Corporate Tax

Company taxes are wealth taxes

The main cause of the radical decline in tax rates for very wealthy Americans over the past 75 years isn’t what many people would guess. It’s not about lower income taxes (although they certainly do matter), and it’s not about lower estate taxes (although they are important too).

The biggest tax advantage for the rich has been the sharp drop in the corporate tax rate.

In the 1950s, 1960s, and 1970s, many companies paid about half of their profits to the federal government. The money helped fund the U.S. military and investments in roads, bridges, schools, scientific research, and more. “A filthy little secret,” said Richard Clarida, an economist who is now the vice chairman of the Federal Reserve, “said that corporate income tax was used to generate a fair amount of revenue.”

Since the middle of the 20th century, however, politicians from both parties have been supporting a reduction in the corporate tax rate, often with intense lobbying by American companies. The cuts were so large – including President Donald Trump’s 2017 tax overhaul – that at least 55 large companies did not pay federal income taxes in the past year, according to the Institute for Taxes and Economic Policy. Among them: Archer-Daniels-Midland, Booz Allen Hamilton, FedEx, HP, Interpublic, Nike and Xcel Energy.

“Currently, the US has less corporate tax revenue as a percentage of economic output than almost any other advanced economy,” write The Times’ Alan Rappeport and Jim Tankersley.

The justification for the tax cuts has often been that the economy as a whole will benefit – that lower corporate taxes would lead to business expansion, more jobs and higher incomes. But it didn’t work out that way. Instead, economic growth has been mediocre since the 1970s. And incomes have grown even more slowly than the economy for any group but the rich.

The American economy doesn’t work very well when tax rates are low for the rich and inequality is high.

Corporate taxes are such an important part of the overall taxes paid by the wealthy because most of their holdings are typically stocks. And as business owners, you effectively pay corporate taxes. Most of their income does not come from a salary or bonus; it comes from the proceeds of their wealth.

“In fact, the only sizeable tax these billionaires have to pay is the corporate income tax they pay through their businesses,” said Gabriel Zucman, an economist and tax specialist at the University of California at Berkeley. “The main reason the US tax system was so advanced prior to the 1980s is because of the high taxes on corporate profits.”

President Biden is now trying to reverse some (but by no means all) of the drop in corporate taxes. His plan would, among other things, raise corporate tax rates, penalize companies that move profits overseas, and introduce a rule to prevent companies from paying taxes. The money would help pay for his infrastructure plan. “It’s honest, it’s fair, it’s taxable and it pays off for what we need,” Biden said in the White House yesterday.

Experts and critics are already raising legitimate questions about his plan, and there will clearly be a debate about it. Biden said he was open to compromise and other ideas.

However, some of the criticism is clearly at odds with the facts: The long-term decline in corporate taxes does not seem to have done much of good to most American families.

For more: If you haven’t heard yesterday’s episode of The Daily – in which Jesse Drucker explains how Bristol Myers Squibb avoided taxes – I recommend it.

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Take some time here with the photo essay.

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Thank you for spending part of your morning with The Times. Until tomorrow. – David

PS New York City changed the name of Longacre Square to Times Square in honor of the New York Times’ move to the area 117 years ago. A Times story immodestly – but correctly – predicted that the new name “is unlikely to be forgotten.”

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Today’s episode of “The Daily” is about the chauvin process. In “Sway” Diana Trujillo discusses the future of space travel.

Lalena Fisher, Ian Prasad Philbrick, Tom Wright-Piersanti and Sanam Yar contributed to The Morning. You can reach the team at themorning@nytimes.com.

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