Mr. Clinton's corporate tax - damaging economic consequences from proposed rise in corporate income tax rates - Column

National Review, July 5, 1993 by Ed Rubenstein

THE PROPOSED hike in corporate income-tax rates--from 34 to 36 per cent-has attracted little attention compared to other elements of the Clinton tax package. Supporters point to a long-term decline in corporate taxes relative to other federal taxes:

In 1950 corporate income taxes accounted for about one-third of all federal revenues. Despite continued revenue growth the tax share plummeted steadily, to a low of 5.3 per cent in 1982. Liberals blame the decline on tax loopholes or deductions available to corporations.

In reality the decline reflects the failure of pre-tax profits to grow as fast as other forms of income taxed by the government. In 1950 corporate profits accounted for 18 per cent of GDP. Throughout the 1970s they hovered at around 11 per cent. They plunged to 4.9 per cent in 1982, and are currently between 6 and 7 per cent.

Take a look at the recent history of corporate tax law. The Tax Reform Act of 1969 repealed the investment tax credit then available and imposed a minimum tax on depreciation allowances. Significant corporate tax reduction in 1981 was canceled by the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982, followed by smaller tax hikes in 1984, 1987, and 1988.

None did more damage than the monumental Tax Reform Act of 1986. While cutting the top corporate rate from 46 to 34 per cent, this law abolished the investment tax credit, which had saved companies billions of dollars a year. Perhaps the most damaging feature of the 2986 law was an alternative minimum tax imposed on corporations that earn little or no profit but have large depreciation write-offs. The cumulative effect of this law--and one of its main selling points-- was to shift $120 billion in tax payments from individuals to corporations in the first five years.

Corporations currently pay nearly 25 per cent of their pre-tax profits to the Federal Government. And state and local corporate income-tax collections--$25 billion in 1992--have grown faster than the federal tax in recent years. Social Security taxes represent a still larger tax liability for business. All in all, the effective tax rate on profits exceeds 80 per cent, according to the Tax Foundation.

Treasury officials fear that if the top personal income-tax rate rises to 36 per cent while the corporate rate remains at 34 per cent, there would be a surge of phony incorporations. Perhaps. But the corporate tax already creates a notorious double taxation of profits when earned by the corporation, and when distributed to shareholders as dividends. Norman Ture of the Institute for Research on the Economics of Taxation estimates that taxes paid on corporate profits are 40 per cent greater than the amount shareholders would have paid if earnings flowed directly to them and were taxed at personal income-tax rates.

Corporate taxes are ultimately paid by individuals, in the form of lower wages for employees, higher prices for consumers, and lower returns to stockholders. An ideal tax system would have no corporate tax whatsoever.

MEASURING THE CORPORATE TAX BURDEN
            ($ Billions)
Corporate Income Taxes
       Corporate  Total      as a Percentage of:
       Income     Federal    Federal   Corporate
       Taxes      Revenues   Revenues  Profits
1950   $17.0      $ 50.4      33.7%     39.6%
1960    20.6        96.9      21.2      40.6
1970    27.1       195.4      13.8      34.9
1980    58.6       553.0      10.6      32.9
1982    33.8       635.4       5.3      22.3
1986    66.0       827.2       8.0      24.3
1987    85.4       913.8       9.3      26.7
1990    88.5     1,107.4       8.0      24.5
1991    81.7     1,122.2       7.3      23.5