Most corporations subject to the corporate income tax calculate their tax liability according to a progressive rate schedule. That tax is assessed at the following rates: 15 percent for the first $50,000 of taxable income; 25 percent for income from $50,000 to $75,000; 34 percent for income from $75,000 to $10 million; and 35 percent for income above $10 million.
This option would set a single statutory rate of 35 percent for all corporate taxable income, increasing revenues by $12 billion from 2012 through 2016 and by $24 billion from 2012 through 2021.
Under current law, surtaxes are imposed on some amounts of corporate income. Income between $100,000 and $335,000 is subject to a surtax of 5 percent (increasing the tax rate on income in that range from 34 percent to 39 percent), and an additional 3 percent tax is levied on income between $15 million and $18.3 million (increasing the tax rate on income in that range from 35 percent to 38 percent). Those taxes effectively phase out the benefit of the three lower tax rates for corporations with income above certain amounts. As a result, a company that reports more than $18.3 million in taxable income effectively faces a statutory tax rate equal to 35 percent of its total corporate taxable income.1 Because the surtaxes would also be eliminated, this option would not alter the taxes those businesses pay, nor would it affect businesses that operate as S corporations or as limited liability companies. (Owners of those enterprises do not pay corporate taxes but instead pay taxes on their total business income under the individual income tax.)
A primary benefit of the progressive rate schedule for the corporate income tax is that it lessens the "double taxation" of profits earned by small and medium-sized companies. Double taxation occurs when the government taxes the earnings of C corporations once at the corporate level and again at the individual level when those earnings are distributed to households. Of the 500,000 to 1 million corporations that typically owe corporate income taxes each year, all but a few thousand pay only the lower rates that apply to lower amounts of income. (Because the companies that benefit earn only about 10 percent to 15 percent of all taxable corporate income, however, the reduced rates have a limited effect on tax revenues.)
One argument for creating a flat corporate income tax is that many of the companies that benefit from the current rate structure are not small or medium-sized. Under current law, large corporations can reduce their taxable income for certain years by sheltering some of it or by controlling when they earn income and incur expenses. Another argument is that the current rate structure creates opportunities for individuals to shelter income in closely held corporations (that is, corporations whose shares are held by one individual or a closely knit group of shareholders and whose shares are not publicly traded). People avoid paying individual income taxes on that income if the corporation retains the earnings--which may be taxed at the lower corporate rates--rather than paying them out as dividends. (That benefit does not apply to owners of personal-services corporations--such as physicians, attorneys, and consultants--whose companies are already taxed at a flat rate of 35 percent.)
An argument against this option is that it would reduce the amount the affected companies would invest and distort the way in which those businesses finance their remaining investments. Investment capital would be more costly for businesses affected by the higher tax rates. Consequently, instead of issuing as much stock, those companies would either increase their use of debt financing (because the interest is tax-deductible) or decrease the amounts they invest. Carrying more debt would increase some companies' risk of default.