The Democrats have proposed an increase in the federal corporate income tax. It is so big that the Americans for Tax Reform refers to it as the “largest tax increase since 1968”.
There is no shortage of research to show the harmful effects of raising the corporate income tax and the benefits of cutting it. See, e.g., contributions from the Fraser Institute in 2015, the Tax Foundation in 2016, American Action Forum in 2017, and with specific reference to the Democrat proposal, by Parker Sheppard with the Heritage Foundation from April this year. In other words, I am not going to argue the case against tax hikes per se.
Instead, I want to point to a void in the debate that has not been filled on the conservative side. There is very little effort in comprehensively responding to the allegations by proponents of higher taxes that corporations don’t pay taxes, and if they do, certainly not their “fair share”. The former, of course, refers to the actual amount of taxes paid, while the latter is a loosely defined attack on the actual tax rate that the corporate income tax inflicts on businesses.
Neither allegation stands up to scrutiny, but before we get to the very interesting case against the “fair share” argument, let us make a couple of observations regarding the actual amount of corporate income taxes paid in the United States in the last few years.
The best place to find information on actual tax revenue is, of course, the Bureau of Economic Analysis. In their National Income and Product Account tables 8.3 and 8.4 they report – among so much more – raw numbers on federal, state and local government revenue from corporate taxes. Using these numbers, we find that corporations paid, in income taxes,
- $300 billion in 2017;
- $269.4 billion in 2018;
- $289.9 billion in 2019; and
- $263.7 billion in 2020.
A friend of higher taxes will immediately point out that the total revenue from the corporate income tax declined after 2017. This is due entirely to the “Milton Friedman” effect of the tax cut: Friedman is known to have criticized tax cuts for supply-side purposes by stating that if the tax cut resulted in more revenue after the cut than before, the tax cut was not big enough.
A more comprehensive explanation is that the tax cut was not aimed at increasing revenue. It was not the kind of tax cut that the left portrays it to be: the purpose behind Trump’s Tax Cuts and Jobs Act was to stimulate economic growth, not to close the budget gap. In fact, Trump’s attitude to the budget deficit was essentially the same as Reagan’s, namely that the budget deficit is big enough to take care of itself.
In other words, the lesser revenue in 2019 – the top year of the Trump economy – is not a symptom of failure of the tax reform. To judge its success we should instead look to the one variable that can evaluate it based on its purpose: state and local government tax revenue. All other things equal, a surge in corporate tax revenue in state coffers is a sign that the economic base for the tax expanded as a result of the tax cut.
- In 2017 states and local governments received $54.6 billion in corporate income taxes;
- In 2019 that number had grown to $72.9 billion.
This is a rise by 33.5 percent; assuming that state tax rates were unchanged from ’17 to ’19, this tells us that the base for the corporate income tax expanded by one third directly after the Tax Cuts and Jobs Act had gone into effect.
In reality, according to the Tax Foundation, several states reduced their corporate income tax during this period. Connecticut cut its rate from 9 to 7.5 percent, Indiana cut their from 6.5 to 5.75 percent. Corporations in Kentucky paid a whole percentage point less in 2019 (five percent) than they did in 2017. New Mexico went from 6.2 to 5.9 percent, Georgia cut one quarter of a percent off its six-percent rate, while North Carolina dropped their rate from three to 2.5 percent.
It is perfectly reasonable to suggest that none of these tax cuts were big enough to have a Friedman effect on corporate tax revenue in their respective states. It takes a lot more for that to happen. It is also worth noting that New Jersey went against the majority by raising the top bracket in their corporate income tax from nine to 11.5 percent.
In short, we can safely conclude that the rise in state revenue from the corporate income tax is due entirely to the positive growth effects of the cut in the federal corporate income tax. Therefore, the tax did what it was designed to do. But if we need more evidence, the Bureau of Labor Statistics reports that there were four million more people working in the private sector in 2019 than in 2017. That is four million more income-tax payers that both the federal government and states and local governments benefited from.
But what about individual corporations? On April 2 this year the Institute on Taxation and Economic Policy claimed:
At least 55 of the largest corporations in America paid no federal corporate income taxes in their most recent fiscal year despite enjoying substantial pretax profits in the United States. This continues a decades-long trend of corporate tax avoidance by the biggest U.S. corporations, and it appears to be the product of long-standing tax breaks preserved or expanded by the 2017 Tax Cuts and Jobs Act (TCJA) as well as the CARES Act tax breaks enacted in the spring of 2020.
Attached to their article is a list of corporations and their tax payments as per Securities and Exchange Commission filings. However, ITEP does not specify how they calculate the tax base, only referring vaguely to “profits”. This is not a stringent analysis, but their lack of stringency is not unique to this paper. It is also reflected in their 2017 study claiming to show that under the 35-percent corporate tax rate, the effective rate paid was just above 21 percent.
There are a number of problems with the ITEP studies, one being that the more recent one is based on numbers from 2020. That was a year when extraordinary circumstances – including an emergency provision to give businesses tax relief – went into effect (passed, we might point out, by the Democrat-led House of Representatives). However, the deeper problem is that ITEP does not tell us how they arrive at their numbers, even though they claim to use the Securities and Exchange Commission as their source. Therefore, I made my own little survey of corporate income-tax payments.
