Total corporate taxation: "hidden," above-the-line, non-income taxes

National Tax Journal, Sept, 2001 by Kevin Christensen, Robert Cline, Tom Neubig

INTRODUCTION

The current U.S. tax system relies heavily on corporations not only to pay income taxes, but also to pay and collect excise, payroll, property, and sales taxes. Much of the focus of corporation tax policy and planning has been on corporate income taxes. However, income taxes represent only 27 percent of total taxes paid and collected by corporations (see Figure 1).

The disproportionate focus on corporate income taxes is due largely to the reporting of income taxes on corporate income statements, the assumed shifting of non-income taxes, and the federal reliance on income taxes. The availability of reported income tax on corporate financial statements has resulted in numerous effective income tax rate studies (see Sansing, 1999; U.S. General Accounting Office, 1992; Sullivan, 1999). The fact that other corporate tax payments are not combined and reported, thus "hidden," has meant that non-income taxes have not been the focus of benchmarking studies.

This paper provides an overview of the importance of non-income corporate taxes and identifies the distinct roles that corporations play in the tax system. For example, corporations are both collectors of sales and use taxes from final consumers and payers of these taxes on their own purchases of taxable goods and services. For the sales and excise taxes that are imposed on corporation purchases, corporations are legally the taxpayers. However, depending upon the degree of shifting, the final incidence of these taxes may fall on the corporation's consumers, employees, or investors. In this final step, corporations are "distributors" of the taxes in determining the final tax incidence.

Many economists believe, for example, that excise and sales taxes are shifted forward to consumers and employer payroll taxes are shifted to employees through lower wages. Thus, these taxes do not receive much attention in discussions of corporate taxes. However, the compliance costs imposed on businesses as tax collectors are of significant concern and deserve greater attention from economists. As evidenced by the current debate on what constitutes taxing jurisdiction ("nexus") for the requirement to collect sales tax, the extensive effort on trying to simplify and stream line the current state and local sales taxes, and the increased focus on other countries' value-added taxes, collection of non-income taxes has significant implications for corporations' tax-related costs and tax policy.

Most of the hidden corporation taxes in the U.S. are state and local taxes. Many of these are industry-specific taxes, often on deregulating industries. Thus, these taxes are more likely to cause distortions in the geographic location of production and sales or the inter-industry competition of converging technologies and services, such as telecommunications, energy, and financial services. The efficiency effects of these corporate taxes also deserve greater attention.

This paper provides a framework for discussing the tax policy, administration, planning, and compliance issues related to non-income corporate taxes. The next section of the paper frames the issues of non-income business taxes. The third section presents data on total corporate taxes in the United States. The fourth section discusses the burden of corporate taxes. The fifth section presents the composition of income and non-income business taxes in other G-7 countries, and the final section summarizes the implications of "hidden," above-the-line corporate taxes.

ISSUES OF TOTAL CORPORATE TAXES

The tax system relies heavily on businesses for the administration of taxes. The effects of the tax system depend on the ultimate burden of the tax system, not where the statutory tax liability is placed. The burden includes not only the tax payments that reduce disposable income of households, but also the reduced efficiency in the economy (e.g., deadweight loss), as well as the compliance burden imposed on the private sector and the administrative costs of the public sector.

Corporations' Role in the Tax System

Businesses have several different roles and requirements in our voluntary payment tax system.

Businesses as Entities Subject to Tax Liability

Corporations are the statutory taxpayers for corporation income taxes, property taxes, customs, employer payroll taxes, and sales/use taxes on business inputs. The statutory liability of these taxes falls on the business entity, even though the ultimate incidence of taxes rests with people.

Businesses as Entities with Tax Collection/ Remittance Responsibility

Sales tax on final goods is an example of where businesses are responsible for collecting and remitting the tax to the government, although the statutory tax liability rests with the consumer. If the business does not collect the tax, the business still is responsible for remitting the tax liability.

Businesses as Remittance Agents for Withholding Taxes

Businesses are required to withhold for personal income and employee payroll taxes and remit payments to government. Unlike the tax collection responsibility, if an insufficient amount of tax is withheld, the employee is responsible for paying the difference.