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Corporate Federal Tax Policy

The federal government taxes corporations from 15 to 35 percent of their profits. Corporations, those organized under the C category in the IRS code, argue that the corporate taxes in the United States are much too high as compared to other countries. It is actually more complicated than that. (Remember we are not talking about S corporations, such as lawyers, doctors, etc., which are not incorporated and are a limited liability corporation. Taxes on S corporations are taxes on the individual, not a corporation, and thus are governed by the IRS’ individual income tax rates.)

First, what are coroporate tax rates in this country? The federal corporate tax rates in 2010 as defined by the Legal Information Institute of the Cornell Law School are:
  • (A) 15 percent of so much of the taxable income as does not exceed $50,000,
  • (B) 25 percent of so much of the taxable income as exceeds $50,000 but does not exceed $75,000,
  • (C) 34 percent of so much of the taxable income as exceeds $75,000 but does not exceed $10,000,000, and
  • (D) 35 percent of so much of the taxable income as exceeds $10,000,000.
The United States has one of the highest corporate income tax rates on paper at least – 35 percent. Next comes Australia and New Zealand at 30 percent. On the low end is Ireland with 12.5 percent.

Now we come to the important question. Do corporations actually pay those rates? Of course not.

The IRS tax code taxes a corporation’s taxable income. This means the gross income (sales minus the cost of goods sold and any tax exempt income); then the corporation can subtract allowable tax deductions including depreciation expense.

The first fact about this corporate tax rate is that American corporations do not pay taxes on overseas profits unless they bring those profits back to the United States. This is a clear incentive to keep monies abroad.

The second fact about this corporate tax rate is that American corporations can become a foreign corporation by stating that its headquarters are in another country and still operate in the United States. They then pay the corporate income tax of that foreign country. Currently, Switzerland is a favorite having a corporate tax rate of 12 to 15 percent depending upon what town the corporation resides. Sixty Minutes did a show on corporate taxes, or the lack of them, and it is clear that whatever tax law is passed, the corporations have teams of lawyers to figure what how to get around the taxes.

My favorite story from the Sixty Minutes piece is when U.S. Representative Doggett proposed legislation that a corporation should be taxed on where their top management actually resides, not on a piece of paper. Based upon this proposed legislation, two multinational corporations that had headquarters in the United States shipped their top management to Geneva.

It is true that in 2004 Congress passed a law that said any corporation that moves overseas must continue to pay U.S. tax rates. But there are so many loopholes, the legislation is not effective.  Many of the loopholes come in the form of tax credits as well as generous rules allowing corporate losses to be carried forward for twenty years.

The New York Times recently had an article talking about how corporations used the loopholes: “Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.”

The Urban Center and Brookings Institution report that – “Revenue from the corporate income tax fell from between 5 and 6 percent of GDP in the early 1950s to 2.1 percent of GDP in 2008.”

If Congress were working properly, we could very well lower the corporate tax rate and gain more tax revenue by simply closing all the loopholes. But the current Congress is more likely to lower the corporate tax rate and not close the loopholes.


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