The Decline of America’s Corporate Sector
Friday, January 9th, 2015
The U.S. loses about 60,000 corporations per year and has lost about 1 million corporations since the Tax Reform Act of 1986, according to the latest report from the nonpartisan Tax Foundation. The number of traditional C corporations in the U.S. has fallen to a historically low level and in-turn eroded the corporate tax base. There is now more net business income taxed under the individual income tax system than the traditional corporate tax code, a trend that does not appear to be stopping any time soon.
Although there are a variety of factors contributing to the decline, the report finds that the trend is driven heavily by America’s poorly structured tax code, specifically its two layers of tax on C corporations (the corporate tax plus capital gains and dividends taxes on shareholders).
The report’s key findings include:
- Over time, more businesses have structured themselves as "pass-through" entities. This allows profits to be passed through to owner(s) and taxed at individual tax rates that are often lower than the corporate tax rate and eliminates double taxation for shareholders.
- More than 60 percent of U.S. business profits are now taxed under the individual income tax code rather than the corporate tax code, which explains why the U.S. collects a relatively small amount of tax revenue from corporations despite having the developed world’s highest corporate tax rate.
- Outside of taxation, the traditional corporate form often provides the most efficient business structure for large-scale projects and investments. Excessive corporate taxation and the subsequent decline of the corporate sector artificially limits this important aspect of the economy.
Over the past year, corporate inversions have been the dominant tax issue and have forced a serious evaluation of the U.S. corporate tax system. What has been missing from this debate, however, is recognition that inversions are just the latest example of a more than two decade long trend in self-help tax reform by American businesses. The structuring of businesses as pass-through entities is another example of this kind self-help.
“Although this kind of do-it-yourself tax reform is beneficial to the overall economy because it lowers the tax burden on business investment, something is nevertheless lost” said Tax Foundation Chief Economist William McBride, PhD. “Pass-through businesses do not offer the same ability to invite investment from thousands of shareholders or easily transfer shares. That means the decline of the traditional corporate sector represents an economic distortion that is hobbling American industrial capacity and job growth. No other developed country has such a distorted business sector.”
The U.S. should do what the rest of the developed world has done (source): reduce the corporate tax rate, integrate the corporate and shareholder taxes to avoid double taxation, and limit corporate taxation to profits earned domestically.
Full report: America’s Shrinking Corporate Sector