Many economists and policy makers argue that reform of the corporate income tax system is needed, although a variety of rationales on why and how have been offered. Many believe it is a combination of these arguments that justify reforming the corporate tax system. Data on which companies pay the corporate tax, corporate tax revenue, and how the U.S. system compares to the rest of the world are then presented and analyzed. Next, the economic effects of the corporate tax are reviewed—including a discussion of the purpose of the corporate tax, who bears the burden of the tax, and how to evaluate alternative corporate tax systems. The corporate income tax is designed as a tax on corporate profits (also known as net income). Corporate Tax Rates

Most corporate income is subject to a 35% statutory tax rate. Some of the largest corporate tax expenditures include the domestic production activities deduction (Section 199 deduction) and the deferral of income earned abroad. In 2014, the sum of all corporate tax expenditures was $154.4 billion. Some of this shift can be explained by various legislative and regulatory changes over this time period that reduced the top individual tax rate below the top corporate tax rate (making it more attractive to be a pass-through), increases in the shareholder limit for S corporations, and the ability of LLCs to elect partnership tax status. The share of business income generated by C corporations has also changed over time. There is also substantial variation in taxes paid by corporations in different industries. The corporate tax has also decreased in significance relative to other revenue sources. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In 2013, the corporate tax accounted for 9.9% of federal tax revenue, whereas the individual and payroll taxes generated 47.4% and 34.2%, respectively, of federal revenue. Second, the increasing fraction of business activity that is being carried out by pass-throughs (particularly partnerships and S corporations) has led to an erosion of the corporate tax base. Table 2 compares the statutory tax rate, the weighted effective rate, and the weighted effective marginal rate in the United States to the rest of the Organization for Economic Co-operation and Development (OECD) countries. While the U.S. statutory tax rate is about 10 percentage points higher than the other OECD countries, the U.S. effective tax rate is about the same as effective rates found elsewhere. There are a couple of reasons why the United States collects less in federal corporate tax revenue than other countries. The recent change in corporate tax incidence assumptions has important implications for policy analysis. Generally, it is believed that the corporate income tax contributes to the overall progressivity of the U.S. tax system. Policy makers frequently note that the U.S. tax system should be competitive. Corporate tax reforms and corporate tax systems designed to minimize economic distortions can help promote an efficient economy. The differential treatment of domestic and foreign-source income by U.S. multinationals also raises concerns that business decisions of U.S. multinational corporations may be motivated by tax policy. Competitiveness

Policy makers often use "competitiveness" as a rationale for corporate tax reform. While the current U.S. system is occasionally referred to as a worldwide tax system, in reality it is actually a hybrid, containing features of both worldwide and territorial tax systems. Comparing Current Corporate and Business Tax Reform Proposals

In recent years, economists, lawmakers, and others have offered a number of business and corporate tax reform proposals. While the discussion draft did include text that would reduce the corporate tax rate to 25% (supporting documentation indicated that this rate reduction would be paid for with unspecified base-broadening provisions), the focus of the discussion draft was on provisions that would shift the United States to a territorial tax system. The Administration's proposal would eliminate a number of corporate tax expenditures, and provides options for other corporate reforms.
Many economists and policy makers believe that the U.S. corporate tax system is in need of reform. There is, however, disagreement over why the corporate tax system needs to be reformed, and what specific policy measures should be included in a reform. To assist policy makers in designing and evaluating corporate tax proposals, this report (1) briefly reviews the current U.S. corporate tax system; (2) discusses economic factors that may be considered in the corporate tax reform debate; and (3) presents corporate tax reform policy options, including a brief discussion of current corporate tax reform proposals.
The current U.S. corporate income tax system generally taxes corporate income at a rate of 35%. This tax is applied to income earned domestically and abroad, although taxes on certain income earned abroad can be deferred indefinitely if that income remains overseas. The U.S. corporate tax system also contains a number of deductions, exemptions, deferrals, and tax credits, often referred to as "tax expenditures." Collectively, these provisions reduce the effective tax rate paid by many U.S. corporations below the 35% statutory rate. In 2014, the sum of all corporate tax expenditures was $154.4 billion.
The significance of the corporate tax as a federal revenue source has declined over time. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In 2013, the corporate tax accounted for 9.9% of federal tax revenue. The decline in corporate revenues is a combination of decreasing effective tax rates, an increasing fraction of business activity that is being carried out by pass-through entities (particularly partnerships and S corporations, which are not subject to the corporate tax), and a decline in corporate sector profitability.
A particular aspect of the corporate tax system that receives substantial attention is the 35% statutory corporate tax rate. Although the United States has the world's highest statutory corporate tax rate, the U.S. effective corporate tax rate is similar to the Organization for Economic Co-operation and Development (OECD) average. Further, the United States collects less in corporate tax revenue relative to Gross Domestic Production (GDP) (2.3% in 2011) than the average of other OECD countries (3.0% in 2011).
This report discusses a number of economic considerations that may be made while evaluating various corporate tax reform proposals. These might include analyses of the likely effect on households of certain reforms (also known as incidence analysis). Policy makers might also want to consider how certain corporate tax provisions contribute to the allocation of economic resources, choosing policies that promote an efficient use of resources. Other goals of corporate tax reform may include designing a system that is simple to comply with and administer, while also promoting competitiveness of U.S. corporations.
Commonly discussed corporate tax reforms include policies that would broaden the tax base (i.e., eliminate tax expenditures) to finance reduced corporate tax rates. Concerns that the U.S. corporate tax system inefficiently imposes a "double tax" on corporate income have led some to consider an integration of the corporate and individual tax systems. The treatment of pass-through income—business income not earned by C corporations—has also received considerable attention in tax reform debates. How the United States taxes income earned abroad, and the possibility of moving to a territorial tax system, have emerged as important issues.