Why Income Taxes Are Tiered While Corporate Taxes Remain Flat: An SEO-Optimized Analysis

Corporate tax rates used to be tiered with the highest rate being 39%, but the highest bracket was much lower. The tiers were designed by giant corporate lobbyists to harm small and mid-sized firms. The tax reform of 2017 made corporate taxes flat, resulting in a level rate of 21%, but personal income taxes remain tiered.

History of Corporate Tax Rates

Before the 2017 tax reform, corporate tax rates were stepped just like personal tax rates. They were mostly progressive, with some peculiar steps where the tax rate on higher earnings dropped. For instance, a corporation might pay 28% on its millionth dollar of profit but 33% on its 750,000th dollar of profit. This structure meant that forming subsidiaries and complex corporate structures could significantly reduce overall tax liabilities.

The Cost of Complexity in Corporate Taxation

The complex structure set up through subsidiaries was beneficial because it was cheaper to file four corporate tax returns on four companies with $125,000 in profit than to file one return on a company with $500,000 in profit. This complexity allows corporations to minimize their tax burden through creative accounting.

Taxing the Same Thing: Corporate and Personal Income

Corporate income tax and personal income tax both aim to tax the same thing: the 'profits' an entity creates through its effort. For a corporation, the corporate income tax is levied against the profits they earn after all expenses are deducted, while for an individual, the individual income tax is levied against the 'profits' after all costs of maintaining their 'business' are deducted.

Reasons for Different Tax Rates

The differences in tax rates between corporations and individuals can be attributed to multiple factors:

Politics: Personal income is taxed based on individual income brackets. Since individuals vote, any proposed flat tax would burden most Americans, who earn less than $36,000 annually. Political parties and voters would not support this. In contrast, corporations, which can spend unlimited amounts on political advertising, would oppose a progressive tax on top incomes. Influence of Lobbying: Giant corporate lobbyists shaped the tiered corporate tax system to benefit large corporations at the expense of small and mid-sized ones. The 2017 tax reform, which reduced corporate tax rates to 21%, was influenced heavily by such lobbying efforts. No Individual Agency for Corporations: Corporations are legal fictions with no individual purpose. Their sole function is to generate profits for shareholders. This makes it logical to implement flat or uniform tax rates for corporations, as they do not have the cross-purposes of human individuals.

Conclusion

While both corporate and personal income taxes aim to tax the profits from business activities, the tiered nature of income taxes for individuals allows for a more nuanced and fairer distribution of tax burden. In contrast, the flat corporate tax rate of 21% was influenced by lobbying and political considerations, reflecting the unique nature of corporate entities in the current tax landscape.