The GREAT Corporate Tax Rate Debate

There has been a steady drumbeat over the past year or so on the pages of the WSJ and other business journals concerning the (comparatively) high corporate tax rate in the US. This rate is seen as strangling American business interests and putting us at a disadvantage.


As I always do when I read these opinion pieces (especially when they are published in media controlled by Mr. Murdoch) I ask; “what issue they not addressing?” In this case these articles rarely address the preponderance of pass-through entities in the U.S. tax system. The extensive use of the pass-through entities makes the U.S. tax landscape very different from many other major countries. Pass-through entities such as LLC’s, S corporations and partnerships allow the business to “flow through” the company profits directly onto the tax returns of the members, shareholders and partners (respectively). This is critical because US personal income tax rates are some of the lowest in the world; to quote Eric Toder, a senior fellow at the Urban Institute in Washington, D.C., and former director of the office of research for the Internal Revenue Service: “When you look at the overall (personal) tax burden, the U.S. is quite low." This lower personal tax rate, of course, has driven the use of pass-through entities in the American business community as well as the institutionalizing of large bonus payouts seen in US corporations, and not typically seen to such an extent in the European business community (when a business pays bonuses to officers they effectively remove the funds from the corporate taxation and transfer it to the lower personal tax rates).

It is hard to know what to really make of all this propaganda as many European countries also have a VAT tax that further muddies the business tax waters. I think a real side by side comparison is, and the end of the day, very difficult. During periods of great prosperity in the US, such as the postwar period of the 1950’s thru the 1960’s personal tax rates topped 91% (this was the top personal tax rate from 1951 through 1963, when it took a precipitous drop to 77% in 1964!) and top corporate rates were in the 48% to 52% range (according to an IRS data sheet).

The bottom line is that while tax rates certainly affect the business environment, it is hardly the primary controlling factor (which often seems to be the take-away when reading these overheated op-ed pieces). We have a saying in the tax planning world; “don’t let the tax tail wag the dog” meaning that you make decisions based on what is best for you and your business and then you factor in tax considerations NOT the other way around. Might tax considerations change your plans?, absolutely, but you cannot operate any business based on the eccentricities of any tax code.