The background on corporate taxes
The Obama administration could soon propose a lower, flat corporate tax rate. But how do corporate taxes really work?
Adriene Hill: The Obama administration will outline a broad overhaul of the nation’s corporate tax code today. It includes cutting the tax rate businesses pay and closing corporate loopholes, which is going to mean a whole lot of talk about corporate tax policy.
So we thought we’d start with a “Corporate Tax 101.” Charlie Wheelan is a public policy professor at the University of Chicago. Good morning.
Charlie Wheelan: Good morning.
Hill: So what are corporate taxes? Who pays them?
Wheelan: So if you are incorporated as a business — which is a legal distinction — you will calculate the profits that are made by corporation — which is some form of business — and you will pay some percentage in tax to the federal government. Many small businesses will actually have their income passed through as personal income tax. But for the most part, we’re talking about large corporations.
Hill: How do corporate taxes work today?
Wheelan: They don’t work terribly well. We have a relatively high tax rate in the United States, relative to what it might be if we were to close a lot of exemptions. In that respect, it’s very similar to the personal income tax, where you get an exemption for interest you pay on your home; you get an exemption for some high medical expenses. You get exemptions here and there so that by the time we take away all the revenue that is lost from those exemptions, we have to take more of what is not exempted.
Hill: So it sounds complicated — is there consensus that it should be changed?
Wheelan: There is a strong and powerful consensus among people who look at tax policy in general that lower rates with a broader base — so fewer loopholes — is always preferable to a tax that levies a high rate against some income and virtually none against all these little loopholes that you might be able to find.
Hill: What’s the difference between loopholes and exemptions — are they exactly the same?
Wheelan: One is a more polite version, and the other is a less polite version
Hill: Charlie Wheelan, thanks.
Wheelan: Thank you.