Why doesn’t the U.S. have a bracketed corporate tax?

Question

This might be a question better-suited for Economics StackExchange, but I figured I'd try my luck here first.

In the U.S. we have a bracketed tax system for personal income tax, which serves to increase the percentage tax you pay on dollars that are earned past a certain amount.

Why, then, do we have a flat corporate tax rate? Why not have a bracketed system that places a higher percentage tax on revenue dollars earned past a certain amount?

In my eyes, this may bring two benefits:

• It serves to increase the amount of tax going to the federal government, which can be used to fund various social programs.
• It prevents companies from growing excessively big - at some point, a company will stop expanding because the effective tax rate on new dollars would be too high. This would allow smaller competitors to take some of that lost market, and serve to actually increase the effectiveness of a capitalistic structure.

Has this ever been proposed by a U.S. lawmaker, and if not, what are the large problems with this that prevent it from becoming politically or economically viable?

Answer 1

The discussion whether such a taxation system would be useful or politically wanted would be a matter for a more discussion-oriented website. But regardless of where you stand on the question of supply-side vs. demand-side economics, there is a problem with this idea: It would not be enforceable.

The reason is that contrary to natural people, legal people like companies can split up and merge as much as they want.

If you had a multi-billion dollar corporation with branches all over the country, you could simply turn each branch into an independent company owned and controlled by the same shareholders. Now each branch would be in a much lower bracket and your total tax burden would be a lot lower.

It would also mean that companies would no longer officially merge. They would ask their lawyers to write a contract which states that the companies will practically work together as if they were the same company, but still stay financially independent companies on paper and thus are able to file their taxes separately. Such unofficial megacorporations would be even less transparent to the average citizen and even harder to regulate than large corporations today.

And then there is of course the big elephant in the room: Corporate tax avoidance. Fact is, many of the largest international companies pay little to no taxes in the countries where they make the most business. Why? Because on paper, they make almost no profit there. Their subsidiaries located in offshore tax havens make all the profits. A bracketed corporate taxation system would likely make this problem worse. Mid-sized regional companies which can not afford offshore tax haven arrangements would find themselves in an even higher tax bracket than before while the large corporations you actually wanted to target with this system are barely affected at all.

Answer 2

YOU MISSED IT. Through 2017, the US (Federal) C-corporation tax was bracketed -- although most of the variation was in brackets below $75,000, which is a small for a corporation, especially since many small businesses elect to be S-corporations which are not subject to entity level tax but instead pass through their income, deductions and credits to the individual taxes of their owner(s). See pub 542 from IRS prior-year files. Since the statutory rate for most C-corp income (by dollars) was 34 or 35%, people mostly spoke of it as a flat rate. Of course the effective rate was much less -- usually under 20% -- but quite variable depending on business structures and activities.

Reducing this statutory rate to 21% (with no brackets) while eliminating US tax on foreign income of US corporations (but not of US individuals) was a major part of the tax reform law widely attributed to Trump (although of course actually passed by the two chambers of Congress), formally the Tax Cuts and Jobs Act of 2017 Pub.L. 115-97.

Answer 3

Thanks for joining us. The short answer is that the U.S. Constitution limits what government can do.

A purely economic explanation such as you've offered in your two bulleted points isn't politically sufficient to justify a law. Let me offer a more detailed response to illustrate, but please don't take it as criticism:

Contested point: It would increase the amount of tax going to social programs.

The US is a republic, where the U.S. Constitution limits the power of government. There's no mention of "social programs" in the Constitution, that is not one of the enumerated powers, so some U.S. citizens might well argue increasing taxes to achieve these ends is unconstitutional. But let's say that's a minority opinion, and that oh let's say 70% of Americans agree with you. Does that justify it based on "majority rule"?

The framers of the constitution recognized that they did not want majority rule. That sounds undemocratic, but in doing their historical research the founders discovered that democracy has its problems, and the biggest of these is fairness to minorities. To illustrate, let's say 70% of Americans were religious Puritans. Would we allow a law saying everyone should join a Puritan church?

Contested point: It prevents companies from growing excessively big.

Here too you're letting opinion enter into it. What says there should be a limit on how big companies are, or what measure of bigness should be used?

Again hypothetically, let's say that 70% of US citizens owned stock in Costco. Costco, while a for-profit company benefits the citizenry in general: Yes the 70% profit from their ownership of Costco, but under the principals of capitalism non-owners still benefit from Costco's putting downward pressure on prices across the consumer goods market. Capitalism holds that benefit exists even if it's only 1% who own Costco stock, as long as Costco doesn't hold and abuse a monopoly.

Now let's say I am one of that 1% minority owning Costco stock, but that I'm not rich, I just got it as a fringe benefit of being a Costco employee. Should my benefit from Costco's profits be taxed higher because Costco is successful? I think not, and I'd suggest that fairness is the strongest reason to oppose progressive taxes on corporations.

If on the other hand Mr. Doe was a rich Costco stock owner, the progressive tax on individual covers him without penalizing me.

P.S. Macro economics is explicitly on-topic here. Thanks for asking.