The Incredible Shrunken U.S. Corporate Tax

A blog about business and economics.
July 31 2014 4:55 PM

The Incredible Shrunken U.S. Corporate Tax

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America's team.

Photo by Justin Sullivan/Getty Images

As I argue in my column today, one of the basic problems with the corporate income tax is that it was conceived in a pre-globalization world, a time before tax havens and before U.S. companies started making a sizable chunk of their profits overseas. So I thought it would be useful to break out this graph, from the Tax Policy Center, showing how the corporate income tax’s role in the U.S. tax base has changed over time. Back in 1950, the corporate income tax was able to provide more than a quarter of federal revenue. Today, it’s down closer to 10 percent. Payroll taxes have essentially taken its place.

Globalization is far from the only story here. One reason corporate profits shrank as a piece of America’s tax base in the middle 20th century, for instance, is that they shrank as a piece of the economy, as shown in the graph below. But now, company profits are growing fast compared to our GDP while corporate tax receipts are relatively stagnant. (To be fair, they did pop up a bit during 2006 and 2007, before the recession.)

taxes_and_profits
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Part of the issue is likely that U.S. companies are earning more profits abroad and keeping them there to avoid taxes they would pay when they send the money back home. The presence of tax havens helps greatly in that regard. Tax credits and loopholes also play a role. But however you think we should fix the tax code, the one we have now doesn't seem to be built for the times.  

Jordan Weissmann is Slate's senior business and economics correspondent.

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