Taxing Businesses: Domestic Investment

Part 8 of a series about Taxing Businesses

After the 1980s tax reform, the decline in savings and the increase in consumption caused domestic investment to fall, swamping any increase due to incentives from lower taxes on high incomes.

Data source: Federal Reserve Economic Data

The codes used to download data: 

• W171RC1Q027SBEA Net domestic investment, Billions of Dollars, Quarterly, Seasonally Adjusted Annual Rate

• W170RC1Q027SBEA Gross domestic investment, Billions of Dollars, Quarterly, Seasonally Adjusted Annual Rate

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Taxing Businesses: Net Savings

Part 6 of a series about Taxing Businesses

In the 1980s the effective top rate on pass-throughs (unearned) was dropped to match the corporate rate on profits, making pass-through businesses more desirable than in the past since with pass-throughs owners were not double taxed. As a consequence, these tax changes created an incentive to change the business structure from C corporation to pass-throughs. The double taxation of corporate profits had provided an incentive for corporations to retain earrings (to save) but a pass-through's profit is tax indifferent between saving and consumption (there is no incentive to either save it or spend it).

C corporation's share of net business income dropped from 1980 to 2012, 68% to 37%. The effect of fewer C corporations and more pass-through businesses was less savings since retained earnings by corporations was half of private savings (pdf). So, tax-induced decrease in number of corporations had a substantial effect on the level of private savings in the US.

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Data Notes: Tax rates are from Internal Revenue Service; Tax Policy Center; Center for Tax Justice; Tax Foundation and  more details on the tax rates available in Part 1 and Part 2 in the series.

Federal Reserve Economic Data is the source for net savings.

Taxing Businesses: Decline of Listed Companies on Stock Exchange

Part 4 of a series about Taxing Businesses

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This is an intriguing graph showing the decline of companies listed in the United States on the stock exchange. (These companies would be corporations whose's stocks are freely traded on a stock exchange, not pass-throughs).

The tax changes in the 80s provided a tax incentive to change the business structure from C corporation to pass-throughs like LLCs. Originally, the IRS was very strict as to when a business could be treated a pass-through entity, however, that changed on January 1, 1997. That is when you see the ratio of listed companies the stock exchange drop dramatically.

Data Notes: Federal Reserve Economic Data (FRED); Historical Data for listed companies The U.S. listing gap Craig Doidge, G. Andrew Karolyi, and René M. Stulz 

• FRED code for Number of Listed Companies for the United States (DDOM01USA644NWDB)

• FRED code for Civilian Noninstitutional Population (CNP16OV)

Taxing Businesses: Lowest Marginal Rate

Part 3 of a series about Taxing Businesses

Combining the different scenarios from the previous two posts in the series, I highlighted the lowest marginal rate available to US businesses (one version with pass-though business income taxed as earned income the second taxed as unearned income). These graphs, showing how different business structures are taxed a different top rate and that the business structure that offered the lowest marginal rate has changed over a 99-years.

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Lowest Marginal Rate: Earned Income Scenario

• After 1970, pass-through businesses taxed as earned income via the individual tax code offered the lowest marginal rate.

• 1935-1939; 1952-1970 the lowest option was the effective top rate on C corporate profits & capital gains.

• Before 1935; 1940-1951 the lowest option was the effective top rate on C corporate profits & dividends.

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Lowest Marginal Rate: Unearned Income Scenario

• After 1981, pass-through businesses taxed as earned income via the individual tax code offered the lowest marginal rate.

• 1935-1939; 1952-1981 the lowest option was the effective top rate on C corporate profits & capital gains.

• Before 1935; 1940-1951 the lowest option was the effective top rate on C corporate profits & dividends.

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Data Notes available in Part 1 and Part 2 in the series

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Taxing Businesses: C corporations

Part Two of a series about Taxing Businesses

A C corporation is subject to the corporate income tax. While the income from business structures like S corporations, partnerships, LLC's and sole proprietorships are taxed under the individual income tax and therefore not subject to the corporate tax code.  

However, when owners want to extract income from a C corp, they are subject to a second level of taxation, either though taxes on dividends payments or through a capital gains tax on the sale of their share of the business.

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Double Taxation: Scenario I

A C corp first pays taxes on their profits through the corporate tax code then distribute dividends to their owners. These dividends are taxed through the owner's individual income tax. 

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Double Taxation: Scenario II

C corporation pays taxes on their profits through the corporate tax code then owners pay tax on capital gains from sale of their stock shares (or the business itself)

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Double Taxation: Scenario I and II

A comparison of the two options available to corporate owners to extract income from the corporation (dividends payments vs through sale of shares). During 1950s, 1960s, 1970s and parts of the 30s, 80s, and 90s, the tax code favored the owners who paid taxes on long-term capital gains. Since 2002, the effective rate for these two options mirrored each other.

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Data Notes

• Federal Income Tax Rates - Citizens for Tax Justice (through 2012)

• Tax Topics - Topic 409 Capital Gains and Losses (recent data)

• Federal Individual Income Tax: Exemptions and Treatment of DividendsIncome Years 1913­-2006 (historical rates)

• Publication 17 (2016), Your Federal Income Tax (check for more recent rate)  

• Corporate Top Tax Rate and Bracket | Tax Policy Center (with download of excel file)  

• Questions and Answers on the Net Investment Income Tax (For ACA)

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