Key Takeaways

• The current U.S. corporate tax system features a statutory tax rate of 35 percent and purports to tax the worldwide income of multinational firms. Yet effective tax rates are typically far lower—in the single digits for the most aggressive tax-planning U.S. corporations—and little if any revenue is raised by taxing the foreign income of multinational firms. Corporate tax reforms should better align the “label” of our tax system with its underlying reality.
• The U.S. corporate tax system generates less revenue than that in other countries (as a share of gross domestic product) due to the narrowness of our tax base, the tax preference for non-corporate businesses, and the pervasive profit shifting of multinational firms. At present, multinational firms have a large incentive to earn income in low-tax countries and to avoid repatriating that income to the United States.
• Corporate tax revenues have been relatively flat as a share of GDP in an era when both corporate profits and the capital share of national income are increasing.
• In order to tax capital income, it is particularly important to protect the corporate income tax base since only a small share of U.S. equity income is taxed at the individual level. The corporate tax also plays a vital role in the larger tax system, since it protects the individual income tax base.
• Capital taxation is no more inefficient than labor taxation, once you take into account realistic models of optimal tax theory, the possibility that much capital income is due to rents (excess or monopoly profits), and the difficulty of crisply distinguishing capital and labor income for high-income individuals. Therefore, capital tax burdens should be harmonized wth labor tax burdens, eliminating the tax preference for capital income.
• Capital income is far more concentrated than labor income. In 2012, the top 5 percent of taxpayers report 37 percent of all income, but they report 68 percent of dividend income and 87 percent of long-term capital gains income.
• The corporate tax is likely to burden capital or shareholders far more than it burdens workers; there is no robust international evidence that corporate taxes lower wages. This stands in contrast to most other important tax instruments, like the payroll tax and the labor income tax, where the burden falls nearly entirely on workers’ salaries and wages.
• The U.S. corporate system is highly distortionary, favoring debt-financed investments, investments in certain sectors, and income earned in non-corporate form.
• Since U.S. corporations are enjoying years of particularly high profits and are competitive when compared to peer companies in foreign countries, tax reform proposals should focus on corporate tax base protection and reducing distortions within the existing system.
• Relatively simple reforms could address the flaws in the current system. These include measures that would harmonize the tax treatment of different types of investments and income as well as measures that would protect the tax base from profit shifting to low-tax countries.