The new Inflation Reduction Act of 2022 recently passed the Senate and the House and was signed into law by President Biden on August 16, 2022. One of its provisions is an increased tax rate of 28% with a 15% minimum tax rate on book income for corporations with at least $1 billion in income. The 28% is a 7% increase over the 2017 Tax Cuts and Jobs Act rate. No matter if you think the rate is high, low, or in between, corporations have a long history of not paying taxes, whatever the rate. Will this change in 2023? I’m looking forward to finding out.
Reagan cut corporate taxes in the 1980s
President Ronald Reagan is credited with the small government movement. He wanted to abolish the corporate income tax, which in 1983 was 46%. However, that rate only applied after all deductions, credits, and exclusions. Many companies paid little or no tax during the Reagan era; the average tax rate for all industries was 20.5%.
From the Parade op-ed above: "Experts say if corporations were subject to the same tax rates as individuals, it would mean an extra 100 billion in tax revenue annually in federal coffers." I found other articles from the mid-80s, taking note of the fact that corporations pay a low tax rate.
“Companies engaged in crude oil production paid federal income tax at an average rate of 3% in 1981, commercial banks paid 2%, railroads paid a negative 8% - i.e. the government paid them, and wood and paper products paid a negative 11%.” (“The Twice Taxed Myth” Jay Angoff, St. Louis Post-Dispatch, February 26, 1983).
In contrast, I used a pay stub of mine from 1980 and information from the IRS to recalculate my taxes. (unfortunately, a search through an old file cabinet for my actual 1040 was fruitless) Using this marginal tax rate table (here) on my salary of $21,600 and one deduction of $1000, my income tax was approximately $3387, an overall rate of 15.6%.
Corporations Still Aren’t Paying Taxes
Twenty years later, a GAO report showed that 61 percent of US corporations paid no federal income taxes from 1996 through 2000, a period of rapid economic growth and rising corporate profits.
The percentage of federal tax collections paid by corporations has tumbled from a high of 39.8 percent in 1943 (30% in the 50s) to a low of 7.4 percent last year. It ranged from 10 percent to 11 percent in 1996-2000, the period studied by the GAO.
Now forty years after the Reagan era, companies still aren’t paying taxes. Christopher Ingraham writes in the Washington Post (April 6th, 2021) that fifty-five of the largest corporations paid no federal income tax on profits of $40 Billion in 2020.
The companies on the list are in diverse industries - Archer Daniels Midland (Food), Charter Communications and Dish Networks (Telecommunications), Duke Energy, Nike, Mohawk Industries, and Hewlett Packard. These companies use stock options given to executives to reduce their tax liability. Other deductions are investments in research and development, or fully depreciating new equipment. But still, no tax on $40 Billion in profits?
Tax Cuts and Jobs Act versus Inflation Reduction Act
The TCJA’s changes affected both corporate and individual income taxes. The act reduced the top corporate tax rate from 35% to 21%—a 40% reduction. Actual corporate income tax revenue in FY2018 was $135 billion lower than CBO’s projection from 2017—almost exactly a 40% decline.
In principle, this tax cut from the TCJA would “pay for itself” by creating substantial economic growth—if tax revenues rose from the combination of higher wages and hours worked, greater investment returns, and larger corporate profits. However, this hasn't happened, and tax revenues have decreased. I have been alarmed at the increase in our deficit as well since the passing of the TCJA, but that's a topic for another blog post.
The Inflation Reduction Act creates a new 15 percent corporate minimum tax based on the financial statement income of corporations with at least $1 billion in such income, and a higher rate of 28% on profits, so fewer companies will pay zero. The Act still allows for bonus and accelerated depreciation deductions when calculating taxable book income.
The key point is that tax revenues will increase and fund programs that the majority of our citizens desire. Programs that lower health care, prescription drug, and energy costs. I've been paying income taxes for years, now profitable corporations will contribute with me.
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