Myths and Facts about the Corporate Income Tax

January 24th, 2018 by

Why the Rate Should Be Zero!

January 2018
Paul Stam


On New Year’s Day the corporate income tax rate at the federal level dropped from 35% to 21%. The corporate income tax rate in North Carolina is 3%. It will drop 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. Several of these reasons have been discussed extensively at the national and state level and these reasons are discussed very briefly in section C and D. But there are other important reasons stated in sections A and B.


In North Carolina this tax began in 1921 at a rate of 3%[1] and in the United States in 1909 at a 1% rate.[2] In Fiscal Year 2011-12 the corporate income tax was only 6.1% of the N.C. general fund. Despite the significant reductions in the rate over the years, in Fiscal Year 2016-17 the corporate income tax was 3.5% of the N.C. general fund, which is about 1.75% of the total state budget.[3]

Corporations only collect taxes which they then pay on behalf of shareholders. A corporation is an aggregation of individual humans (or other businesses that are aggregations of individual humans) that invest their money for profit.[4] Many, if not most, businesses do not pay corporate income tax at all because they are “pass through” entities like Subchapter S corporations, Limited Liability Companies, partnerships, trusts, or estates. These entities report information to the IRS, but the income is “passed through” to the owners who then pay income tax on the income that is passed through. Forty million American taxpayers report “pass through” income.


A. It is a myth that the corporate income tax, state or federal, is a tax on the wealthy that helps to “Level the Playing Field.” Cutting the corporate income tax rate to zero would put those who invest in these businesses, not in a preferred footing against “pass through” business entities, but almost 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 2017 tax reform at the federal level and before 2011-2017 tax reform at the state level. Compare two investors in different income brackets for 2011 and 2019.[5]

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. In 2018 that will drop 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. In 2018 that will drop to about $200.[6]

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

B. It is a Myth that Wealthy People are the Ones Who Bear the Expense of the Corporate Income Tax. The effect of the corporate income tax is not even predominately on the wealthy. Those opposing reductions in rate argue that the tax paid by a large corporation is a tax on wealthy individuals. For several reasons this is not true:

First, 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, say 35 cents of that is used to pay the federal corporate income tax and about 7 cents to pay the North Carolina corporate income tax for a total of 42 cents per cheeseburger at the previous higher rates. Under the new rates the share of that 2018 cheeseburger for federal corporate income tax is say 21 cents and 3 cents at the state level for a total of 24 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 cent reduction in that hidden tax on each cheeseburger means more to the poor than to the rich.

Second, 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, 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.

Most public utilities are provided by privately owned, regulated utilities that pay corporate income tax. The North Carolina Utility Commission will require lower utilities rates for consumers as a consequence of tax reform. Lower utility bills for electricity, water, and sewer mean more to the poor than to the rich.

Third, 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 does go to the wealthy. If the corporate income tax rate is reduced, then, all other things being equal, dividends will 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.[7] The corporate income tax is not a progressive tax. It is a regressive “add on” tax to the progressive individual income tax rates.

C. Competitiveness. 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. Opponents of reductions often state that the nominal rate is not the same as the effective rate. True, but irrelevant. See Section D.

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. Many 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. When it goes to 2.5% in 2019, it will be the lowest in the nation (of the states that impose a corporate income tax). At 3% it is the lowest rate in the southeast. This change has been a major competitive advantage for North Carolina for economic development and is one of the reasons why North Carolina ranks at the top in national business rankings (e.g., # 1 by Forbes and Site Selection magazine) and near the top in tax rankings. As the National Tax Foundation stated in its introduction to the 2017 State Business Tax Climate Index:

North Carolina continues to phase in reforms from its successful 2013 effort. The corporate income tax was further reduced this year, raising the state to 4th on its corporate tax component ranking. North Carolina now ranks 11th overall, an astonishing improvement from 41st just three years ago.

D. Targeted Tax Incentives. The incessant competition of big firms with each other and with state governments to receive special treatment on their tax bills impose significant costs on the economy. I have written on that extensively at (see Articles for 2005). To the extent that the corporate income tax rate is very low or zero then targeted tax expenditures are less costly and less of a distortion to the economy in the making of business decisions.[8]

While reducing the corporate income tax rate, the reforms at the federal and state level also eliminated many unjustified deductions, credits and exemptions that made the nominal corporate income tax rate so high, complicated, unfair, and rife with political gamesmanship.

Much of the rhetoric at the federal and state level attacking these reforms mentions the elimination of a deduction, credit or exemption without mentioning, in the same sentence, paragraph, or article, that the taxpayer also pays at a much lower rate. This sophomoric rhetorical device is unfair and deceptive.


The corporate income tax rate should be zero. Elimination of this tax or reductions in its rate do not favor the wealthy over the poor. Lowering the rate, while eliminating some deductions, credits, and exemptions, helps the economy by reducing distortions and improving the economic competitiveness of the State and nation.



[1] Revenue Act of 1921,
[4] Nonprofit corporations may pay high salaries but do not pay dividends. They are not the subject of this paper.
[5] The Tax Cut and Jobs Act of 2017 at the federal level includes a deduction for business owners of 20% for some “pass through” income. That deduction complicates the comparison shown below and is ignored for this paper.
[6] In each case this is a higher amount of tax than the same earnings achieved from a “pass through” investment.
[7] Ordinary dividends are taxed at the individual’s own rate. Qualified dividends are taxed at lower rates of 0%, 15%, and 20%, still progressive. For purposes of the calculations in Section A, I have assumed some dividends of each kind.
[8] Some incentives are credits against other taxes.