Myths and facts about the corporate income tax


On January 21, 2018, the federal corporate income tax rate dropped from 35% to 21%. The corporate income tax rate in North Carolina fell to 2.5% in 2019. As recently as 2011, the North Carolina corporate income tax rate was 6.9%. This article explains the reasons for these reductions. Governor Roy Cooper always equates taxation on corporations with taxation on the wealthy, unless he is doling out billions of tax giveaways to his favorite corporations, like Apple.

The North Carolina corporate income tax began in 1921 at a rate of 3% and in the United States at a 1% rate in 1909. Corporations only collect taxes which they pay on behalf of shareholders. A corporation is an aggregation of individuals who invest their money for profit. Most businesses do not pay corporate income tax at all because they are “pass through” entities like Subchapter S corporations, limited liability companies (LLC), partnerships, trusts, or estates. These entities report information to the IRS, but the income is “passed through” to the owners who pay tax on the income. Forty million American taxpayers report “pass through” income.


It is a Myth that the corporate income tax, state or federal, is a tax on the wealthy. Cutting the corporate income tax rate to zero would put those who invest in corporations on an equal footing with those who invest in other businesses. Most businesses in America are “pass through” entities and their profits are taxed once. The corporate income tax is double taxation. The same economic activity is taxed once at the corporate level and then taxed a second time when distributed to shareholders as dividends.

Consider a taxpayer before the 2017 tax reform at the federal level and before the 2011-2017 tax reform at the state level. Consider two investors in different income brackets for 2011 and 2019.

In 2011, a wealthy North Carolina taxpayer whose economic investment in a corporation earned $1000 would have paid or accrued a combined tax of over $600 on those earnings. By 2019 that dropped to about $500.

In 2011, a working poor North Carolina taxpayer whose investment in her retirement fund earned $1000 would have paid or accrued a combined tax of $350. By 2019, that dropped to about $200.

Whether rich or poor, earnings from a corporate investment are taxed to the individual human at a higher, not lower, rate.

Those opposing reductions in rate argue that the tax paid by a large corporation is a tax on wealthy individuals. That is not true.

A reduction in the rate is partially a reduction in the price of goods and services to those who consume them. If I bought a cheeseburger in 2011 for $5.00, 35 cents of that were used to pay the federal corporate income tax and 7 cents to pay the North Carolina corporate income tax for a total of 42 cents per cheeseburger. Under the new rates, the share of that cheeseburger in 2021 for federal corporate income tax is 21 cents and 2 ½  cents at the state level for a total of 23 ½ cents. It does not matter whether the person who eats that cheeseburger is rich or poor. It is the same tax embedded in each cheeseburger. That is an extremely regressive tax. It is also a tax that is hidden from the burger buyer. The 18 ½  cent reduction in that hidden tax on each cheeseburger impacts the poor more than the rich.

To the extent that there is a competitive market for labor (which is now the case) wages and other compensation can rise faster to the extent that the corporate income tax is reduced. Immediately after tax reform passed Congress at the end of 2017, several major corporations announced bonuses or other significant benefits for employees: Bank of America, Comcast, AT&T, Boeing, Fifth Third Bank, BB&T, PNC, and Wells Fargo, each crediting the tax reform bill. An OECD study found that between 30% and 70% of the corporate income tax is effectively paid by workers.

Public utilities are provided by privately owned, regulated utilities that pay corporate income tax. The North Carolina Utility Commission required lower utility rates for consumers due to the 2017 tax reform. Lower utility bills for electricity, water, and sewer benefit the poor more than the rich.

A part of the effect of a corporate income tax rate reduction is on the distribution of net profits. Some of that net profit of the corporation goes to the wealthy. If the corporate income tax rate is reduced, then dividends may increase. Half of American households are invested in mutual funds, retirement funds, or otherwise in the stock market. The largest corporations have millions of shareholders, both rich and poor. Dividends ultimately are taxed at the individual’s own tax rate, a high rate for the wealthy, and a low (or even zero) rate for the working poor.

The corporate income tax is not a progressive tax. It is a regressive “add-on” tax to the progressive individual income tax rates.

Effective January 1, 2018, the nominal federal corporate income tax rate went from 35% to 21%. 35% was the highest in the industrialized world; 21% is in the middle of the pack.

Money flows easily across national and state borders. While the United States has many inherent competitive advantages, its extremely high corporate income tax rate was a major impediment to investment here. Americans were prompted to invest overseas, and investors from abroad were discouraged from investing here.

Similarly, when North Carolina’s corporate income tax rate was 6.9% in 2011, its rate was the highest of all our bordering states. Now at 2.5% in 2021, it is the lowest in the nation (of states that impose a corporate income tax). 2.5% is the lowest rate in the southeast. This change has been a competitive advantage for North Carolina for economic development. It is one of the reasons why North Carolina ranks at the top of national business rankings. The proposal to reduce the rate to zero by 2028 will be a major boon to economic development.

The incessant competition of big firms with each other to receive special treatment on their tax bills impose significant costs on the economy. I have written on that extensively at www.paulstam.info (see articles for 2005). To the extent that the corporate income tax rate is very low or zero, targeted tax expenditures are less costly and less of a distortion to the economy for those making business decisions.

The corporate income tax rate should be zero. Elimination of this tax, or reductions in its rate, does not favor the wealthy over the poor. Lowering the rate or eliminating the tax helps the economy by reducing distortions and improving the economic competitiveness of the state and nation.

Paul “Skip” Stam lives and works in Apex. He practices real estate and state constitutional law. He served 16 years in the NC House, the last 10 years as the GOP leader or Speaker Pro Tem.

A footnoted electronic version of this article is available at: http://paulstam.info/myths-and-facts-about-the-corporate-income-tax/Myth