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As corporate taxes shrink, who pays?

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Outside in the parking lot, demonstrators held signs saying the federal income tax is unconstitutional. Inside, in a former furniture store turned software firm, President Bush's Advisory Panel on Federal Tax Reform was holding a public hearing, this one on corporate taxes.

That juxtaposition in Tampa, Fla., last week was apt. Although judges routinely knock down claims that income taxes are unconstitutional, corporate taxes are shrinking. The push is on to make them disappear completely.

There may be some economic reasons to do that. But would the nation's tax system remain as progressive?

Mr. Bush's tax cuts reduced rates for individuals. Corporations have done even better over time. Federal revenue from corporate taxes has fallen from 6.4 percent of gross domestic product, the nation's output of goods and services, in 1951 to a mere 1.5 percent to 2 percent of GDP in the last few years.

This downward drift has resulted from three factors, says Douglas Shackleford, a tax professor at the University of North Carolina at Chapel Hill.

The first is the desire for low corporate tax rates to help domestic firms compete internationally. In the United States, Congress responds by providing various loopholes, such as accelerated or bonus depreciation and research and development deductions and credits.

A second is the rising popularity of "S corporations," mostly small companies that can pass on profits tax-free to individual owners. The profits become part of the owners' personal income and are subject to taxes there. The third factor is more corporate tax planning, including the use of tax shelters. Some of these are abusive.

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