes (and enjoys the benefit when they’re cut)?
My friends could write in multiple answers to this question. Only one thought shareholders bear the burden of corporate taxes. Five people thought consumers do, while four said workers ultimately pay corporate taxes.
It turns out there is an ongoing debate among economists over the incidence of the corporate income tax. TPC assumes that 80 percent of the burden falls on capital and shareholders, while labor bears about 20 percent. This view is roughly shared by the Congressional Budget Office and the Congressional Joint Committee on Taxation. TPC explains why in this paper.
But others think workers pay far more of the corporate tax. For example, Kevin Hassett, former Chairman of the Council of Economic Advisers in the Trump Administration, argued that workers may bear the entire corporate income tax (or even more). Thus, he argued during the debate over the TCJA, lowering corporate income tax rates would significantly boost average annual household salary or wages.
Is that possible? Perhaps, though this would occur (if at all) over a long period of time and following a complex series of events. My TPC colleague Steve Rosenthal explained last month: Corporations must attract and keep new investment. They have to put that extra money into new plants, equipment, and production processes that makes workers more productive. Then workers have to negotiate for higher pay.
But none of this has yet happened following passage of the TCJA. Shareholders, for now, appear to bear most of the cost of corporate taxes, and are happier when tax cuts lower those costs.
Maybe it’s not corporations who are not paying their fair share, but shareholders.
Who are shareholders? A Gallup poll found that 55 percent of Americans said they were shareholders of some kind in 2019, though most own their shares through tax-advantaged retirement accounts.
Generally, shareholders tend to be well off (making the corporate tax progressive). Among US investors, the bottom 90 percent of income-earning households own about 12 percent of US stock. The top 1 percent own 57 percent (up from 46 percent in 1990). Steve estimates that foreign investors own about 35 percent of all US equities.
Presidential candidates have a catchy slogan when they demand that “big multinational corporations pay their fair share”—whatever that might be. When voters hear that, they just need to remember that corporations themselves do not bear the burden of the corporate income tax. Shareholders bear most of that burden, and workers bear the rest at some point in the future.
“Corporate taxes: Taxing richer people now, and everybody else eventually.”
That’s not as catchy a slogan, is it?
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Mark Lennihan, File/AP Photo