Corporate Taxes

Reads at about grade 6Both sides shown9 sources cited

A corporate income tax is a tax on a company's profit — the money it has left after paying its costs.

What it is

A corporate income tax is a tax on a company's profit -- the money left after it pays its costs. The U.S. government charges one flat national rate of 21%, and California adds its own tax of 8.84% on profit earned in the state. A company adds up its income, subtracts its costs, and pays a share of what's left; special breaks called deductions and credits can shrink the bill. In recent years the tax has raised money equal to about 1.7% of the U.S. economy, or less than 10% of all federal taxes. Here is what experts argue about most: a company signs the check, but real people end up paying the cost. It can land on the owners, called shareholders, or on workers, in the form of smaller raises. Most economists agree the cost is split between owners and workers, but they strongly disagree about how much each group bears -- clear real-world proof is hard to find, so honest experts land in different places. That one question, who really pays, drives most of the debate.

How it works

Only some companies pay this tax. They're called C corporations. Many other businesses, called pass-through businesses, skip the corporate tax and pass their profit straight to their owners, who then pay personal income tax on it instead. To find profit, a company starts with all the money it took in, then subtracts the costs of doing business, such as wages, rent, and equipment -- these subtractions are called deductions. After that, credits can cut the tax bill even more. People debate the tax for two main reasons. The first is fairness: some say large, profitable companies should pay more to help fund public services. The second is harder -- who really pays the tax? This is called tax incidence. If the tax mostly hits wealthy owners, the system gets more progressive, meaning richer people pay a bigger share; if it mostly hits workers, it can quietly hurt regular people. Money and companies can also move to lower-tax places, which makes the answer even harder to pin down.

The debate — equal weight, both sides

The case for raising corporate taxes

Most often made by Democrats, labor unions, and progressive tax-policy groups.

Big corporations earn huge profits, and supporters say they should pay a fair share -- money that can fund schools, roads, and health care. Backers also argue the tax is fair because it lands mostly on the wealthy, since stock is owned mostly by rich households. One analysis of who gains from corporate tax cuts found the richest 5% of Americans get most of the gain. Foreign investors own about 40% of U.S. stock, so cutting these taxes mostly helps them, not workers. California shows the problem clearly. The state charges one flat rate of 8.84%, so a small firm pays the same rate as a giant one, and for nearly half of profitable corporations, this 8.84% tax is all they pay to the state. Supporters want a graduated tax -- higher rates on bigger profits -- and say it could raise about $6 billion a year, almost all of it from a few thousand very profitable companies, with one estimate counting around 2,500 firms.

The case for lower corporate taxes

Most often made by Republicans, business groups, and free-market economists.

"Corporations" don't really pay taxes -- people do. Supporters of low rates say the cost falls on workers, not just wealthy owners, and many studies back this up. One review found labor bears between 50% and 100% of the tax, with 70% or more the most likely result. The Cato Institute points to evidence that workers pay about three-quarters of the cost. The reason is simple: when taxes are high, companies invest less and buy fewer tools and machines, so workers produce less and earn less. High rates can also push money and factories to other countries. Analysts studied a proposal to raise the federal rate to about 28% and estimate it would shrink the economy by 0.8%, lower wages by about 0.7%, and cost around 159,000 jobs -- while giving the U.S. the highest corporate rate in the wealthy world. Supporters say a lower rate helps workers instead, because it draws investment and jobs to America, and to California.

Sources

Behind the summary

Cited by "The case for raising corporate taxes"

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