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Our dumb corporate tax system

One place liberals and conservatives should be able to agree is on corporate tax reform. Our corporate tax is so bad that the two seemingly opposed positions on corporate taxation are actually both right. Yes, as liberals say, corporations should pay more in taxes. And yes, as conservatives say, our corporate tax rate should be a lot lower. Oddly, we can actually have both.

Consider this graph, which shows corporate tax rates against the OECD average. As you can see, we're on the high side:


That's the evidence for the conservative view. Our rate is about one standard deviation higher than the OECD average. But here's the thing: If you actually look at the amount of money our corporate tax raises, we're about one standard deviation beneath the OECD average:


The reason is simple enough: Our corporate tax code is complicated. A lot of businesses, like S-corporations and partnerships, don't pay corporate taxes. Others use loopholes and exemptions and deductions to push their actual rate way down. We could have a simpler code with lower rates that would raise more money. I'm not holding my breath for that compromise, as the relevant interests here want to pay less money in taxes rather than have a simpler code, but it's nevertheless a theoretically possible outcome.

Graph credit: The Tax Policy Center

By Ezra Klein  | September 27, 2010; 2:48 PM ET
Categories:  Taxes  
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I'm not a big believer in corporate taxes. Is it fair that Bill Gates and a widow who owns 20 share of MSFT get their Microsoft income taxed at the same rate?

This is actually a trick question, since Microsoft is one of our more adept tax-avoidance tricksters and, last I heard, was not paying any corporate income tax at all.

I'd rather have the shareholders themselves pay income taxes and get tax credits for loss, in effect turning all companies into S-corps. Simpler, cleaner, fairer.

Posted by: roblimo | September 27, 2010 4:05 PM | Report abuse

I'll use this as another opportunity to plug the idea (stolen without remorse from Kevin Willis!) of trading a lower corporate tax for instituting a carbon tax. The corporation could pay whichever tax resulted in a lower burden. Boom! Closed loop holes means everybody pays some tax, we get a carbon tax with an incentive for companies to reduce their carbon emissions, and conservatives get lower tax rates. It's one of those rare situations where I think everyone kind of wins, both politically and on policy.

Posted by: MosBen | September 27, 2010 4:21 PM | Report abuse

I posted a complaint about the graphs on a previous Ezra column (the one about border enforcement spending) and now I'll post a compliment: these are good graphs. The scale is consistent (well, you could start the first one at 0%, both it's otherwise good) in both directions. I actually turned around in my office to confirm that it matched the chart I made and keep on my wall -- it does. :-)

Posted by: masseydvt | September 27, 2010 4:25 PM | Report abuse

Ezra, you sound suspiciously like Ronald Reagan in this post. More revenue by simplifying the system and reducing the rates.

Posted by: bgmma50 | September 27, 2010 5:20 PM | Report abuse

"This is actually a trick question, since Microsoft is one of our more adept tax-avoidance tricksters and, last I heard, was not paying any corporate income tax at all."

This kind of stuff is easy to check online. Pull up their latest annual report filed online at and search for income taxes.

Posted by: tuber | September 27, 2010 5:24 PM | Report abuse

It's a little misleading to state that businesses such as S-corporations and partnerships don't pay corporate taxes, because it makes it seem like they don't pay any income taxes. That's false.

S-corps and partnerships have their income flow down to the individual owners of those entities. They don't pay corporate income taxes because the income is actually taxed at the individual rates of the people who actually own the income.

We could do away with corporate taxes if all corporations had similar flow down of income and expenses. Unfortunately, that would be incredibly complicated as well for some businesses and taxpayers. Imagine buying one share of Microsoft stock, and then having to include your portion of Microsoft's income on your income taxes, and having to pay your share of taxes on that stock, without having realized a single dollar in your personal possession.

While corporate taxes may need reform, a simpler tax code won't necessarily make corporate income taxes more fair - just simpler.

Posted by: PatrickEarnest | September 28, 2010 2:07 AM | Report abuse

What people forget is that corporations don't pay the taxes. The consumer does. Corporate tax is just another progressive hidden tax on the consumer.

Posted by: gfafblifr | September 28, 2010 6:30 AM | Report abuse

The current corporate tax structure is also unfair in many ways to... corporations:

Excel file (data set): Source:

As you can see from the data, effective tax rates vary widely by industry sector. I am sure the Trucking industry, who pays a 30.87% Effective tax rate, finds it grossly inappropriate that the Real Estate Investment Trusts (REIT) industry pays on average .71%.

We hear about the market distortions of Fannie et. al. but we never hear about the affects of the unequal tax structure.

Posted by: chrisgaun | September 28, 2010 11:44 AM | Report abuse

ignorance is bliss.

Many of our corporations pay no taxes because the taxes are imposed on the individual under corporate law

to imply otherwise or to fail to state such an obvious difference is fraud, poor reporting, stupidity or lying by omission. So which is it?

Posted by: JohnSpek | September 28, 2010 2:57 PM | Report abuse

IMHO the corporate tax should be more like insurance premiums where corporations with more risk of default on loans pay more tax. The way I see it the corporate tax pays for limited liability which is a form of insurance. As such, highly leveraged financial firms and for example BP and southern company that have high risk environmental damage beyond what they can pay, should pay more.

Posted by: jwogdn | September 28, 2010 5:02 PM | Report abuse

Agree with Roblimo in principle. Anyone know whether studies show any relationship between the diffential taxes between S-Corp and C-Corps and the meme that says S-Corps create all of the new jobs? ie with a level tax structure would C-Corps also create more jobs?

Posted by: litheveder | September 28, 2010 9:15 PM | Report abuse

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