Corporations Don’t Pay Taxes, People Do

Published March 1, 2004

When Democrats on the Presidential campaign trail talk taxes, attacks against the Bush administration are de rigeur. The Bush tax cuts, they complain, benefitted big corporations rather than individual taxpayers.

Former Vermont Governor Howard Dean’s Web site lamented that “corporate income tax revenues have declined as a share of the federal tax take.” The tax cuts “worked to shift the tax burden away from corporations,” complained Connecticut Senator Joe Lieberman’s Web site. The promise that their plans “would make corporations pay their fair share” apparently wasn’t enough to attract voters, and Dean and Lieberman are both out of the race.

Even front-runner John Kerry is a “fair share” man. According to Washington, DC economist J. Edward Carter, Kerry “routinely preaches that corporations should pay their ‘fair share’ of the nation’s tax burden. That sounds like a no-brainer. But it isn’t.”

Continues Carter, who is chairman of Economists for Bush, “As most college freshmen learn in Economics 101, corporations do not pay taxes, people do. The burden of corporate taxation is ultimately borne by customers (through higher prices), stockholders (smaller dividends and capital gains), and employees (lower wages).”

But in an election year, politics regularly trumps economics. Even some Democrats not running for President have said corporations pay too little. Congressman Rahm Emanuel (D-Illinois) noted in an October 15 Wall Street Journal op-ed that the “corporate tax burden [in 2002] fell to its lowest level since 1983.” Accounting shenanigans, overseas tax shelters, and the Bush tax cuts are regularly blamed.

By the Numbers

The main reason for the drop in revenue from corporate taxes is much less mysterious–and also less interesting to the press or politicians–when viewed over time. Since World War II, the federal government’s dependence on corporate income tax revenues has been falling steadily.

According to the Office of Management and Budget, federal tax collections from corporations peaked in 1943, when corporate tax revenue was 39.8 percent of total federal tax collections. In more recent history, corporate tax revenue was as high as 17 percent of total federal tax collections in 1970, bottoming out at just 6 percent in 1983. During the 1990s, corporate tax revenues rose again following President Bill Clinton’s 1993 tax increase, which raised the top statutory corporate income tax rate from 34 percent to 35 percent. Congressman Emanuel’s statement is basically correct, but it would be true for almost every year since 1943, too.

Just because the corporate income tax is a smaller share of the federal revenue pie doesn’t mean corporate tax collections have fallen in dollar terms. The long-term trend of federal corporate tax receipts is upward, from $123 billion collected in 1970 to $136 billion collected in 2000 (both expressed in real dollars). Corporate profits are volatile, rising in boom economies and falling in recessions, and so too are government receipts from the corporate income tax. Federal corporate tax receipts dipped during the current recession as well as those of the early 1980s and early 1990s. Yet corporate tax collections for 2002 ($142.7 billion in real terms) were still higher than corporate tax collections at any time during the recession of the early 1980s or 1990s.

A corporation’s tax burden is measured by how much the firm pays in taxes in relationship to what it makes in profit. That rate has been on a steady downward trend for 30 years. Yet the total effective rate for 2002 is higher than it was in 2001, and also higher than the effective tax rates for the years 1995 through 1997. Corporations have a higher tax burden today than they did at the end of the Clinton administration’s tenure.

S Corporations More Popular

Since the most recent peak in 2000, at just over 10 percent, corporate income tax revenue has fallen slightly as a share of total federal tax revenues. Tax shelters are not to blame. A much more interesting and nuanced phenomenon is taking place: Alternative legal arrangements such as S corporations have become increasingly popular.

Between 1986 and 2001, the number of S corporations in the United States more than quadrupled, while the number of all other corporations grew by just 6 percent. In 1999, more corporations filed as S corporations than in all other corporate structure categories.

As S corporations continue to grow in popularity, the share of federal revenue derived from the corporate tax will continue to fall. Income earned through an S corporation is taxed only once, whereas income earned through a C corporation is taxed twice: once through the corporate income tax, and again when investors pay individual income taxes on dividends. As the percentage of business activity conducted through S corporations increases, a larger portion of taxes will be collected through the personal income tax instead of the corporate income tax.

This should serve as a wake-up call for federal and state policymakers. The corporate income tax is one of the most burdensome and economically inefficient taxes in the federal/state tax code. Simplifying, lowering, or eliminating this burdensome tax entirely would remove a very significant source of inefficiency from the capital markets and promote economic growth. That alone would do far more for the future of America than any class-warfare rhetoric.

Stephen Slivinski is a senior economist for the Washington, DC-based Tax Foundation. His email address is [email protected].

For more information …

See Tax Foundation Special Report No. 126, “The Corporate Tax Burden,” written by Stephen Slivinski and published in November 2003. The 12-page report is available on the Tax Foundation Web site at