August 12, 2008
Economics Department
Twisted Facts About Corporate Income Tax
Kip Esquire points us to an AP wire story that has some shameful news (emphasis mine):
WASHINGTON - Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress.
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Collectively, the companies reported trillions of dollars in sales, according to GAO's estimate.
"It's shameful that so many corporations make big profits and pay nothing to support our country," said Sen. Byron Dorgan, D-N.D., who asked for the GAO study with Sen. Carl Levin, D-Mich.
Isn't that terrible? North Dakota Senator Byron Dorgon can't read. Either that, or he doesn't know the difference between sales and profits. He has an MBA degree, so I guess either is possible.
As the proud owner of a small software consulting corporation, I can assure you that I pay taxes. Lots of taxes. The company itself doesn't pay federal income taxes, but I pay personal income taxes on every dollar I receive from the company and every dollar of company profit.
If I hadn't incorporated, I'd receive fees from my clients and deposit them in my personal bank account. I'd deduct my expenses, and then make estimated self-employment tax payments during the year. Then at the end of the year I'd do a final accounting and settle up with the IRS.
Instead, my corporation receives the clients' fees, which are deposited in the corporate bank account. As the only employee, I pay myself a salary, which is then deposited into my personal bank account. Just like every other employer, I withhold federal income taxes and deduct Medicare and Social Security from my paycheck and send that money to the government right away. Then at the end of the year, I do a final accounting in which I deduct corporate expenses from revenue to calculate profit and report that to the IRS as income for myself as the owner of the corporation. Then I do a final accounting of my personal taxes and settle up with the IRS.
Either way---whether I receive the money directly or pass it through the corporation---I pay roughly the same amount of taxes. Only the paperwork is different.
(For various reasons, I'm probably paying a bit more as a corporation than I would as a self-employed consultant.)
When the corporations are giants like Microsoft and Exxon, the numbers are a lot larger, but the principle is the same: Even if the corporation doesn't pay income taxes, every employee and every stockholder does. And the amount they pay will be roughly comparable to what would have paid if they had received the corporation's revenue (and paid the corporation's expenses) directly.
Don't forget, too, that one-third of U.S. corporations do pay income taxes. That's in addition to the income taxes paid by their employees and stockholders.
(Note: Of course, some corporations do manage to get some sweet deals written into the tax code. For example, the mortgage bailout bill includes an awesome tax cut for Chrysler. But most corporate income is taxed before any fat cats can spend it.)
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