The Complicated Perquisites of the 1%

It’s amazing what you can learn from research. Recently, the Brookings Institution took note of the oft-made assertion that the corporate tax rate in the U.S. (at 35%) is too high. The usual response is to point out that 35% may be the statutory rate, but many of our largest and most profitable corporations take advantage of tax breaks that substantially reduce–or even eliminate–federal taxes.

This report, however, looked at a different issue.

Corporations used to be the dominant form in which business was done. Partnerships and other “pass through” entities–so named because the income “passes through” and is taxed as the partners’– were far fewer.  In 1980, only 20.7% of all business income was earned by pass-through entities; in 2011, the share had grown to 54.2%.

So a band of number-crunching economists at the U.S. Treasury and some academic partners, with access to far more data than outside researchers can see, set out to answer two simple questions: Who is getting all this partnership income? And what tax rate do they pay? They offered their answer Thursday in a paper presented at a National Bureau of Economic Research conference in Washington.

The findings are significant. And troubling.

*Pass-through business income is even more concentrated among the richest Americans than traditional corporate profits. “Overall, 69% of pass-through income earned by individuals accrues to the top-1%. Corporate income is similarly concentrated, but other business income (typically considered very concentrated) is substantially less concentrated.

* The average federal income tax rate paid by individuals who report pass-through business income was 19% in 2011. In part, that’s because so much of that income is considered capital gains or dividends, which are taxed at preferential rates.

* Across all business entities except for sole proprietorships, the average tax rate of U.S. business income in 2011 was 24.3%, they estimate. That’s lower than is often assumed in debates over corporate tax reform.

* “The migration of business activity out of the C-corporate sector and into the pass-through sector has likely substantially reduced U.S. tax revenue,” the economists conclude. If pass-through activity had remained at the (low) level of the 1980s, then the average tax rate on total U.S. business income in 2011 would have been approximately 28% rather than 24%, and tax revenue would have been at least $100 billion higher.

Who was it who used to say “A billion here, a billion there–pretty soon, you’re talking real money”?


  1. We hear a lot about making America Great Again. So let’s pick a year – say 1955. Individual
    Income Taxes accounted for 7.1% of the GDP, and Corporation Income Tax accounted for 4.4% of the GDP. In 2014 Individual Income Taxes accounted for 8.1% of the GDP, and Corporation Income Tax accounted for 1.9% of the GDP. If you care to read it there is an extensive article on large corporations that have managed to pay no federal income tax.

    Locally, we have our Pacers and Colts playing in stadiums they pay no taxes on. The stadiums through a slight of hand are “owned” by the quasi-public C.I.B. The costs of construction and maintenance are passed on the 99%.

    I recently took a trip to Ohio on I-70. I did not need to see a sign that said welcome to Indiana the rough condition of the road and the numerous patches, broken pavement and potholes told me I was back home in Indiana.

  2. Recently I contacted Senator Coats about reforming our tax code. His idea of reform was to make the code “easier to understand, flatter, and simpler”. The word “fair” never seemed to enter his mind, it certainly did not make it into his e-mail response. I doubt that he, nor any Republican politician for that matter, thinks in that term. When was the last time anyone heard one of them use that word? Having a system that is “fair” is not the goal of Republican leaders nor their minions. What is particularly galling is the canned Republican response to anyone asking for fairness. “They just want another handout. Welfare for the lazy. Entitlements.”

  3. Timely…must share with my dad who just said yesterday that the reason why our companies go abroad is because the corporate taxes are so high to do business here. I told him I was not sure about that claim but typically they have access to lawyers who find every loophole available that I don’t think they ever pay their share of taxes.

  4. I read somewhere recently (seems like it was Robert Reich, but I wouldn’t swear to it) the suggestion that we eliminate corporate taxes altogether (pregnant pause). And instead place higher taxes on the income from the corporations that goes to those who own the corporations. This eliminates all of the myriad business deductions that our tax system is riddled with, and would make the Republicans happy – they have been yelling that businesses are paying to much taxes for decades. Something interesting to think about.

  5. So the argument that the US has the highest corporate tax rate in the world and it should be lowered to promote job creation, really means that if the US lowers the corporate tax rate it 1) may not make any noticeable difference in tax revenues or 2) would only mean that corporations wouldn’t have work so hard to find loopholes to exploit, or 3) that they would have to lobby to make sure that additional loopholes are included in any new tax system?

  6. Q: If Corporate taxes are so high, why does GE, AT&T and/or Yahoo , et al, pay 0 taxes?
    A: Because they have deductions that are taken by very good accountants that have balance sheets for the IRS and one for the board room. Unfortunately, the citizen doesn’t have access to either.

    Remember that wheel tax that “not my man Mitch” implemented in the state of Indiana?
    Yeah, all those chuck holes should have been filled but they aren’t because, somebody robbed that account and stole the money, right?

    Socialism works. The Gov’t taxes citizens and give them smooth roads and/or public transportation so they don’t need a vehicle and keeps all of it running smoothly. Unions protect workers from corporations and provide benefits so that Everyone is happy. They have elections coming up here and the newspaper (delivered every Tues and Thursday to your mailbox for FREE) is now full of campaign candidates, policies and polling places to maximize turnout.

    The US is doing it all wrong and that’s why the country is a mess. They let the major corporations call the shots, pay the politicians off and buy elections because they have created an environment of apathy with the citizens. A perfect way to destroy a country and the US is winning!

  7. Most corporations, but certainly not all, are honest but pay people big bucks to stay as close to the “line” as possible. Same with wealthy individuals. So the “line” must be drawn by law makers with great attention paid to closing loopholes. It’s the old cops and robbers arms race except that it exploits the letter of the law just onto the legal side.

    It’s axiomatic that capitalism redistributes wealth up supposedly to motivate hard work and innovation. A good thing in moderation but unaffordable in the extreme.

    Progressive taxes counterbalance both the redistribution inherent in capitalism and the financial advantage of hiring expert advisors to minimize your “dues” for living in America.

    In addition wealth powers lobbying which is really just brand marketing to law makers designed to create rather than reduce loopholes.

    All of this explains why wealth and business fund brand advertising designed to weaken government in order to manage externalities like regulation and tax policy.

    Some of us fall for it hard. We give away the power of democracy for the same reason that we buy “sexy” cars and clothes. Our minds get messed with by media playing the brand tune.

    We need to become brand marketing proof to resist it’s siren song and to think for ourselves.

  8. The NRA for instance lobbies law makers and brands consumers. Same stuff really just presented from different perspectives. To the same goal. Keeping democracy out of business. Opening the door to their wealth by closing the door to our democratic interests.

  9. Pete; those people the big corporations pay to keep as close to the tax “line” as possible are called Loophole Lawyers. They cannot be hired by the general public; only big corporations and all 1%ers.

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