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The basis of calculation

January 9, 2017

In 2015, Boeing paid federal income taxes of $1.98 billion on profits of $7.15 billion, giving it an effective tax rate of 27.7%. That same year, ExxonMobil paid $5.4 billion on $21.97 billion of profits and Apple paid $19.1 billion on $72.5 billion, for tax rates of 24.6% and 26.3%, respectively. While these rates are far higher than many anti-corporate activists claim, they are also well below the official American corporate tax rate of 35%. For purposes of comparison, an individual paying tax at similar rates would be making between thirty and ninety thousand dollars in income each year.

The real discrepancy between corporate and personal taxation in the United States arises from one of the less obvious privileges given to corporations by the state: a parallel accounting system to that which it imposes on humans. The individual pays tax on his entire income. The corporation, however, pays tax only on its profits. The individual cannot deduct the cost of his food, housing, or transportation from his income before he pays his taxes; the corporation can. If Boeing, Exxon, and Apple had derived their effective tax rates based on their annual revenues rather than their profits alone, the former of which would correspond to an individual’s gross income, they would have paid 1.8%, 2.1%, and 8.2%. That is, if corporate taxation were administered on the same basis as personal taxation. By contrast, if they paid the same rate on their entire revenues that they actually did on their profits, they would have seen tax bills of $26.6 billion, $63.8 billion, and $61.5 billion. In two cases out of three, they would have been bankrupt because their profits could not have covered the tax demands they would have incurred by paying the same tax rate on the same basis as an ordinary worker.  According to Forbes, the ten most profitable companies in the United States in 2015 paid cumulative taxes of $60 billion on revenues of $665 billion – less than ten percent, or comparable to what an individual making less than ten thousand dollars a year would pay.  If the one hundred most profitable American companies that year had been required to pay the full statutory rate on their total incomes, as individuals do, not one of them would have earned sufficient profits to end the year in the black. Not one.

Corporations are not more efficient than an individual, nor are they shining monuments to the forces of competition within a free market. They are, in fact, less efficient than the individual, because without the benefit of a privilege bestowed by the state, most of them would be forced out of business within a year or two. Somewhat ironically, they could not afford to compete with the individual if taxes were equalized, and thus would not exist at all in a free market. They almost represent a modern form of mercantilist policy, in which the state designs economic legislation to benefit itself and further its objectives – or in which the organizers of the state design the legislation to serve their personal ends. In the United States, the privileges of corporations have been maintained as law by thousands of elected representatives, who have been well rewarded for their silence by those same corporations. But as time-honored as that tradition may be, it must be recognized for what it is: a form of state intervention in the market. The existence of corporations makes the market less free and less efficient, not more so.

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