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Who foots the bill for taxes corporations pay, avoid?

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Did you know that tax breaks for corporations exceed the amount of taxes they pay to Uncle Sam?

Corporations will pay about $136 billion in federal taxes this fiscal year. But, according to a study by Citizens for Tax Justice (CTJ), a Washington research group, tax loopholes will save them $171 billion.

To liberals, that fact illustrates the power of corporate lobbyists to win what CTJ calls "corporate welfare." And, to the delight of Wall Street, the stimulus package passed by Congress this winter will enlarge those loopholes further.

The effective corporate tax rate – what companies actually pay as a proportion of their earnings – will drop 2.5 percentage points, reckons Bruce Steinberg, chief economist of Merrill Lynch & Co. (The rate last year was 22.1 percent.)

The new tax breaks will add more than a dollar to the total earnings per share of the Standard & Poor's 500, an index of 500 major American companies. Mr. Steinberg expects S&P 500 earnings to jump 19 percent in 2003 to $56 per share – though not just because of the extra tax breaks. Strong productivity gains also will widen profit margins of companies.

That's good news for stock-market investors.

Going further, some academic economists – and certainly many business lobby groups – say the corporate tax should be completely abolished. They see it as a burden on the investments that advance productivity, and thereby living standards for everyone.

Chances of Congress taking that step, however, are slim.

What is happening instead is that corporate taxes are fading gradually in their importance. In the 1960s, corporate tax revenues came to 4 to 5 percent of gross domestic product, the nation's total output of goods and services. By 1995-97, they had fallen to about 2.5 percent. This year and next, corporate tax revenues will amount to only 1.3 percent of GDP, figures CTJ.

Who ultimately bears the burden for the billions of tax dollars corporations pay each year is difficult to determine. The subject has been debated by economists for decades. The tax bill might be paid by consumers through higher prices. Employees can have their salaries or benefits cut. Or shareholders may take the hit via reduced earnings and dividends.

Perhaps corporate taxes cost all these parties something.

The fading of corporate taxation helps stock prices. That largely benefits the upper-income Americans that own the bulk of corporate shares, and widens an already large income gap between rich and poor. It also means Washington must raise individual income taxes, including those on the less-than-rich.

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