Corporate tax in the United States

Corporate tax in the United States
Name	Corporate Tax
Country	United States
Subdivision	Federal, state, and local
Type	Income tax
Legislation	Internal Revenue Code
Admin	Internal Revenue Service
First	Revenue Act of 1913
Current rate	21% (federal statutory)

Corporate tax in the United States. The corporate income tax is a levy imposed on the profits of corporations by the federal government, most state governments, and some local jurisdictions. The primary federal statute is the Internal Revenue Code, administered by the Internal Revenue Service. The modern system has evolved significantly since its inception, influencing business investment, international trade, and government revenue.

Overview

The U.S. corporate tax system applies to entities classified as C corporations under the Internal Revenue Code, while S corporations and other pass-through entities are generally taxed at the shareholder level. Federal taxation is layered atop taxes levied by states like California and New York, and cities such as New York City. Key concepts include the distinction between domestic corporations like ExxonMobil and foreign corporations, the calculation of taxable income, and the application of various tax credits and tax deductions. The system's complexity is amplified by provisions for international taxation, including rules targeting profit shifting by multinational enterprises such as Apple and Google.

History

The first permanent federal corporate income tax was enacted under the Revenue Act of 1913, following the ratification of the Sixteenth Amendment to the United States Constitution. Major reforms followed, including the Revenue Act of 1935 during the Great Depression and the Internal Revenue Code of 1954. The Tax Reform Act of 1986, signed by President Ronald Reagan, dramatically lowered rates and broadened the tax base. The 21st century saw significant changes with the American Taxpayer Relief Act of 2012 and the Tax Cuts and Jobs Act of 2017, the latter championed by the Trump administration and Speaker Paul Ryan, which cut the federal statutory rate from 35% to 21%.

Tax rates and structure

The federal corporate tax is imposed at a flat 21% rate on taxable income, a structure established by the Tax Cuts and Jobs Act of 2017. Prior to this, a graduated rate schedule existed. State corporate tax rates vary, with Iowa and Pennsylvania imposing high rates, while states like South Dakota and Wyoming levy no corporate income tax. Local jurisdictions, including New York City and Philadelphia, may impose additional taxes. The combined federal and state rate places the United States competitively among OECD member countries.

Taxable income and deductions

Taxable income for a corporation like General Motors is generally its gross income, including revenue from sales and services, minus allowable deductions. Major deductions include ordinary and necessary business expenses, such as employee compensation, costs of goods sold, and depreciation of assets under rules like the Modified Accelerated Cost Recovery System. Deductions are also allowed for net operating loss carryovers, certain research and development expenditures, and charitable contributions to organizations like the American Red Cross. Specific industries, such as oil and gas, have unique deduction provisions.

International taxation

The U.S. taxes its corporations, including Microsoft and Pfizer, on worldwide income but allows a credit for foreign taxes paid to jurisdictions like the United Kingdom and Japan. The Tax Cuts and Jobs Act of 2017 moved the system toward a territorial model for foreign profits and introduced the Global Intangible Low-Taxed Income (GILTI) and Base Erosion and Anti-abuse Tax (BEAT) regimes to combat profit shifting. These rules interact with international efforts led by the OECD and the G20, including the BEPS project.

Economic impact and debate

The economic effects of the corporate tax are widely debated among economists from institutions like the National Bureau of Economic Research and think tanks such as the Tax Foundation and the Brookings Institution. Proponents of lower rates, including many Republican lawmakers, argue they spur domestic investment by companies like Caterpillar and boost competitiveness against economies like Germany and China. Critics, including some Democratic legislators, contend that reductions contribute to income inequality and federal deficits, advocating instead for increased revenue to fund programs like the Affordable Care Act.

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