Part V

Welcome back! I had a few hiccups in the data on this one but I think we can run with it, I thought would explain the problem before we start. The IRS has not released their data on corporate tax receipts for 2010 (I have the total amount from the Government Printing Office, but not the details) so we have to get a little creative to approximate the specifics. I looked at the most recent available year which was 2007, to work out the percentages (I figured they would be similar since overall corporate tax rates have not changed since 2007), but as it turns out even though the tax rate has not changed in a while the tax credits and deductions change quite a bit from year to year so I extended my data set to get a more accurate picture. Based on the averages, over the past five years, US corporations have been able to deduct 49 percent of their total profits. Of the non-deducted profits, corporations pay 35 percent in taxes. Out of what they pay in taxes, 24.2 percent is refunded back to the corporation in the form of tax credits.

To break down how this works let's say that that I ran a lemonade stand that was taxed the same way that US corporations are. Over the course of the summer I earned $100. When I look at my expenses at the end of the summer I see that I paid $40 for materials to make my stand and for the ingredients and $9 for a city permit to sell lemonade. These expenses are deductable under federal law so I can subtract them from my overall profits and report that I made $51 (Notice I did not deduct the $20 I spent at the arcade because that would be tax fraud). So now I owe 35% of $51, which is $17.85. But I am a clever accountant and I filed for a small business tax credit which is $3 and the sustainable resources tax credit because all my lemonade cups were made from recycled paper, which is $1.31. So when it is all said and done I will owe $16.54 to the IRS (of lemonade stands) at the end of the summer.

So moving from the world of lemonade stands to our corporate world, in 2010 the total amount of tax revenue from corporate taxes was $191 billion (this number is official and is from the Government Printing Office, who publishes the historical annual budgets). Assuming this number is consistent with the average of the past five years, that means there were about $255 billion in owed taxes before tax credits were taken into account, $729 billion in taxable income (the difference between taxable and untaxable profits is very similar to individual income taxes after untaxable income and deductions are factored in) and $1,487 billion in total profits.

Based on these numbers, to cover the deficit we would have to tax corporations doing business in the US 7 times the amount we do now. Not only would this be politically impossible to do it would be mathematically impossible as well. It is impossible to raise the necessary amount of money as there was only $729 billion in corporate taxable income in 2010. Even an impossible 100% tax rate would only cover 55.3% of the deficit.

So a corporate tax hike could not have balanced the budget in 2010 as the deficit was still higher than all the taxable income of America’s corporations combined. To gain any more revenue from corporate taxes it would require that the tax code be rewritten to be able to tax the necessary 88.5% of total corporate profits and this would most likely be a political and economic disaster.

But that being said, what could realistically be accomplished by an increase in corporate taxes? I am not an economist so I cannot factor in what a raise in taxes would do to economic growth, but assuming we could change the tax rate without substantially effecting corporate incomes. I will look at three options.

1. Eliminating all corporate tax credits.

2. Increase federal tax rates to be comparable with the highest corporate tax rates of other industrialized nations.

3. Increase federal tax rates to be comparable with the highest corporate tax rates of other industrialized nations and eliminate all corporate tax credits.

1. Eliminating all corporate tax credits.

By my loose estimates about $64 billion in tax credits were handed out in 2010 (It was $65 billion in 2007 which is the most recent year I can confirm). Corporate tax credits are a heavily debated issue, some people call these tax credits corporate welfare, some say they give unfair advantages to certain industries, and some say they encourage economic growth and give businesses incentives to expand and hire new employees. I cannot say whether tax credits are good or bad but I can say that eliminating them would do little to balance the budget. Cutting $64 billion in spending would only reduce the deficit by 5.6%.

2. Increase federal tax rates to be comparable with the highest taxes rates of other industrialized nations.

The US corporate tax rate is 35% of taxable income for corporations that make more than $18,333,333 . There is a graduated tax scale for businesses that make less that than that amount in a year but their taxes make up less than 5% of corporate tax revenue. After tax credits and deductions are figured in, the amount in taxes the average US corporations pays is 34.9 percent. So for simplicity sake I am going to say the tax rate is 35%.

Now you may have often heard that the US has the highest corporate tax rate in the world. This is mostly true. We have the highest overall tax rate when you factor in federal, state, and local corporate taxes (in some areas it is over 50%). When it comes to just the national rates we are the second highest. Japan is the highest with 40% (local taxes add about 0.6%*). So if we were to tax US companies at 40% we would raise an additional $27 billion (2.3 percent of the deficit), even less than if we cut corporate tax credits.

3. Increase federal tax rates to be comparable with the highest taxes rates of other industrialized nations and eliminate all corporate tax credits.

This would raise corporate tax revenue from the current $191 billion to $282 billion and reduces the current deficit by 7%.

So what is the verdict? What would happen if we hike corporate taxes and eliminated all corporate tax credits?

By the numbers:

Percentage this idea could reduce the federal budget deficit by: 7%
Total dollar amount this idea could cut the deficit by: $91 billion

* I pulled this number from a New York Times article (http://www.nytimes.com/2010/12/14/business/global/14yen.html) and Wikipedia supports this figure. I tried to verify it independently but oddly enough Japan’s National Tax Agency publishes all their statistics in Japanese, which I cannot read.