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Corporate Income Taxes:Trends and Forecasts Presentation to the President’s Advisory Panel on Federal Tax Reform March 8, 2005 Douglas A. Shackelford University of North Carolina and NBER Overview Look back Corporate income taxes are in a long decline Why have they declined? International competition Alternative organizational forms More effective tax planning Tax shelters Mobility of income Look forward Feasibility of the corporate income tax in an information economy Corporate Income Tax as a Percentage of Federal Revenue and GDP Source: Office Management and Budget, Fiscal Year 2005 Budget, as reported by the Tax Policy Center. Why Have Corporate Taxes Declined? International competition has eroded corporate taxes as a revenue source Lower rates at home and abroad Smaller base—e.g., accelerated/bonus depreciation, RD deductions and credits Other organizational forms (e.g., S corp) The corporate income tax is a special levy on companies that access capital through the public equity markets Other techniques to undo two levels of tax More effective tax planning International Competitiveness: Reducing Corporate Tax Rates Source: Gravelle, J. “The Corporate Tax: Where Has it Been and Where is it Going?” National Tax Journal 57 No. 4 (December, 2004): 903:922. S Corporations: Eroding the Corporate Tax Base 2004-2010, projected. Source: IRS Statistics of Income. Business Net Income by Type of Entity Source: Drew Lyon, PriceWaterhouseCoopers, Presentation at the 6th Annual Tax Council Policy Institute Symposium, February 11, 2005. Underlying data from IRS statistics of Income. Other Ways to Eliminate Double Taxation Year-end bonuses in privately-held firms Debt shifts business profits to the lender’s tax return since interest is deductible Employee stock options Total deductions from stock option exer