[UNITED STATES] The question of who bears the brunt of U.S. income taxes - corporations or individuals - is a complex and often misunderstood issue. This article delves into the intricacies of the American tax system, examining the contributions of both corporations and individuals to the federal coffers.
The Current State of U.S. Income Taxes
Individual Income Tax
The individual income tax is the largest source of federal revenue in the United States. In 2021, taxpayers filed 153.6 million tax returns, reporting over $14.7 trillion in adjusted gross income (AGI) and paying nearly $2.2 trillion in individual income taxes6. The average income tax rate for individuals in 2021 was 14.9%.
The U.S. individual income tax system is progressive, meaning that those with higher incomes generally pay at higher rates. In 2024, there are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top marginal rate of 37% applies to taxable income above $609,350 for single filers and $731,200 for married couples filing jointly.
Corporate Income Tax
The corporate income tax, while significant, contributes a smaller portion to federal revenue compared to individual income taxes. Since January 1, 2018, the nominal federal corporate tax rate in the United States has been a flat 21%, following the passage of the Tax Cuts and Jobs Act of 2017.
In fiscal year 2022, the corporate income tax raised $424.7 billion, accounting for 8.7% of total federal receipts and 1.7% of GDP. This is substantially less than the revenue generated by individual income taxes and payroll taxes.
The Distribution of Tax Burden
Individual Tax Burden
The distribution of the individual tax burden is heavily skewed towards high-income earners. In 2021:
The top 1% of taxpayers (those with AGI of $682,577 and above) paid an average income tax rate of 25.93% - nearly eight times the rate faced by the bottom half of taxpayers.
The top 50% of all taxpayers paid 97.7% of all federal individual income taxes, while the bottom 50% paid the remaining 2.3%.
The bottom half of taxpayers, with AGI under $46,637, faced an average income tax rate of 3.3%.
Corporate Tax Burden
While corporations pay a significant amount in taxes, the question of who ultimately bears the burden of corporate taxes is more complex. Economists generally agree that the burden of corporate taxes is shared among shareholders, workers, and all investors.
The Tax Policy Center estimates that about 60% of the corporate tax falls on excess returns or economic rents, which are assumed to be borne entirely by corporate shareholders. The remaining portion affects wages and other labor income, as well as investment returns across all sectors of the economy.
The Shifting Landscape of Business Taxation
It's important to note that not all businesses pay the corporate income tax. Many U.S. businesses are taxed as "pass-through" entities, where profits are passed directly to owners and taxed under the individual income tax system. These include sole proprietorships, partnerships, limited liability companies (LLCs), and S-corporations.
The rise of pass-through entities has contributed to the declining share of federal revenue coming from corporate income taxes. In 2019, over 95% of businesses were organized as pass-through entities.
The Impact of Recent Tax Changes
The Tax Cuts and Jobs Act of 2017 brought significant changes to both corporate and individual taxation. The reduction of the corporate tax rate from 35% to 21% was a major shift, aimed at making U.S. corporations more competitive globally.
For individuals, the Act increased the standard deduction and child tax credit while eliminating personal exemptions. It also lowered individual income tax rates for most brackets.
The Debate Over Tax Fairness
The question of who really pays U.S. income taxes is often at the center of debates about tax fairness. Critics argue that corporations don't pay their fair share, pointing to high-profile cases of large corporations paying little to no federal income tax in certain years.
Defenders of the current system argue that corporate taxes are ultimately borne by individuals - either as shareholders, workers, or consumers - and that high corporate tax rates can harm economic growth and job creation.
The Global Context
It's crucial to consider U.S. tax policy in a global context. Many countries have been reducing their corporate tax rates in recent years to attract investment. The U.S. corporate tax rate of 21% is now closer to the average of other developed countries, though still higher than some competitors.
Looking Ahead: Challenges and Potential Reforms
As the U.S. grapples with budget deficits and changing economic conditions, debates over tax policy are likely to continue. Some potential areas of focus include:
- Addressing the taxation of multinational corporations and digital businesses
- Closing loopholes and reducing tax avoidance strategies
- Balancing the need for revenue with incentives for investment and growth
- Addressing wealth inequality through the tax system
The question of who really pays U.S. income taxes doesn't have a simple answer. While individuals, particularly high-income earners, contribute the largest share of federal income tax revenue, corporations also play a significant role. The corporate tax burden is ultimately shared among various stakeholders in complex ways.
As the economy evolves and fiscal challenges persist, policymakers will need to continually reassess the balance between corporate and individual taxation, always mindful of the impacts on economic growth, competitiveness, and fairness.
Understanding the nuances of who pays U.S. income taxes is crucial for informed public debate and policy-making. As we've seen, the answer involves a complex interplay of individual and corporate contributions, shaped by an ever-evolving tax code and economic landscape.
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