Corporations

Number of American Corporations Declines for 17th Straight Year

U.S. businesses are reclassifying themselves to avoid the highest corporate tax rate in the West.

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The number of registered corporations in America has decreased every year since 1994, according a report from the Tax Foundation, and the trend shows no signs of stopping.

In this chart from the report, "C Corporations" are ones we think of in the traditional sense—those that are taxed separately from their owners' and shareholders' incomes:

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The report, issued in January, has data up to 2011, the most recent year of Internal Revenue Service (IRS) reporting. In that year, the IRS reported 1.6 million C Corporations, the lowest since 1974 and 1 million fewer than the high point of 1986.

As the report states:

In every year since 1986, roughly 40,000 U.S. corporations have disappeared from the tax rolls. However, the losses have accelerated since 2006 to a rate of about 60,000 per year. 

The report claims that the reduction in the number of incorporated firms is not so much due to inversions, mergers, or bankruptcy, but rather more firms classifying themselves as S Corporations, in which profits pass directly to owners and are taxed as individual income. Individual rates are typically lower than the U.S. corporate tax rate, currently the highest among members of the Organisation for Economic Co-operation and Development at 35 percent federal plus an additional 4.1 percent average rate levied by individual states.

Reclassifying a company as an S Corp also avoids the "double taxation" of shareholders, who would be subject to capital gains taxes on corporate profits for which corporate taxes were already levied. Only a handful of developed nations—the U.S. among them—have this double taxation.

These policies have had significant effect on tax revenue, according to the report:

In the 1960s and 1970s, C corporation profits were about 8 percent of GDP, while partnership profits were about 1 percent and S corporation profits were virtually nil. C corporation profits now hover around 4 percent of GDP (4.7 percent in 2011), while partnership profits are almost at the same level (3.7 percent in 2011), and S corporation profits are not far behind (2.4 percent in 2011).

This explains why U.S. corporate tax revenues are smaller than you might expect, given that we have the highest corporate tax rate in the West (shades of the Laffer Curve at work). As of 2011, over 60 percent of U.S. business profits are taxed as individual income.

Here's where you're probably wondering: If all of these corporations are merely reclassifying themselves—not actually disappearing—what's the big deal? The answer, according to the Tax Foundation: "Pass-through businesses do not offer the same ability to invite investment from thousands of shareholders or easily transfer shares. That means the decline of the traditional corporate sector represents an economic distortion that is hobbling American industrial capacity and job growth."

The report recommends the U.S. lower its corporate income tax rate and eliminate double taxation to solve this issue. The former policy has been discussed widely for years, but no meaningful legislative progress has been made.

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  1. In this chart from the report, “C Corporations” are ones we think of in the traditional sense?those that are taxed separately from their owners’ and shareholders’ incomes…

    NO TAXATION WITHOUT REPRESENTATION.

    1. IOW, those businesses which are double-taxed.

  2. So the war on the Kochporashunz is WORKING! KEEP GOING!!1!1

    1. Damn you, you beat met to it!

      “SUCCESS!”

      -progs

    2. After the war in one, there will still be one big corporation left. Let’s just name it Obamacorp.

      1. is won, geez.

      2. No, it’ll be a good and righteous entity, Peoplecorp.

          1. Only because you can’t make Soylent Green out of corporations.

            1. SOYLENT GREEN IS S-CORPS!!!

  3. Well, just wait until the “Anti Going Out of Business” law passes!

  4. I’m assuming the partnerships being created are LLPs and the like. Because who in his right mind would want to form a traditional partnership?

  5. Corporate Taxes Are 10 Percent of Federal Revenue, Down from 30 Percent

    It’s commonplace to hear corporations and businesses complaining that at 35 percent, the U.S. has the highest corporate tax rate in the world. That statement is true. But in reality, most corporations don’t pay anything close to 35 percent. In fact, “by taking advantage of a warren of credits, deductions and exemptions, corporations pay an average effective rate of just 12.6 percent, according to the Government Accountability Office,” the Times said.

    http://finance.yahoo.com/news/…..EEc2VjA3Ny

    Time to scrap the tax code and start over.

