What Would American Businesses Look Like If We Fixed the Tax Code?

Richard Borean

Wednesday, November 12th, 2014

As the American economy continues its slow recovery, both sides of the aisle are looking to business tax reform as a means of fixing present financial woes and avoiding future pitfalls. Some policymakers and taxpayers argue for higher taxes on business investment, while others fight for lessening the corporate tax burden. However, the conversation is often driven by misinformation about what the U.S. economy, business landscape, and tax code look like and how they function together.

In an effort to help ensure that the debate over business tax reform is fact based and easily digestible, the nonpartisan Tax Foundation has released a major new studyBusiness in America: Illustrated. The report examines the vast array of business types and sizes, the sectors of the economy they serve, and the effect of taxes on U.S. businesses and the people they employ.

Business in America is a visual guide to business, taxes, and the economy with more than 40 illustrations accompanied by concise and easily digestible analyses. Here are a few examples of the key takeaways:

  • The U.S. labor force as a percent of population is smaller today than in the past 30 years.
  • 95% of businesses pay their taxes through the individual income tax code, not through the corporate tax code.
  • Large companies earning more than $100 million pay more than 90% of all corporate income taxes.
  • Corporations face high effective tax rates across all industries, although the rates vary by industry due to the profitability of an industry in a given year, how much business they do overseas, and different benefits in the tax code.
  • Effective and smart tax reform could grow the economy by $2.5 trillion.

After months of debate over the relationship between corporate inversions and the U.S. tax code, tax reform will be a key issue for the newly elected congress. As the President and Congressional leaders work toward an effective compromise, it is crucial that they understand what American businesses look like, how the tax code is failing those businesses and the people they employ, and where there is room for improvement.

“Americans often look at businesses impersonally. We think of them as lifeless entities that earn profits and don’t do much else,” said Tax Foundation President Scott Hodge. “When we think of businesses this way, it becomes very easy to think that business taxes are somehow different than other taxes. But the reality is that businesses are simply groups of people; they are workers, consumers, and shareholders. This means that when we tax businesses, we actually tax people. Workers get lower wages, consumers pay higher prices, and shareholders receive lower returns.”

Full report: Business in America: Illustrated