As we watch the turmoil in Europe, the U.S. gets closer and
closer to a
sovereign debt crisis
of its own. Yet the most recent public uproar over whether
corporations are paying their fair share of taxes distracts from
the far more important question: Why are we wasting time worrying
about a tax that hasn't contributed all that much to the
government's coffers for decades?
Much ado about little
Wall Street Journal
raised the hackles of tax reformers everywhere by highlighting a
statistic from the Congressional Budget Office. According to the
CBO, corporations paid just over 12% of their profits in taxes
last year -- the lowest percentage since 1972.
The resulting outcry was fast and furious.
Fellow Fool Alyce Lomax pointed to a report
from the Citizens for Tax Justice and the Institution on Taxation
and Economic Policy that pointed to 280 profitable Fortune 500
companies that received $223 billion in tax subsidies, and paid
an average effective rate of 18.5%. Thirty of those companies had
negative tax rates, with
) topping the list with $18 billion in tax breaks from the
Treasury, according to the report.
Much ado about little
But amid all this turmoil is an often-forgotten point: Corporate
tax revenue didn't disappear overnight. It's been an
insignificant part of tax revenues for a long time. In fiscal
2010, for instance, corporate income tax represented only 6% of
the total federal income for the year. But as long ago as 2003,
the figure was just 7.4%. To give some sense of perspective, when
you combine personal income taxes with payroll taxes like Social
Security, Medicare, and unemployment, those payments added up to
of federal tax revenue in 2010.
This trend away from corporate tax goes back for decades.
According to the Center on Budget and Policy Priorities, the
percentage of federal revenue coming from corporate income taxes
has fallen from a peak of 32% in 1952 to around 15% on average in
the 1970s, and dropping further into the 10% range from the
Why did corporate tax revenue largely go away? A lot of it has
to do with the ease with which corporations can take advantage of
tax structures that avoid it. Consider:
) doesn't have to pay corporate tax because it qualifies as a
real estate investment trust
. All it has to do is pay out 90% of its income every year, and
it avoids corporate-level tax entirely.
(Nasdaq: LINE) doesn't have to pay corporate tax because its
LLC structure qualifies as a
master limited partnership
for tax purposes. By generating 90% of its income from
qualifying sources like energy production and transportation,
it also frees itself from the corporate tax structure.
(Nasdaq: PSEC) and
(Nasdaq: AINV) don't have to pay corporate-level tax because
they qualify as business development companies. By getting at
least 90% of their income from dividends, interest, capital
gains, or other investment income, and then paying it out to
shareholders, BDCs steer clear of corporate tax requirements.
That's also how Prospect and Apollo pay such attractive yields:
in order to keep their favorable tax status.
But the rest of why corporate income tax revenue has fallen is
simple: The government has passed laws giving corporations big
tax breaks, and corporations have taken full advantage of them.
acknowledges that so-called "bonus depreciation" is likely the
culprit for the current drop in corporate tax receipts, as
companies have been able to write off capital expenses
immediately rather than depreciating them over time.
Set your priorities
Obama administration officials have said that the president
expects to announce a revenue-neutral overhaul of the corporate
tax system this month, which could include a cut in the current
35% tax rate in exchange for greater taxation on profits
But, to borrow a page from fellow Fool Morgan Housel's
playbook, we might be better off doing nothing. In fact, I think
the corporate income tax entirely might well work better -- as
long as we made sure that business income was fully taxed at the
shareholder level, and that shareholders had to pay the higher
rates of tax that are slated to take effect at the beginning of
2013. In the long run, that would not only simplify taxes but
also put investments on a more even keel, allowing money to
gravitate to the most valuable enterprises rather than ones that
provide artificial tax benefits.
Unfortunately, for now, we have to live with the tax system we
have. One way to minimize taxes is to invest using tax-favored
retirement accounts, but you need the right stocks to have a rich
retirement. The Motley Fool's latest special report reveals three
great stock names, and it doesn't cost a dime -- but it won't be
around forever, so read it today while it's still available.
Tune in every Monday and Wednesday for Dan's columns on
retirement, investing, and personal finance. You can follow him
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