    1. In fact, “by taking advantage of a warren of credits, deductions and exemptions, corporations pay an average effective rate of just 12.6 percent, according to the Government Accountability Office[…]”

      It takes a lot of sorely-needed resources to scrape that 12.6% which only a few big companies can afford.

      Time to scrap the tax code and start over.

      Start over?

    2. In fact, “by taking advantage of a warren of credits, deductions and exemptions, corporations pay an average effective rate of just 12.6 percent according to the Government Accountability Office

      That’s quite an unbiased reckoning given by the GAO. I wonder what the effective tax rate on corporations is when you account for the taxes paid by individuals on their pass-though revenue.

      I’m going to have to look for the GAO report because to find out how they’re getting that as an effective rate because I have no idea how they’re sussing out 12.6% based on the IRS’s available numbers.

      1. My God, that’s a misleading headline. Corps paid 30% of Federal revenue following WWII, when the top marginal rate was over 90%. Of course individuals pay a greater share now, the revenue no longer has to be held by the Corps to avoid paying those catastrophically high rates. And what’s with all of the ignorant hemming and hawing by ignorant progressive mouthpieces like Tim Dickinson?

        I want those 2 mins of my life back. What a waste.

  6. Taxing cigarettes reduces cigarette use.

    Taxing wealth creation…hey, wait a minute!

    Taxing businesses may be THE most immoral act ever perpetrated by humans. Let’s stifel the only mechanism that can increase living standards.

    May god have mercy on their souls.

    1. Wealth creation? How is wealth measured? In money. Who creates money? Government. Thus wealth is money and government creates it. Duh. Stupid libertarians apologizing for the corporations that would enslave us all if not for government.

    2. Re: Francisco d’Aconia,

      Taxing wealth creation… hey, wait a minute!

      Your regular little red Marxians will argue that government taxes wealth because capitalists stole it from the workers – you know, the tired, old, debunked (and left for dead) exploitation theory of profits.

      Why do you think little red Marxians are so angry at B?hm-Bawerk? Butt-hurt still stings – just ask Shriek.

    3. Francisco d’Anconia|2.23.15 @ 12:06PM|#
      “Taxing cigarettes reduces cigarette use.
      Taxing wealth creation…hey, wait a minute!”

      I once read a comment by a CA politico along the lines of ‘no company leaves CA; it’s too pretty here!’.
      Yes, it was a lefty twit, in case there were any doubts.

    4. Practically all broad-based taxes have about the same effect on the economy if they’re kept steady for a while. Doesn’t much matter whether you tax the wages & profits, the sales, or the use of the goods or services. That’s not counting recurrent taxes on the same thing, though, like wealth, property, xfer, inheritance, or double taxes.

  7. I think, in addition to the tax burden, you need to add in the non-trivial and increasing compliance costs.

    1. Oh, fo shizzle.

      This is really why CA, NY and NJ are on my “do not fly” list – more than the taxes, it’s the regulation and bureaucracy.

  8. How do they tax an anarcho-syndicalist commune?

    1. By confiscating their pot plots.

  9. Even converting to S corps can be nasty business. We looked into converting and found out our 12 shareholders would be subject to personal income tax, and filing, in every state where the corporation had nexus. Since we were filing in five states, our shareholders (who themselves lived in four states) were not about to start learning the tax laws and tax forms of five more states. So we stayed as a C corp. and, for the most part, don’t pay dividends when we can help it.

  10. “Unexpectedly!”
    Perhaps re-looking at the tax code needs to be expanded to re-examining the need for Sarbanes-Oxley, and for Dodd-Frank, as the Congress has ladled needless regulation upon regulation on the business community restricting its vigor and growth.

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