Corporations should pay their fair share. This is a refrain often heard on the campaign trail. Believe it or not, the US has the highest corporate tax rate (35% + state taxes, estimated to total about 39%) in the world. Here is a list of corporate tax rates, by country. In addition to the high rate, the US is one of a few (and shrinking) number of countries who tax foreign income. Most countries only tax corporate revenue that is earned within their borders. Even this wouldn't be that big of a deal if the US didn't have extraordinarily high tax rates. If the US taxed worldwide revenue at a reasonable rate, similar to other countries, then corporations wouldn't have to pay that much after deducting the taxes they have already paid to the foreign countries where the income was earned.
Before we get into the numbers, I just want to consider how weird the public debate on this is. For instance, the Obama administration has been pushing for capital controls to prevent corporations from moving out of the country to lower tax jurisdictions (which, as noted above, is roughly the entire rest of the world). Burger King was targeted because they merged with Tim Horton's and moved their headquarters to Canada. Moving to Canada is now considered a tax dodge. Literally any business any US corporation conducts abroad can be derided as a tax dodge, because there is nowhere else a corporation could conduct business under a more onerous tax regime.
The usual response to this is that the real rate is much lower because of all the corporate loopholes. Think about this. If real corporate tax rates were actually lower, then why would they be moving to Canada? Either de facto tax rates are low, or there is an epidemic of corporations moving to other countries to avoid high taxes. Both can't be true.
Here is the White House (pdf: corporate tax expenditures start on page 228) estimate of tax deductions. In 2015, corporations will pay about $340 billion in taxes. Corporate tax deductions ("tax expenditures") total about $130 billion. Of this, about $65 billion (from the White House file) is "Deferral of Income from Controlled Foreign Corporations". This is the net additional tax firms would pay to repatriate their earnings from foreign subsidiaries. Note, this is only considered a tax deduction because (1) the US has the highest corporate tax rate and (2) we impose that tax on foreign earnings in a way that most of the developed world does not. In other words, if we simply mimicked, say, Denmark (23.5% tax on domestic income), US corporations would pay lower taxes and this $65 million would not be considered a tax deduction, because Denmark would have never considered it to be taxable income in the first place.
The next four largest corporate tax deductions are: $11.4 billion on "Deduction for US Production Activities", $9 billion on municipal bond interest, $7.6 billion for low income housing credits, $6.6 billion for expensing R&D activities. These four, together, account for about half of the remaining deductions, and I think only the $11.4 billion would contain some of what people might generally be imagining when they think about corporate tax loopholes.
As a comparison, the four big individual housing tax deductions (imputed rent, mortgage interest, capital gains, and property tax deductions) total about $218 billion. The deduction for employer provided health insurance is about $206 billion.
There is support among economists on both the right and left to eliminate (not reduce - eliminate) the corporate income tax and to eliminate these individual deductions. These changes would, on net, make the tax code more progressive without reducing total revenues significantly. Some of the housing deductions are much like the supposed deduction on foreign corporate earnings. They are only considered deductions because we presume to tax them to begin with.
The taxation of rental income from tenants, which is not imposed on homeowners, is a very large and regressive tax expenditure. This regressive taxation would automatically go away if we stopped taxing capital income. Some, or all, of any revenue shortfall, in aggregate terms (local, state, and federal) could be made up for with higher property taxes. Lower income households tend to spend more on housing, so property taxes are still somewhat regressive, but they are less regressive than our current set of capital taxes, which include large tax benefits, like nontaxed imputed rent and deducted mortgage interest, that are aimed solely at high income, high wealth households. Somewhat higher property taxes would also probably help to alleviate some of the volatility we have seen in housing markets.
Anyone having political debates where they presume that higher corporate taxes are a step toward fairness is simply not engaging with reality. Our current tax regime compares unfavorably in this regard to every other country on the planet, and doing the exact opposite of that would actually better achieve the end result of creating a more fair tax regime.
Corporate taxes don't fall on the corporation. After tax capital income has been a very stable proportion of total domestic income for many decades, with various levels of corporate income tax. The distribution of incomes emerges from an infinitely complex set of inputs which are not significantly changed by a marginal change in corporate tax rates. Corporate taxes are not particularly progressive or regressive because they don't particularly fall on shareholders. In these two graphs we can see that total capital income (after tax corporate profit + interest income + proprietor income) is fairly stable over time, after tax profit is more stable than pre-tax profit, and most of the change in capital incomes come from changing shares of interest and proprietor income, not changing tax rates. Capital income is such a stable portion of domestic income that its level is an insignificant factor in changing wage levels. And, corporate tax rates have little discernable effect on the aggregate level of after tax capital income. In short, corporate taxation would not be an important topic on a pragmatic platform for economic prosperity and fairness, and to the extent that it might be a topic, the elimination of corporate taxation would be the policy goal.
The effect of taxes on after tax profits can be seen clearly with municipal bonds, which are one of the larger corporate tax deductions. The White House estimates this deduction at $9 billion, or a little less than 1% of domestic corporate profits. So, the accounting for this appears to pull the effective tax rate down by a little less than 1%. But, this tax deduction isn't a corporate tax deduction. It is a municipal tax deduction. Since municipal bonds are tax deductible, they pay lower interest rates, saving money for local governments and agencies. So, if a municipal bond pays 3%, an equivalent corporate bond will typically pay something like 4%. This is a well known issue. So, this tax deduction reduced corporate taxes by $9 billion, but it also reduced corporate profits before tax by something close to $9 billion. The existence of the municipal bond tax deduction has little effect on after tax corporate income. Most taxes that are universally applied will have a similar effect. Municipal bonds just happen to be publicly traded in liquid markets, so that we can see the effect easily.
Here is one more graph, measuring Compensation over time. The upper and lower bands represent the maximum and minimum share of domestic income that has gone to compensation over this period. Overwhelmingly, it is the growth rate of total domestic income that raises future Compensation levels, not the relative share, which is fairly stable over time. And, of course, according to my recent research, both the decline in total growth of domestic income and the decline in relative compensation income to the bottom portion of its long-term range, are largely attributable to our destructive limitations on urban housing expansion. This is why we don't see an unusual rise in capital incomes in the graphs above. I didn't include income to homeowners in that graph, and that is the income category that has risen during our recent malaise.
We are the 100%. Overwhelmingly, our well-being is a product of past growth rates. Income shares between corporations and laborers are too stable to make much difference in aggregate income levels, and even if they weren't corporate taxes don't have much of an effect on after tax corporate income anyway. The best tax regime, considering these issues, is the regime that encourages production and growth. I will leave it as an exercise for the reader to decide if haranguing corporations as they move away to anywhere else in the world to avoid a tax that has little effect on income distribution is a sign of success.