Your Questions About Corporate Income Taxes Answered

What you need to know about taxes, economic growth and more

When American businesses compete on a level tax playing field they can win in global markets. When American companies win in global markets, they hire more people at home, increase wages and invest in new facilities and research and development.

Raising taxes on American companies now, as the U.S. begins to emerge from a crippling recession, would slow economic growth and job creation at just the wrong time. To get America back to work, businesses need certainty, stability and a level global tax playing field.

As a variety of corporate tax increases are on the table, here’s what you need to know:

1) How are American companies taxed?

American companies pay federal and state income taxes, as well as a range of other taxes, including payroll taxes, excise taxes, sales taxes and property taxes. The federal corporate income tax rate is 21%. The average combined federal and state corporate income tax rate is 25.8%.

2) How do those taxes compare with other countries?

The current combined federal and state corporate income tax rate is already higher than most of the world’s other advanced economies, as well as higher than China, the world’s second largest economy.

However, the U.S. is the only major country to impose an additional tax on the foreign business income of its companies. This minimum tax (“GILTI”) puts U.S. businesses on an uneven playing field because their foreign competitors don’t pay tax to their home countries on their foreign earnings. Raising the U.S. GILTI tax as proposed by some would tilt the global tax playing field even further against American companies.

3) Who loses when American companies pay higher taxes than their foreign competitors?

Corporations are a legal entity or form of doing business. As such, they pass the cost of taxes on to people: their employees, through lower wages and less investment in new jobs and future opportunities; the more than half of Americans who hold stock; and their customers, through higher prices. When American companies pay higher taxes than their foreign competitors, they will be less able to compete. To compensate for their higher tax costs, U.S. companies may reduce employment and cut wages, invest less in their facilities and R&D, and raise their product prices, causing demand for their products to decline, further reducing their employment and investments.

4) Do big American companies actually pay their fair share of taxes?

Large U.S. companies are responsible for nearly all corporate income tax payments. In 2017, the latest year of available data, the 2,000 largest U.S. corporate taxpayers represented just 0.1% of all U.S. corporations but paid 85% of all federal corporate income taxes.

Each year, a small number of large American companies report profits but don’t have a significant tax bill. But that is because they are doing exactly what Congress encouraged them to do on a bipartisan basis — invest in new plants and equipment and tax-favored activities ranging from research and development to clean energy.

Sometimes large companies also lose money. The tax law generally does not allow a company with losses to claim these immediately for tax purposes; instead they can be used in a future year only when the company returns to profitability. As a result, companies with current year profits but past losses may have a reduced current year tax payment.

From 2018–2022, the amount of taxes corporations are estimated to pay as a percentage of corporate income is 18.4%, slightly above the OECD average of 18.1%. While the U.S. does have a lower percentage of corporate taxes as a percentage of GDP compared to other OECD countries, that is only because most business income in America is earned by businesses that are not taxed as corporations. These businesses are organized as partnerships and S corporations, which pay individual income taxes, not corporate income taxes, on their business income.

Additionally, as more parts of the 2017 tax law come into effect in the coming years, the amount of corporate income subject to tax will expand and increase the amount American companies pay in taxes.

5) How would raising corporate income taxes affect U.S. employers and their workers?

6) How else would Americans be affected by higher corporate tax rates?

7) Why does the tax on income from foreign operations matter?

8) How would raising corporate taxes affect the economic recovery?

For more information visit actontaxreform.com.