Annette Nellen
Annette Nellen

The Journey to a Lower Corporate Tax Rate

What can be learned from recent congressional hearings and statements of political leaders regarding corporate tax reform?

March 24, 2011
by Annette Nellen, CPA, Esq.

President Barack Obama mentioned corporate tax reform in his State-of-the-Union address in January 2011. Treasury Secretary Timothy Geithner met with corporate executives about corporate tax reform. Federal Reserve Board Chairman Ben Bernanke mentioned a territorial system and repatriation in testimony before congressional committees. And government offices have issued various reports on tax reform in early 2011. This article summarizes these activities' key points raised and what it tells us about the direction and likelihood of corporate tax reform. Some comparative data about U.S. corporations is provided first to help in understanding the rationale for and issues of corporate tax reform.

Corporate Tax Data

Global tax rates: A commonly cited reason to reform the U.S. corporate income tax is that the corporate income tax rate is higher than most Organization for Economic Co-operation and Development (OECD) countries. OECD data for 2010 shows that the combined federal and state corporate income tax rate in the U.S. is second highest among 31 OECD countries. This data includes the following: [OECD Tax Database, Table II.1]


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39.54% (scheduled to drop to 35% on April 1, 2011)

2nd highest

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Forms of business: In terms of numbers of U.S. businesses filing tax returns, most operate as sole proprietorships. As illustrated in the Chart 1, based on IRS data, the mix of businesses operating as corporations, partnerships and sole proprietorships has not changed significantly since 1980.

One significant change in the nature of business entities, though, is in the mix of corporations. The number of S corporations has increased significantly since 1980, as shown in Chart 2.

Business activity: While more businesses operate outside of the corporate form, C corporations generate the bulk of business activity as receipts show, rather than S corporations as illustrated in Charts 3 and 4.

Tax collections: For fiscal year 2009, four percent of total federal income was generated from C corporations (Chart 5). Considering only tax revenues, in FY 2009, the corporate-income tax represented 6.6 percent of total federal-tax revenues.

Relative to other years and taxes, corporate-tax revenues were low in FY 2009. Historical data from the Office of Management and Budget (OMB) indicates corporate tax revenues as a percent of total tax revenues as follows (OMB, FY2012 Budget, Table 2.2 (PDF)):

Fiscal Year

% total revenues









2011 estimated


2012 estimated


Corporate-Tax Reform Themes

Much of the recent testimony, statements and reports can be described within the following themes:

  • Exploration rather than action: Recent hearings in Congress have focused more on gaining an understanding of current tax problems rather than crafting solutions to them. For example, a March 1, 2011 Senate Finance Committee hearing was titled, "How Did We Get Here? Changes in the Law and Tax Environment Since the Tax Reform Act of 1986." Also, while President Obama suggested in his State-of-the Union speech (January 25, 2011) that the corporate tax rate should be lowered, his FY 2012 budget proposal does not include such a rate reduction, although it does include various "revenue changes and loophole closers" (FY 2012 Greenbook (PDF)). A Tax Notes article quoted Jason Furman, deputy director of the National Economic Council, as saying that the Administration preferred to have a proposal "emerge from a set of discussions" ("Obama, Advisers Tout Tax Breaks for Small Businesses," February 28, 2011, page 1007).
  • Revenue neutrality: President Obama's State-of-the Union speech called for Congress to "get rid of the loopholes. Level the playing field. And use the savings to lower the corporate-tax rate ... without adding to our deficit." Treasury Secretary Geithner and Jason Furman have also noted that tax reform must be revenue neutral.

    Revenue neutrality will likely be a continued discussion topic as some testifying in recent congressional hearings have suggested that a corporate rate reduction will stimulate economic growth. In contrast, others have noted the need for additional revenues to address the deficit.
  • Tax expenditures: Tax expenditures — special deductions, credits and exclusions, have been a focal point in all recent tax reform and deficit reduction discussions and reports. Reducing tax expenditures is noted as necessary for reducing the deficit, paying for rate reductions, improving economic efficiency and simplifying the tax law.
  • Corporations vs. businesses: As noted in the charts above, C corporations constitute a minority of businesses, but a majority of business receipts. The number of passthrough entities increased significantly since 1980. As noted in recent hearings, the likely cause was the rate changes of the Tax Reform Act of 1986 that made the corporate rate higher than the individual rate. A corporate rate reduction today would likely lead to shifts in choice of entity, although the tax rate on dividends would also be relevant.

    Revenue neutrality suggests that a corporate tax rate reduction will be accompanied by elimination or reduction of deductions, deferrals or credits. However, not only do corporations, but all businesses use these provisions, such as the §199 manufacturing deduction or LIFO (last-in-first-out accounting inventory-measurement methods). These concerns were part of the reason for a March 3, 2011 House Ways and Means Committee hearing on small businesses and tax reform (February 24, 2011 advisory (PDF)).

    Recent hearings also highlighted that legal structure does not always tie to size. Some very large businesses operate as partnerships and avoid double taxation. Suggestions were made that tax rules should perhaps apply based on size rather than entity type.
  • Structure and integration: The corporate and individual income taxes are intertwined. The double taxation feature of C corporations further increases the effective tax rate on corporate earnings. The need to consider corporate integration as well as the rate structure for both corporations and individuals, including the rate on dividends and capital gains, has been noted in hearings.
  • Complexity: Complexity and its costs have also been highlighted. The National Taxpayer Advocate's report issued to Congress in January 2011 includes a section entitled, "The Time for Tax Reform Is Now" (PDF). This report reiterates prior reports by stating: "The most serious problem facing taxpayers — and the Internal Revenue Service (IRS) — is the complexity of the Internal Revenue Code."
  • Globalization: Recent hearings have highlighted the need to reform outdated international tax provisions in the Code. Several people noted problems with the current system of taxing foreign income including that the U.S. is the only OECD country that taxes worldwide income. Testimony also noted that the rules work against making good business decisions, are costly due to complexity and the need for planning, and do not bring in a lot of revenue. Bernanke noted in a February budget hearing that a territorial system should be considered as a more permanent approach to the question of whether to enact a temporary repatriation incentive. (BNA, "Geithner Says No Corporate Tax Reform, Repatriation in FY 2012 Budget," February 10, 2011.)
  • Economic growth: Testimony on tax reform suggested that high tax rates — both for corporations and individuals — can hinder economic growth. (Tax Foundation testimony (PDF), March 9, 2011.) It was also noted that studies indicate that workers bear a substantial portion of the corporate tax rather than investors. (Eric Solomon testimony (PDF), March 1, 2011).
  • Alternative taxes: Suggestions for a value-added tax (VAT) for both deficit reduction and global competitiveness reasons continued to be offered. In addition, suggestions were made to consider replacing the corporate-income tax with another tax, such as a cash-flow tax.

Looking Forward

Tax reform discussions will continue. The January 20, 2011 House Ways and Means Committee hearing on the subject was labeled as the "first in a series." Based on what has transpired to date, it appears that corporate-tax reform will not be solely a rate reduction paid for by elimination of a few tax preferences. Instead, broader discussions will continue and will look at all business taxation, international competitiveness, simplification, deficit reduction and the once again, the looming expiration of temporary tax cuts.

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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She chairs the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog. For further information on federal tax reform and links to reports and legislation, as well as to the author's report with additional data, visit http://www.21stcenturytaxation.com/