Corporate Tax Behavior So Bad Even Fortune Magazine Can’t Stomach It

[Engineer]

*snip*

Regardless, corporations, like people don't have an effective rate of their highest marginal rate. It may (or may not as I don't understand enough of it to know) be 12.6%, but I bet you the EFFECTIVE (REAL) rate is not 35%. My wife and I, based on income alone, would be in a decently high tax bracket. However, with deductions and credits, we paid just over 7% federal income tax last year (not counting FICA). As you know, effective is what matters.

Again, set it to a flat 18%, get rid of the other stuff so people can quit bitching about it. Of course, they won't until it's ZERO (or even negative).

By the way, I have to issue (and have even suggested) lowering the corporate tax rate. I'm not sure (any more) that it will help though. At one time, I thought that the companies would hire more people (investment) with the tax savings but based on trillions of dollars in their accounts and doing nothing but propping up their stock, I don't think they will do more than they are currently doing. Why should they?

 

[Fern]

Regardless, corporations, like people don't have an effective rate of their highest marginal rate. It may (or may not as I don't understand enough of it to know) be 12.6%, but I bet you the EFFECTIVE (REAL) rate is not 35%. My wife and I, based on income alone, would be in a decently high tax bracket. However, with deductions and credits, we paid just over 7% federal income tax last year (not counting FICA). As you know, effective is what matters.

Look up a corporate tax rate table (I found one and linked it below). Unlike individuals corporations will pay an effective rate of 35% if their income is high enough.

The corporate rate schedule has areas where the tax rate is above 35% (IIRC it's at 39%) which is designed to make up for the lower rates at lower income levels. Individuals do not have that 'bubble' in their rate schedule.

Here's a 2013 corporate tax rate schedule. You can easily see at income of $18.3 million the rate simply a flat 35% starting with the first $1 of income. I.e., the effective rate is 35% at $18.3 and above.

http://www.taxpolicycenter.org/taxfacts/content/pdf/corporate_rates.pdf

Corporations don't have anything akin to itemized deductions. There are some minor credits for hiring more people etc but IIRC they are phased for big companies. I could be wrong though about the phase out. I no longer do such large returns and have no time atm to check. But clearly the green credit GE enjoys is not minor nor is it phased out.

Fern

 

[Engineer]

Why does the rate go from 34 to 39 to 34 in that table?

 

[Fern]

What does the rate go from 34 to 39 to 34 in that table?

You know, I don't know.

I saw that and found it curious too. I don't recall it ever being there before.

I'll look it up tomorrow.

Fern

 

[Engineer]

You know, I don't know.

I saw that and found it curious too. I don't recall it ever being there before.

I'll look it up tomorrow.

Fern

Everything that I could find (quickly) shows the same tables? The corporations making just over 100K to 325K are taking it in the butt!

 

[Cozarkian]

Why does the rate go from 34 to 39 to 34 in that table?

It's how the government causes a corporation's marginal tax rate and effective tax rate to become the same.

A company making 100,000 has an effective tax rate of 22.23%. The marginal tax rate from 100,000 through 10 million is 34%. However, a company making 10 million would have an effective tax rate of only 33.88%. The government decided they wanted companies making between 335,000 and 10 million to have both a marginal and effective tax rate of 34%, not just a marginal rate of 34%. Thus, they added 5% to the marginal rate for taxable income between 100,000 and 335,000.

The result is that a company making 200,000 has an effective tax rate of 30.63% instead of 28.13% (the effective rate without the additional 5%). A company making 300,000 has an effective tax rate of 33.42% instead of 30.08%. Finally, a company making 335,000 has an effective tax rate of 34% instead of 30.5%.

They do the same thing once a company hits 15 million taxable income, increasing the marginal rate by 3% until the effective tax rate (which is somewhere between 34% and 35%) reaches the marginal tax rate of 35%.

 

[Fern]

Why does the rate go from 34 to 39 to 34 in that table?

I found an explanation:

Congress formulated the 39% and 38% “bubble” rates to take back advantages of lower rates otherwise applicable. For instance, the 39% bracket acts as a five-percentage-point addition to the 34% rate, neutralizing the advantage of the 15% and 25% brackets. When a corporation’s taxable income reaches $335,000, the 39% bracket begins taking back the advantages of the lower 15% and 25% tax rates and completes the process once taxable income reaches $10 million. Thus, you can obtain the tax attributable to taxable income ranging from $335,000 to $10 million by applying all the rates in the above schedule to taxable income or, more simply, by multiplying taxable income by 34%.

Similarly, when a corporation’s taxable income reaches $15 million, the 38% acts as a three-percentage-point addition to the 35% rate and starts taking back the advantages of the 34% tax rate, completing the process after taxable income reaches $18,333,333. To calculate the tax on taxable income of $18,333,333 or more, you can multiply taxable income by 35%.

http://www2.gsu.edu/~wwwerl/mtr/lessons/BasicConcepts.htm

Fern

 

[Engineer]

I found an explanation:



http://www2.gsu.edu/~wwwerl/mtr/lessons/BasicConcepts.htm

Fern

Yes, pretty much what Cozarkian stated above and makes sense (after reading it a few times).

Thanks.