Backgrounder: What’s Happening with Indiana Corporations?
by Maryann O. Keating, Ph.D.
Most agree that similar legal entities be treated fairly. Note, however, in Figure 1 below that the number of U.S. corporations is in decline as compared with other firms; this raises a serious concern regarding bias, but, more importantly, about the flourishing of U.S. corporations at home and abroad.
The combined U.S. Federal and State corporate tax rate (38.9 percent on average) is the highest among developed countries. This “highest” tax rate accounts to some extent for the 25 percent drop in companies headquartered in the U.S. listed among Global Forbes’ 500 largest companies.
Many countries exempt foreign business earnings from home-country taxation. However, U.S. companies’ earnings abroad are taxed by the IRS above any amount paid to foreign jurisdictions. IRS taxing offshore earnings gives foreign multinationals a competitive advantage here and abroad and encourages U.S. corporations to defer U.S. tax payments by keeping profits, earned abroad, trapped abroad.
Figure 1 indicates that U.S. companies increasingly organize themselves as partnerships or S Corporations. This move was unanticipated because partnerships and S Corporations are taxed as pass-through businesses which mean that their earnings are burdened with an immediate personal federal income tax (up to 43.4 percent) plus state and local taxes (up to 13.3 percent). These rates can exceed the total tax (38.9 percent) on regular C Corporations.
Pass-through businesses include those owned by sole proprietors, partnerships, and S Corporations. S Corporations differ from regular C corporations; they are taxed as a pass through businesses, owned by U.S. residents, and limited to 100 shareholders.
Over 90 percent of businesses in the United States are now pass-throughs employing over half of the private-sector workforce in 49 out of 50 states. However, it is essential not to ignore the remaining 10 percent of firms employing the other half of the labor force and, perhaps, contributing even more than half to a state’s annual payroll. Figure 2 below for Indiana indicates that larger firms, most likely subjected to corporate income taxes, account for 60 percent of annual payroll earnings.
Small is beautiful, but considering large firms’ contribution to Indiana’s total payroll, it is worthwhile determining if large firms are increasingly at a disadvantage at home and abroad.
At first glance, it seems as if C corporations might be advantaged. After all, when a pass-through business earns a profit, its owners are taxed immediately at a top rate of 43.4 percent; when a C corporation earns a profit, its earnings are taxed at a top rate of 35 percent. Consider, however, that corporate profits are first taxed and the remaining reinvested or distributed in the form of dividends. If dividends to shareholders are taken into account, C corporations are subject to a top tax rate of 50.5 percent, significantly higher than the 43.4 percent top tax rate faced by pass-through businesses.
Regulations, as well as taxes, hurt U.S. corporations.
Full compliance with the Affordable Care and Medical Leave Acts is dependent on a firm’s employee numbers. Also, companies with 100 or more workers have been targeted to report on employees by fourteen different gender/race/ethnicity groups, within twelve pay bands and ten occupational categories.
Detailed data on owner and business characteristics are available from the U.S. Census Bureau’s Survey of Business Owners but only for years ending in 2 or 7. Therefore, until data for 2017 becomes available, it is impossible to determine the degree to which U.S. firms are increasingly reluctant to incorporate or expand the number employed beyond a certain level.
Meanwhile, Laura Tyson, former head of President Clinton’s Council of Economic Advisors, argues for bipartisan support for U.S. corporate tax reform to benefit America’s workers, companies, and economy.
Maryann O. Keating, Ph.D., a resident of South Bend and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell.