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Corporate tax: only a piece of tax revenue pie

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The Tax Code is loaded with reasons why. For instance, multinationals shift income to low-tax countries. Firms are allowed to depreciate some investments for tax purposes much faster than the equipment needs to be replaced. Congress went even further in December when it agreed to let businesses immediately write off the entire cost of investments they make in 2011. Firms that finance this equipment with borrowed money may end up paying a negative tax rate on the deal.

But these breaks are only one reason why the statutory rate tells less than the whole corporate tax story. It turns out that more than half of taxable business income in the U.S. is earned by pass-through companies such as partnerships and S corporations. Their owners pay individual taxes on this income, but owe no corporate tax at all.

Because this happens far less frequently elsewhere, it is very difficult to compare U.S. business taxes (either rates or payments) with those in other countries. Peter Merrill, a principal at the accounting firm of PriceWaterhouseCoopers, argues that the shift to pass-through companies may be the single most important reason why U.S. corporate tax revenues are so low.

Indeed, even though the U.S. corporate rate is the second highest in the world, corporate tax revenues amounted to only about 1.3 percent of Gross Domestic Product last year–less than half the average among major industrialized countries.

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