U.S. Corporate Tax Legislative History
Corporate taxes are a form of taxation charged upon businesses by the U.S. federal government. Corporate taxes are among the primary method the U.S. Government uses to raise revenue. Although they do not account for as much revenue as they historically did in the past decades, they remain an essential source of revenue. Today, corporate tax rates third in terms of the amount of revenue they raise, preceded by income tax and payroll taxes. This is partly because companies analyze taxation laws to ensure that they pay the lowest amount of tax possible on their income. Additionally, the government of the U.S. has been reforming corporate tax giving companies tax breaks to the extent that large corporations such as Amazon pay zero taxes on their profits today. The Internal Revenue Service is the federal institution mandated to collect taxes and enforce taxation legislation on behalf of the federal government. The Internal Revenue Code at 26 U.S.C. ยง 8001 establishes and advocates a Joint Committee on Taxation, which the U.S. Congress committee responsible for handling matters of taxation. The latest reforms to corporate tax were introduced by President Trump and passed by Congress through legislation known as (TCJA (Tax Cuts and Jobs Act). This Act was significant because it reduced corporate tax from 35% to 21%, the lowest it has ever been since 1935. Throughout the history of the U.S., numerous corporate tax reforms have been introduced depending on the politics and economic policy of the time. This paper, therefore, discusses the history of the corporate tax in the U.S.
At the inception of the Republic, corporate taxes used to be levied upon business owners and not the businesses themselves, thereby being treated as income tax. However, this practice changed with the introduction of the 1894 Revenue Act. The Act declared that corporate tax should be levied upon business profits, and therefore it would be the corporations paying the tax and not the owners. The Act was challenged in Court but was ruled constitutional. However, it was never operationalized, and therefore, it was repealed by the Tax Act in 1909. This Act had been enacted after President William Howard Taft addressed parliament proposing a constitutional amendment that allowed for a dual taxation system in which individuals would pay income tax while businesses pay the corporate tax simultaneously. Various historical events had led to this proposal. In Pollack v. Farmers’ Loan & Trust, the court had pronounced the Income Tax Act of 1894 unconstitutional by declaring that federal taxes on the income of individual was direct taxation as envisioned by the constitution. Corporate tax was therefore considered a form of excise tax which was not affected by the decision of the Supreme Court. The 1984 Act had declared a 2% even tax on incomes above $4,000. This element of the Act was, therefore, constitutional in as far as it was applied to corporations and not the income of individuals. This became the first time that businesses started paying corporate tax to the federal government. The Tax Act in 1909 had been simplified so that all businesses paid the same rate, regardless of their income. Businesses were required to pay 1% taxes for all those that had an income above $5,000.
One of the most significant developments in the U.S. taxation system was the 16th Amendment, which was passed in 1913, giving Congress absolute power to lay as well as collect taxes regardless of the source of the income and without apportionment to any of the States. Congress was, therefore, given exclusive jurisdiction to vary and impose taxation on individuals and businesses. Congress systematically raised the rate of corporate tax from 1909 to 1945 through various legislative elements. However, Congress lowered the corporate tax after 1945 to allow businesses to recover from the adverse aftermath of WWII. During the War, Congress had passed various legislations that raise the tax rate from 19% to 40% to finance the U.S. activities in the War. By the 1950s, the U.S. economy had fully recovered, and businesses were thriving, which caused Congress to resume raising corporate taxes until around 1978. Corporate tax brackets have increased since 1936 from one to eight. In the 1960s, the U.S. was engaged in the Vietnam War. Congress, at the time, enacted the Revenue and Expenditure Control Act of 1968 to strengthen the U.S. fiscal and budgetary policy as many resources had been invested in the War. The Act established a 10% temporary income-tax surcharge. It also raised the marginal tax rate from the then 48% to 52.8%. This made the U.S. have the highest corporate tax rate among developed nations of the time.
In the ’80s, Congress passed four other separate reforms to the federal corporate taxation system. Among these, the most relevant legislation was the Tax Reform Act of 1986, which was also considered the most extensive review and reform of the U.S. taxation system by Congress since the 16th Amendment in 1913. The objective of Congress in passing the legislation was to broaden the tax base, eliminate numerous tax shelters for corporations, and make the tax legislation as easy to understand as possible. Therefore, the legislation effectively reduced tax brackets for corporations from 7 to 5 and consequently eliminated about $30 billion in corporate tax loopholes that had existed in previous taxation regimes. The Bill, which was one of the most bipartisan legislation passed, was meant to strengthen the corporate tax collection systems and eliminate any avenues in which corporations could legally avoid paying taxes. Although this legislation had been ambitious in its objectives, it still managed to lower the corporate tax from 46% to 34%. The Act corrected some of the mistakes made during the Reagan administration, where the President, with the help of Congress, had raised corporate taxes eleven times during Reagan’s tenure in office. The effect was that the U.S. achieved one of the highest corporate tax hikes in history. Congress continued to reform corporate tax, especially the Omnibus Budget Reconciliation Act, thus creating four new corporate tax brackets and increasing the tax rates for corporations with an income of over $335,000. Clintons Bill continued to be operational until 2017 when the House Republicans passed the Tax Cuts and Jobs Act, which gave tax relief to corporations. The intention of Congress at the time was to increase the income of corporations to stimulate economic growth.
In conclusion, Congress has been actively passing legislation since the Sixteenth Amendment to revise corporate taxes according to either the politics of the day or the monetary and economic policy that had been established. In dispensing its legislative mandate, Congress has not been consistent in its approach to corporate tax. Congress has varied the corporate tax rate and the tax brackets severally by either increasing or reducing the rates. It was the Tax Cuts Jobs Act that would trickle down to workers of all levels, although this has yet to be achieved. The Tax Cuts and Jobs Act, which became operational in 2018, introduced a base corporate tax rate of 21% from all organizations.
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