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Thursday, July 15, 2004

Corporate Tax Payments Fall Off a Cliff

If corporations were still paying taxes at the 1999 rate, the federal government would have collected about $100 billion more in taxes last year, and the budget deficit would be over 25% smaller.

No one is exactly sure why tax collections from corporations have fallen so precipitously, but there are two main reasons:
* An annual $50 billion or so of the decrease is due to corporate tax cuts included in the 2001 and 2003 tax bills (mostly greater write-offs for new investment). Source: CBPP.

* Much of the rest is probably due to increasing use of tax shelters and various techniques for avoiding and evading taxes.

Paul Krugman wrote a few years ago, "Tax receipts this year are falling far short of expectations, even taking the recession into account; my bet is that it will turn out that newly aggressive tax avoidance by corporations (and wealthy individuals) is an important part of the story. And it will get worse next year." Now, with corporate profits soaring, it's becoming clear the Krugman's prediction was right.

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Source: Congressional Budget Office (CBO), and BEA National Income and Product Accounts (NIPA).

Note: Total corporate profits and tax payments from NIPA. NIPA tax payments include state & local taxes, "taxes" paid by the Federal Reserve, and some other amounts. CBO figures are for federal corporate income tax only. The CBO tax rates divide fiscal year taxes by calendar year profits.

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