Corporate tax revenues have been declining for the last six decades. This report discusses the three main factors for the decline. First, the average effective corporate tax rate has decreased over time, mostly due to reductions in the statutory rate and changes affecting the tax treatment of investment and capital recovery (depreciation). Second, an increasing fraction of business activity is being carried out by partnerships and S corporations, which are not subject to the corporate income tax. And third, corporate sector profitability has fallen over time, leading to a further erosion of the corporate tax base. As Congress considers options for tax reform, background on the decline in corporate tax revenue could prove useful in preserving any tax reforms enacted, or structuring a reform to obtain a desired revenue effect, such as revenue neutrality or enhancement. The House Committee on Ways and Means and the Senate Committee on Finance have held hearings on tax reform throughout the first session of the 112 th Congress. In his 2011 State of the Union address the President called for corporate tax reform that did not add to the deficit. Generally, the corporate tax reform discussion has focused on reducing statutory rates and achieving revenue neutrality through broadening the tax base by eliminating various deductions, exemptions, and credits, among other things, such as shifting to a territorial tax system. In the post-World War II era, corporate tax revenue as a share of gross domestic product (GDP) peaked in 1952 at 6.1% and generally declined since (see Figure 1 ). Taken together, the corporate tax has also decreased in importance relative to other revenue sources. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In that same year the individual tax accounted for 42.2% of federal revenue, and the payroll tax accounted for 9.7% of revenue. Today, the corporate tax accounts for 8.9% of federal tax revenue, whereas the individual and payroll taxes generate 41.5% and 40.0%, respectively, of federal revenue. This has led to an erosion of the corporate tax base.
Corporate tax revenues have declined over the last six decades. In the post-World War II era, corporate tax revenue as a percentage of gross domestic product (GDP) peaked in 1952 at 6.1%. Today, the corporate tax generates revenue equal to approximately 1.3% of GDP. The corporate tax has also decreased in importance relative to other revenue sources. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In that same year the individual tax accounted for 42.2% of federal revenue, and the payroll tax accounted for 9.7% of revenue. Today, the corporate tax accounts for 8.9% of federal tax revenue, whereas the individual and payroll taxes generate 41.5% and 40.0%, respectively, of federal revenue.
This report discusses the three main factors for the decline in corporate tax revenue. First, the average effective corporate tax rate has decreased over time, mostly as a result of reductions in the statutory rate and changes affecting the tax treatment of investment and capital recovery (depreciation). Second, an increasing fraction of business activity is being carried out by partnerships and S corporations, which are not subject to the corporate income tax. This has led to an erosion of the corporate tax base. And third, corporate sector profitability has fallen over time, leading to a further erosion of the corporate tax base.
Understanding the decline in corporate tax revenue could be helpful in preserving any tax reforms enacted, or structuring a reform to obtain a desired revenue effect, such as revenue neutrality or enhancement. The House Committee on Ways and Means and the Senate Committee on Finance have held hearings on tax reform throughout the first session of the 112th Congress. The President, in his 2011 State of the Union address, called for corporate tax reform that did not add to the deficit. Generally, the corporate tax reform discussion has focused on reducing statutory rates and achieving revenue neutrality through broadening the tax base by eliminating various deductions, exemptions, and credits, among other things.