How Corporate Taxes Work

Episode Summary

Executive Summary: The episode is a wide-ranging, humorous but substantive examination of corporate income tax in the U.S. Josh and Chuck trace its history, explain how corporations are taxed differently from people, and explore major arguments for and against the tax. They focus on tax avoidance strategies, who ultimately bears the cost, and why corporate taxation remains politically and economically contentious.

Main Topics: History and evolution of corporate income tax (Priority: 5/5): The hosts review the origins of U.S. corporate income tax, major rate changes over time, and how the tax has shifted from a major source of federal revenue to a relatively small one. How corporate taxation works (Priority: 5/5): They explain the difference between corporate and individual taxation, the idea of pass-through entities, and why corporations are taxed on net income rather than gross receipts. Tax avoidance, inversion, and transfer pricing (Priority: 5/5): The episode details how multinational corporations use subsidiaries, headquarters moves, and internal pricing to shift profits to low-tax jurisdictions. Who really pays corporate tax (Priority: 5/5): A core debate is whether the burden falls on shareholders, workers through lower wages, or consumers through higher prices, with the episode emphasizing the modern view that labor and capital share the burden. Arguments against corporate taxes (Priority: 4/5): The hosts outline claims that corporate taxes reduce investment, discourage entrepreneurship, double-tax shareholders, and fuel stock buybacks instead of reinvestment. Arguments for corporate taxes (Priority: 4/5): They discuss public fairness, infrastructure funding, limiting corporate power, and using corporate taxes as a backstop on wealthy shareholders and tax shelters. Potential reforms (Priority: 3/5): The episode closes with ideas such as a corporate wealth tax or treating corporations more like pass-through entities, though both are presented as complicated or politically unlikely.

Key Arguments: Corporate income tax is politically durable because most Americans believe corporations should pay taxes, even if economists disagree about efficiency. The tax burden does not primarily fall on consumers via higher prices; modern economists more often argue it is shared by shareholders and workers through lower returns and lower wages. Corporate taxes can discourage investment and entrepreneurship because interest payments are deductible while dividends are not, encouraging debt financing over equity financing. Multinational firms exploit tax havens and transfer pricing to shift profits out of high-tax countries, reducing domestic tax revenue. Corporate taxes act as a backstop for taxing wealthy shareholders who may otherwise use shelters or shell entities to avoid personal tax. Supporters argue corporations benefit from publicly funded infrastructure and should therefore contribute to its upkeep. Stock buybacks are presented as one unintended consequence of the tax structure and broader corporate incentives, rather than promised reinvestment in workers or equipment.

Data Points: Countries without corporate income tax: 10 of 195 - The transcript notes only 10 countries in the world lack some form of corporate income tax. U.S. corporate tax revenue (2019): $230 billion - Corporate income tax receipts in the United States were compared with individual income tax receipts. U.S. individual income tax revenue (2019): $1.72 trillion - Used to show corporate taxes are a much smaller share of federal revenue. Corporate share of total U.S. taxes: About 6% - Current approximate share of federal tax take from corporations. Corporate share of total taxes in the 1960s: 40% - Shows how much more important corporate taxes once were to federal revenue. Peak U.S. corporate tax rate: Almost 53% - The U.S. corporate tax rate peaked in the 1960s. Peak U.K. corporate tax rate: 1982 - The UK reached its peak later than the U.S.; exact percentage was not stated in the transcript excerpt. Peak Australia corporate tax rate: 49% in 1986 - Included as an international comparison of historical peaks. U.S. corporate tax rate after 1986 reform: 46% to 34% - The Reagan-era Tax Reform Act cut the corporate rate and closed loopholes. Bill Clinton corporate tax rate: 35% - Clinton restored the rate slightly, where it remained until 2017. 2017 U.S. corporate tax rate: 21% - The Trump-era tax cut reduced the federal corporate rate substantially. Corporate tax revenue as share of federal revenue since 1980s: Under 10% - Corporate taxes have remained historically low as a share of federal revenue. Corporate tax as share of GDP: About 1% - The transcript says this fell to its lowest level since the early 1980s. Global tax haven cost estimate: $500 billion to $600 billion - Estimated worldwide revenue lost to tax havens. Apple profit shifted to Ireland: $30 billion over four years - Illustrates profit shifting via tax planning. Ireland corporate tax rate: 12.5% - Ireland’s standard corporate rate, with a reported special deal for Apple. Apple special rate: 2% - The transcript says Apple was taxed at a very low effective rate in Ireland. Ireland GDP impact: 12% - The Apple-related $30 billion was described as about 12% of Ireland’s GDP in 2013. Amazon taxes paid in 2017: $0 - Amazon reportedly paid no federal taxes despite profits. Amazon profits in 2017: $3 billion - Net profit cited alongside zero tax liability. Amazon taxes paid in 2018: $0 - Amazon again paid no federal taxes. Amazon profits in 2018: $11.2 billion - Profit figure used to emphasize effective tax avoidance. Amazon refunds in 2017 and 2018: $129 million and $137 million - The transcript notes Amazon actually received refunds in both years. Amazon taxes paid in 2019: $162 million - Amazon began paying some taxes in 2019 amid public scrutiny. Amazon profits in 2019: $13.9 billion - Used to calculate Amazon’s low effective tax rate. Amazon effective tax rate in 2019: 1.2% - Illustrates the gap between profits and taxes paid. Fortune 500 companies with zero tax in 2018: 91 of 379 profitable firms - A study cited in the episode showed many profitable firms paid no taxes. Potential tax owed at 21%: $161 billion - Compared with the $86 billion those firms actually paid. Amount paid by those firms: $86 billion - Actual tax paid by the 379 profitable Fortune 500 firms in the study. Corporate stock ownership concentration: Nine-tenths owned by the top tenth of the income distribution - Used to argue corporate taxation is effectively a tax on the wealthy.

Pivotal Quotes: "Corporations should pay their fair share." — Narrator / public sentiment referenced by Josh and Chuck: Summarizes the mainstream fairness argument for corporate income tax. "There’s a lot of people out there, typically liberal economists, who tend to think that corporate income taxes are a very, very good thing and we need them." — Josh Clark: Introduces the pro-tax economic and political perspective. "If you want to keep their power and influence a little bit more in check." — Chuck Bryant: Explains the regulatory argument for maintaining corporate taxes.

Implications: Corporate income tax will likely remain a fixture because it is both a revenue tool and a political symbol of fairness. Future reforms may target loopholes, profit shifting, and wealth concentration rather than eliminate the tax outright.