Corporate profits

If corporate profits are at an all-time high, why are corporate taxes near their 60-year low?

Apple is a unique company in many ways, but when it comes to the cavernous difference between its historically high profits and relatively low corporate tax rate, the company is no exception. It is a microcosm. In fact, corporate profits have been rising as a share of the economy since the early 1980s…just as the corporate income tax share has hovered near its 20th century lows. Here is that sentence in a graph, via The Economist:

Why does this happen? I went back to see the tax experts who explained Apple’s Congress report to me. They both gave the same answer: Basically, it’s all about globalization and transmissions.

Business profits escape US corporate income tax in three important ways. First, business is literally move away from the United States, as multinational companies have expanded overseas. Second, large corporations are well aware of the tricks they can use to shift income through foreign subsidiaries that avoid the high US statutory rate. Third, small businesses are finding ways to avoid corporation tax altogether.

Let’s briefly detail each of them.

First, global companies continue to globalize. In large multinationals, the share of revenue from abroad has increased from 37.1% in 1996 to 51% in 2004, according to a report. After the recession, nearly 75% of new jobs at 35 major US multinationals were created overseas, according to a Wall Street Journal To analyse.

Second, as the company traveled overseas, the multinationals benefited from lower tax rates and US tax credits. “The combined federal and state corporate tax rate in the United States has been stuck at 39% since 1986, while almost every other country has reduced its rates. Canada, for example, is now down to around 20%” , said Gary Hufbauer of the Peterson Institute. for the international economy. Thus, global corporations “will do their best to report their income anywhere but the United States.” It’s the kind of ingeniousness that leads to Dutch Sandwichthe Double Irishand other clever nicknames of tax loopholes that, when lined up, look like a European continental breakfast menu.

Third, the most important reason why corporate taxes fall as corporate income rises could be that the government no longer taxes most corporations as corporations, with capital C. Sole proprietorships (like any business sole proprietorship), partnerships (such as law firms), and S-corporations (such as a small real estate company) are examples of “pass-through” businesses, where income is taxed only once. In other words, the income “flows” through the corporate tax code and goes directly to the owners.

“The explosion in transmissions” is the main reason for the bifurcation of income and corporate taxes, said Howard Gleckman of the Tax Policy Center. Look at the chart above, one more time. Between the 1960s and today, the percentage of overall business activity conducted by former “C corporations” has fallen from about 85% to 50%. So even though corporate revenues have increased, “C-corps” revenues have actually fallen as a share of the economy, Hufbauer said.

Low-c societies do not mean poor societies, just smaller societies. Four out of five dollars of all passed-through income is earned by taxpayers earning more than $100,000; and more than a third of all income passed on goes to millionaires, according to the Congressional Research Service.

Corporate income tax has eroded both because globalization has happened and because we have let things go in the way we tax corporate income. You can’t change the first one. You can change the second.