A quick history of corporate taxes and the Constitution
Last week the Obama administration offered a proposal to cut the corporate tax rate from 35 percent to 28 percent. The plan also includes eliminating loopholes and cutting the tax rate for manufacturing corporations to 25 percent. Republican leaders have similarly pitched plans to slash corporate tax rates.
You may be a bit preoccupied with your own taxes, but if you want to learn more about corporate taxes and why they matter, here’s a quick question-and-answer overview. We’ll start with the basics:
What is a corporation?
According to Investopedia, a corporation is:
A legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. The most important aspect of a corporation is limited liability. That is, shareholders have the right to participate in the profits, through dividends and/or the appreciation of stock, but are not held personally liable for the company’s debts.
How long have corporations been around?
It depends on how you define corporation. In The Company: A Short History of a Revolutionary Idea, John Micklethwait and Adrian Wooldridge explain that “from the beginning of economic life, businesspeople have looked for ways to share the risks and rewards of their activities” (p. xvi). Certainly, corporations are at least as old as America itself. America owes its very existence to corporations: The colonies—and the democratic experiment that its residents eventually pursued—evolved out of charters from the Virginia Company, the Massachusetts Bay Company, and the like. However, it wasn’t until the mid-19th century that the “big businesses” began to emerge.
Does the Constitution mention corporations?
No. The Constitution does not explicitly mention anything about corporations. However, a combination of legislation and court decisions have established legal doctrine recognizing some constitutional rights for corporations. There are some rights corporations definitely don’t have: they can’t bear arms, vote, or run for office. There are some rights corporations definitely do have: they can own property, sue and be sued, and be taxed. And there are some rights we’re still debating. The biggest debate is whether corporations have a right to free speech (see our posts on the 2010 Citizens United decision).
What about corporate taxes? How did they come to be?
In 1861 a federal income tax was enacted, and in 1894 a federal corporate income tax was instituted. Both taxes were ruled unconstitutional shortly after being enacted. But in 1913, the 16th Amendment overruled the previous court decisions, granting Congress the power to levy a federal income tax (including corporate taxes) without apportioning it among the states. The U.S. has had some form of corporate taxes ever since.
How much do corporations pay in taxes now?
The tax rate ranges from 15 to 35 percent. According to a 2008 survey by PricewaterhouseCoopers, corporations in the U.S. pay an average total tax rate of 36 percent. Of course, the actual tax rate varies widely, as this infographic by Mint shows.
The U.S. corporate tax rate is the second highest in the world, behind Japan’s 39.5 percent. In 2010, corporate taxes yielded a total of $191 billion in revenues, which amounts to 1.3 percent of gross domestic product and 9 percent of the year’s federal revenue.
Why are President Obama, Mitt Romney, and others proposing a change to corporate taxes?
Many people, particularly Republicans, have argued for a lower tax rate to make the U.S. globally competitive. Today, members of both parties generally agree that they’d like to cut corporate taxes, but as usual, they have differing views on how to make it happen. Obama’s proposed plan may not take effect this year, but it’s likely that the issue of corporate taxes will continue to be discussed during this presidential campaign.
Holly Munson is the Programs Coordinator at the National Constitution Center.