Steve Rosenthal and Theo Burke (Tax Policy Center) present Who’s Left to Tax? US Taxation of Corporations and Their Shareholders virtually at NYU today as part of its Tax Policy Colloquium Series hosted by Lily Batchelder and Daniel Shaviro:
We usually say that corporate earnings are subject to two levels of income tax: first, the corporation pays an income tax on earnings and, second, the shareholders pay an income tax on the dividends they receive and capital gains they realize. The story now is illusory: We tax earnings twice, but badly.
A half century ago, the US corporate income tax was a major source of revenue. Since then, the corporate tax base has eroded and, in 2017, the corporate tax rate was cut sharply from 35 to 21 percent. As a result, corporate tax receipts dropped from 3.6 percent of GDP in 1965 to 1.5 percent in 2017 to 1.1 percent in 2019. Because of the COVID-19 pandemic, and the resultant economic collapse, corporate tax receipts fell further, finishing below 0.8 percent of GDP for the fiscal year 2020, which ended on September 30 (and will finish lower still for the calendar year 2020).
Over the same half century, the shareholder tax base also dwindled. In a 2016 article, we estimated that US taxable accounts only held about a quarter of US portfolio stock down from almost 80 percent 50 years prior. In a 2017 article, we estimated foreign investors held about 35 percent of US corporate stock, including both foreign direct and portfolio investments.
After the 2017 cuts in corporate tax rates, there have been calls to raise them. Most recently, for example, former Vice President Biden proposed to raise the corporate income tax rate from 21 to 28 percent.
This article updates our previous estimates of the shifting ownership of US corporate equity and describes continuing trends. We find that foreigners now hold about 40 percent of total US equity, retirement accounts about 30 percent, and taxable accounts about 25 percent. We then discuss the implications of the ownership trends for tax policy, both for raising taxes on corporations and shifting more taxes to shareholders. Overall, we find that foreigners and the richest Americans incur the burden of increasing corporate taxes—and reap the benefit of cutting them.