Based on corporate finance reports from NASDAQ, I pieced together data from ten corporations on their total revenue, gross profit, earnings before taxes, and corporate income-tax payments. The corporations are: Amazon, Apple, Citigroup, Coca Cola, Exxon, Ford, Microsoft, Tesla, Uber and Walmart. These are significant corporations: in 2017 they paid one quarter of all the corporate income taxes received by the federal, state and local governments.
I calculated tax payments as a share of total revenue, gross profit and earnings before taxes. Using the last one as the actual tax base, here is what I found:
- Amazon paid $2.37 billion in income taxes in 2019, more than three times what it paid in 2017; as a share of earnings before taxes, these tax payments fell from 20 percent to 17 percent, a marginal reduction compared to the significant expansion in their tax payments;
- Apple reduced its tax payments from $15.7 billion in 2017 to $10.5 billion in 2019, cutting its effective tax rate from 24.6 percent to 15.9 percent; at the same time, Apple repatriated well over $200 billion in foreign assets and made significant investments in several places around the country, including a $1 billion new campus outside Austin, Texas; these investments would not have happened without the Trump tax reform;
- Citigroup paid a substantial amount of taxes in 2017, with its $29.4 billion check to the IRS amounting to a 129.1 percent effective tax rate (again over earnings before taxes); in 2019 they paid $4.4 billion, an effective tax rate of 18.5 percent;
- Coca Cola also made an enormous tax payment in 2017, with its $5.6 billion equaling 81.4 percent of their earnings before taxes; by 2019 their tax payments had fallen to $1.8 billion but that still amounted to an effective tax rate of 16.7 percent;
- Exxon went in the exact opposite direction, from a negative tax rate of 6.3 percent in 2017 (and tax deductions exceeding payments by almost $1.2 billion) to paying 26.3 percent of earnings before taxes – or $5.3 billion – in 2019;
- Ford, a struggling car manufacturer, only paid $402 million in 2017 and ended up with a negative tax payment of $724 million two years later; by contrast, in 2018 they shipped $650 million into the federal, state and local government coffers, which amounted to 15 percent of their earnings before taxes;
- Microsoft paid $19.9 billion in income taxes in 2017, equal to 54.6 percent of earnings before taxes; two years later they only paid 16.5 percent, but it still came out to almost $8.8 billion;
- Tesla is a tax dwarf compared to the rest of this sample: in 2017 they paid $32 million, which is still impressive given that their earnings before taxes were negative at $2.2 billion; by 2019 their taxes had increased to $110 million, even though earnings before taxes were still in the red at -$665 million;
- Walmart is the most consistent taxpayer in this sample: in 2017 they paid $4.6 billion; in 2018 $4.3 billion; in 2019 $4.9 billion; and in 2020 almost $6.9 billion; on average, they paid 31.4 percent of their earnings before taxes.
In total, these corporations paid $74.7 billion in income taxes in 2017. By 2019 that number had fallen to almost exactly half, just below $37.5 billion. During the same period of time, however, the federal government only lost 11.6 percent of its revenue from the corporate income tax. This indicates that other corporations delivered more tax revenue in ’19 than they did two years earlier. Or, put differently,
- In 2017 the ten corporations in my sample paid 25 percent of all corporate-tax revenue, federal, state and local;
- In 2019 they accounted for only 13 percent.
In other words, our governments got more tax payments from more corporations – the tax base was diversified. This is a forgotten benefit of the tax reform. Revenue from corporate taxes are highly volatile and among the first to plummet in a recession; a more diversified tax base makes government less vulnerable to industry-specific fluctuations in revenue. (The sample above has two large retail corporations, two computer technology corporations and two car manufacturers.) While the corporate income tax accounts for a lot less than ten percent of federal tax revenue, increased stability in revenue is always welcome.
And let us also not forget state revenue from the corporate tax: it increased by 33.5 percent from 2017 to 2019.
One last point: federal tax revenue indicate a Laffer effect from the Trump tax reform. In 2018, the first year the reform was in effect, total federal revenue from the corporate income tax amounted to $208.9 billion, down 15 percent from the $245.4 billion in 2017. However, in 2019 revenue was up by almost four percent over ’18, totaling $217 billion. If 2020 had been a normal economic year, it is likely that this would have formed a trend of growing revenue.
In other words, even if the tax reform followed the Friedman rule with prioritizing growth over increased revenue, the federal government was beginning to reap the benefits in the form of more revenue.
It is also worth mentioning that of the ten corporations in the aforementioned sample, seven paid a tax rate higher than 20 percent at least one year after 2017. This is significant, since corporations all over America began taking advantage of the entire tax reform, including changes to investment incentives.
The Trump tax reform worked. It stimulated economic growth as it was intended to do. The fact that it did not increase revenue from the corporate income tax is less important, and it is certainly not a reason to blast the reform for contributing to the budget deficit. After all, during the same period of time the U.S. Treasury increased its collections of personal income taxes from $1.6 trillion to $1.7 trillion. For every $100 that the corporate income tax revenue declined, revenue from personal income taxes increased $335.
In view of this, the fact that the budget deficit increased by $326.7 billion from ’17 to ’19 is entirely the fault of Congress for spending too much money.
So there you have it. The Tax Cuts and Jobs Act achieved its goal. Corporations are not tax absconders. To the extent that a corporation does not pay any taxes, it is because they are making investments or not making any money. Anyone who wants to deprive corporations of tax incentives to invest is welcome to explain what alternative he or she has to offer in terms of encouraging corporations to commit to the future of the American economy. To suggest “government” as the solution is not a valid option, for reasons I have explained in my latest book.