Policy Documents

Policy Tip Sheet: Corporate Income Taxes

July 31, 2012

Corporate Income Taxes

Problem

All 50 states currently have a higher combined federal and state corporate tax rate than France, whose rate is third-highest among OECD countries 1. Although corporate income taxes make up a fairly minor part of state tax revenue, they have a harmful impact on economic behavior. Nonetheless, many state lawmakers rely on the corporate tax to avoid placing a heavier burden on individuals.

Corporations are nothing more than legal entities, so corporatetax levies are in reality paid by those who buy from acorporation, work for one, or own stock in one. The burden ofcorporate taxes falls on individuals, and what is worse, theburden is invisible.

In addition to increasing the total tax burden on the entire privatesector, high corporate tax rates divert resources fromeconomically productive activity to tax-avoidance activity—ascapital becomes more mobile, revenues from this inefficient,nontransparent tax have been declining. A working paper ontaxes and economic growth by the Organization for Economic Co-operation and Development found corporate taxes to be theones most harmful to economic growth.

Policy Facts

Fact 1: Domestic labor bears more than 70 percent of theburden of the corporate income tax. 2

Fact 2: State corporate taxes raised $36 billion in 2010, just 5.2percent of state tax revenues and 1.8 percent of total staterevenues. 3

Fact 3: Compliance costs for multistate corporations are twiceas high for state taxes as for federal taxes, relative to theamount of tax collected. 4

Solution

Citizens need to understand how much government is really costing them. Since the corporate income tax invisibly places alarge burden on the private sector relative to the small revenue itgenerates, eliminating it completely will provide greater transparency, efficiency, and economic productivity that maypartially or entirely replace its modest collections.

Eliminating the corporate income tax also will provide greater taxrelief to low-income families than elimination of the personalincome tax, because low-income families already take advantage of numerous credits and deductions from the personal income tax.

The most effective, revenue-neutral way to eliminate thecorporate tax would be a gradual phase-out funded by abroadening of the tax base. This can be achieved by eliminatingcorporate tax subsidies and credits, thereby creating a fairer, more stable fiscal system for state government while promoting long-term growth for all industries.

Policy Message

Point 1. Corporations don't pay taxes; people do. This comes inthe form of lower returns for shareholders, lower wages forworkers, and higher prices for consumers.

Point 2. State tax systems should be transparent so taxpayers know how much their government costs and government canrun efficiently.

Point 3. As profits become even more mobile both nationally and internationally, collecting corporate tax revenue will becomemore difficult over time.

Point 4. Cutting corporate tax rates puts more money in the hands of individuals and families.

Point 5. High corporate taxes create significant obstacles to job creation and attracting businesses.

References

1. "Taxation of Corporate and Capital Income." Organization for Economic Co-operation and Development<http://www.oecd.org/dataoecd/26/56/33717459.xls>.

2. "International Burdens of the Corporate Income Tax." CongressionalBudget Office<http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/75xx/doc7503/2006-09.pdf>.

3. "State Government Finances." U.S. Census Bureau<http://www.census.gov/govs/state/>.

4. "Personalizing the Corporate Income Tax." Tax Foundation<http://taxfoundation.org/article/personalizing-corporate-income-tax>.

 

For more information on budget & tax policy contact: Policy Analyst Taylor Smith at tsmith@heartland.org