Who Really Pays U.S. Income Taxes: Corporations Or Individuals?

The headline was likely a giveaway. But it’s worth looking at the history of income tax on the individual and corporate level. The first step is to bring up the data, which comes from the executive branch’s Office of Management and Budget, Table 2.1, Receipts by Source: 1934 through 2029 (latter being one of the estimates).

The light blue line shows total individual income tax payments; the dark blue line is total corporate income tax payments. Another view is by percentage of total income tax paid.

That brings up several questions:

1. Why should anyone pay income tax?

2. Why does the corporate portion of income tax keep falling?

3. How can you fairly compare corporate profits and individual income?

4. What is a fair income tax balance between corporations and individuals?

For the first question, the answer is probably what you would suspect: People and institutions pay taxes to keep the country running. Many working individuals don’t pay taxes because they make too little. But working people do pay into Social Security, Medicare/Medicaid, local sales tax, fees, and other forms of government payments to do their part.

Why does the corporate portion of income tax keep falling? First, it’s important to compare total personal income to corporate profits. Here’s another graph, this time from the St. Louis Fed’s FRED site, which compares the two measures.

The red line represents collective corporate profits. The blue line is collective personal income. This might be a bit of a surprise — it was for me. In a nation the size of the U.S., with more than 341 million people and is the third most populous in the world, the population expanded far more than the number of corporations.

With all those people there’s a resulting mass of growing wealth. By the above graph, it looks as though individuals have grown so much faster that even without reasonable growth in median household income, it still adds up and is huge. That leads to the fourth question.

Finding a fair balance means digging into the government comparison of which side pays what portion of taxes because there is an inherent difference between the two measures.

The definition of personal income is the amount of money all individuals in a country make. That can come through employment at a company, self-employment, unemployment compensation, returns on investment, money from rental income, gifts, and anything else classified as income. And then come the taxes. Only after the government gets its due do people have so-called disposable income — money to spend on bills, housing, transportation, clothing, education, entertainment, or whatever else they need or want. In other words, people are taxed on their overall personal revenue.

Corporations, on the other hand, are taxed differently. They make huge amounts of deductions for all sorts of things that count as business expenses — materials, salaries, office rents, professional services, and all sorts of things that bring the taxable portion of income to a small percentage of the total. Whereas individuals are taxed on everything they make before paying a single bill, corporations are taxed only on what’s left over.

That’s where the question of a reasonable balance is important. Corporations get to reduce their taxes by everything they’re obligated to pay. Individuals have to pay taxes on all the money they need to pay their obligations. In a way, individuals collectively pay the taxes on the money companies pay them, effectively transferring some significant portion of obligations from corporations to the individuals working for them.

There is an inherent unfairness because the major burden of paying for government sits on individuals and not corporations. Those businesses also have great influence in steering the government into policies that help companies keep more of the money they make, expanding deductions and offering tax credits to lessen the tax burden, which means shifting it elsewhere like onto individuals.