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[IWS] CRS: THE CORPORATE INCOME TAX SYSTEM: OVERVIEW AND OPTIONS FOR REFORM [14 February 2014]

IWS Documented News Service

_______________________________

Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

________________________________________________________________________

 

Congressional Research Service (CRS)

 

The Corporate Income Tax System: Overview and Options for Reform

Mark P. Keightley,  Specialist in Economics

Molly F. Sherlock,  Specialist in Public Finance

February 14, 2014

http://www.fas.org/sgp/crs/misc/R42726.pdf

[full-text, 39 pages]

 

Summary

Many economists and policymakers believe that the U.S. corporate tax system is in need of

reform. There is, however, disagreement over why the corporate tax system needs to be reformed,

and what specific policy measures should be included in a reform. To assist policymakers in

designing and evaluating corporate tax proposals, this report (1) briefly reviews the current U.S.

corporate tax system; (2) discusses economic factors that may be considered in the corporate tax

reform debate; and (3) presents corporate tax reform policy options, including a brief discussion

of current corporate tax reform proposals.

 

The current U.S. corporate income tax system generally taxes corporate income at a rate of 35%.

This tax is applied to income earned domestically and abroad, although taxes on certain income

earned abroad can be deferred indefinitely if that income remains overseas. The U.S. corporate

tax system also contains a number of deductions, exemptions, deferrals, and tax credits, often

referred to as “tax expenditures.” Collectively, these provisions reduce the effective tax rate paid

by many U.S. corporations below the 35% statutory rate. In 2013, the sum of all corporate tax

expenditures was $149.5 billion.

 

The significance of the corporate tax as a federal revenue source has declined over time. At its

post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In 2012,

the corporate tax accounted for 9.9% of federal tax revenue. The decline in corporate revenues is

a combination of decreasing effective tax rates, an increasing fraction of business activity that is

being carried out by pass-through entities (particularly partnerships and S corporations, which are

not subject to the corporate tax), and a decline in corporate sector profitability.

 

A particular aspect of the corporate tax system that receives substantial attention is the 35%

statutory corporate tax rate. Although the U.S. has the world’s highest statutory corporate tax rate,

the U.S. effective corporate tax rate is similar to the Organization for Economic Co-operation and

Development (OECD) average. Further, the U.S. collects less in corporate tax revenue relative to

Gross Domestic Production (GDP) (2.3% in 2011) than the average of other OECD countries

(3.0% in 2011).

 

This report discusses a number of economic considerations that may be made while evaluating

various corporate tax reform proposals. These might include analyses of the likely effect on

households of certain reforms (also known as incidence analysis). Policymakers might also want

to consider how certain corporate tax provisions contribute to the allocation of economic

resources, choosing policies that promote an efficient use of resources. Other goals of corporate

tax reform may include designing a system that is simple to comply with and administer, while

also promoting competitiveness of U.S. corporations.

 

Commonly discussed corporate tax reforms include policies that would broaden the tax base (i.e.,

eliminate tax expenditures) to finance reduced corporate tax rates. Concerns that the U.S.

corporate tax system inefficiently imposes a “double tax” on corporate income has led some to

consider an integration of the corporate and individual tax systems. The treatment of pass-through

income—business income not earned by C corporations—has also received considerable attention

in tax reform debates. How the U.S. taxes income earned abroad, and the possibility of moving to

a territorial tax system, have emerged as important issues.

 

Contents

Structure of the Corporate Income Tax ............................................................................................ 1

Corporate Tax Rates .................................................................................................................. 2

Corporate Tax Expenditures ...................................................................................................... 3

Treatment of Losses ................................................................................................................... 5

Corporate Income Earned Abroad ............................................................................................. 6

Taxation of Shareholders ........................................................................................................... 7

Which Companies Pay? ................................................................................................................... 7

Corporate Income Tax Revenues ................................................................................................... 11

International Comparisons ............................................................................................................. 12

Tax Rates ................................................................................................................................. 12

Tax Revenues ........................................................................................................................... 13

Economic Considerations .............................................................................................................. 15

Why Have a Corporate Income Tax? ....................................................................................... 15

Corporate Tax Incidence .......................................................................................................... 16

Evaluating the Corporate Income Tax ..................................................................................... 17

Equity ................................................................................................................................ 18

Efficiency .......................................................................................................................... 19

Simplicity and Administrability ........................................................................................ 22

Options for Reform ........................................................................................................................ 23

Broader Base, Lower Rates ..................................................................................................... 23

Integration of the Corporate and Individual Tax Systems ....................................................... 25

Other Options for Reducing “Double Taxation” of Corporate Income ............................. 26

Taxation of Pass-Through Income ........................................................................................... 26

International Tax: Territorial vs. Worldwide Taxation ............................................................. 27

Comparing Current Corporate and Business Tax Reform Proposals ............................................. 28

 

Figures

Figure 1. Individual and Corporate Tax Expenditures in FY2013 ................................................... 4

Figure 2. Distribution of Business Types, 1980 and 2008 ............................................................... 8

Figure 3. Distribution of Corporations and Corporate Taxes Paid in 2008 by Industry .................. 9

Figure 4. Corporate Tax Revenue as a Percentage of GDP, 1946-2018 ........................................ 12

Figure 5. Corporate Tax Revenue as a Percentage of GDP in 2011............................................... 14

 

Tables

Table 1. Ten Largest Corporate Tax Expenditures in FY2013 ......................................................... 5

Table 2. Corporate Tax Rates: Comparing the United States to the Rest of the OECD ................ 13

Table 3. CBO’s Distribution of Corporate Income Tax ................................................................. 18

Table 4. Treasury’s Distribution of Corporate Income Tax ............................................................ 19

Table 5. Comparing Business and Corporate Tax Reform Proposals ............................................ 32

 

Contacts

Author Contact Information........................................................................................................... 35

 

 

________________________________________________________________________

This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

 

 




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