No area of tax policy has changed more over the past four decades than corporate income taxation. Since 1980, corporate tax rates have fallen as countries have vied for business investment in an increasingly global economy. More recently, however, lower corporate tax rates have triggered concerns about a “race to the bottom” and, in turn, sparked a multinational effort to create a global minimum tax.

Between 1980 and 2017, the United States fell behind in the race to reduce corporate tax rates and even briefly levied the highest corporate tax rate in the industrialized world. The 2017 Tax Cuts and Jobs Act (TCJA) brought the corporate tax rate down and restored U.S. competitiveness, but the 2022 Inflation Reduction Act (IRA) clawed back some of the benefits by creating two new and untested corporate tax provisions.

As countries continue to work to establish a global minimum tax, economists have demonstrated that the corporate tax is the most harmful tax for economic growth, with much of its burden falling on workers in the form of lower wages.

Although global tax competition is under threat, countries such as Estonia provide a model for administering competitive and economically neutral corporate tax systems.

What Is the Corporate Income Tax?

C corporations, also known as C corps for their chapter designation in the tax code, are legal entities that shield their owners from personal liability. The largest of these companies are publicly traded on exchanges such as the New York Stock Exchange, while smaller corporations tend to be privately held, often by family members.

In the United States, C corporation profits are taxed twice: first at the entity level by the corporate income tax and again at the shareholder level on dividends and capital gains. Many countries, such as Japan, do not levy a second layer of tax on corporations.

Other forms of businesses in the United States, such as sole proprietorships, partnerships, and S corporations, pay only one layer of tax. These firms are called “pass-throughs” because their profits are passed through to the owners, who then pay taxes on their personal income tax returns.

How Does Corporate Taxation Work?

Imagine that a technology company earns $100 in profits on the sale of a new video game. It would then pay the federal corporate income tax rate of 21 percent on its profits, resulting in $79 in after-tax profits that it can distribute to shareholders as dividends. In the United States, dividends are taxed as regular income at progressive tax rates of 15 percent and 20 percent. High-income taxpayers also face the Net Investment Income Tax (or NITT) of 3.8 percent on their individual income tax returns, making the combined top dividend tax rate 23.8 percent. Applying the combined top rate to $79 results in a shareholder tax of $18.80.

The two levels of tax add up to $39.80, resulting in net company profits of $60.20. State and local taxes add another layer to the federal burden.

How Do Corporations Determine Their Taxable Profits?

Companies pay taxes on net profits—total revenues minus total costs. Lawmakers set forth specific rules in the tax code for allowable deductions, which help determine the tax base. The tax base is the total amount of income, property, assets, or economic activity subject to taxation. Every country has a different tax base that reflects its lawmakers’ priorities.

In the United States, companies can reduce their taxable income by deducting operating expenses such as employee salaries, employee benefits, rent, and the cost of materials to make their products. However, the tax code requires companies to amortize–depreciate over many years–the cost of big-ticket capital items like machinery and buildings.

Many economists believe that depreciation raises the cost of capital investments because both inflation and positive real interest rates erode the tax benefits of write-offs. A more economically sound method, many argue,[1] is to allow firms to “expense” or deduct capital purchases in the year they are made.

The tax code also includes tax credits that directly reduce the taxes a company owes. U.S. lawmakers have created tax credits for research and development (R&D), renewable energy production, plug-in electric vehicles, and investments in low-income housing, among others.

While the U.S. tax code is commonly thought to be tilted in favor of corporate “loopholes” or “tax expenditures,” the reality is that there are vastly more tax expenditures benefiting individual taxpayers than benefiting corporations. Taxable profits also differ from accounting profits, which are based on an entirely different set of rules.

Who Bears the Burden of the Corporate Income Tax?

While companies certainly remit the payments for their income taxes, economists have long debated who actually bears the economic burden of a tax paid by a legal business entity. Is it shareholders through lower returns, workers through lower wages, or consumers through higher prices?

For many years, economists believed that shareholders (or capital) shouldered most of the economic burden of the corporate income tax. In the short term, that may be true. However, recent empirical studies[2] suggest that workers and consumers bear a disproportionate share of the corporate income tax burden, especially because workers are less mobile than capital. Virtually every country has strict immigration laws that hamper labor mobility.

A study of corporate tax changes in German regions[3] found that workers bore 51 percent of increases in corporate taxes through lower wages. The authors determined that the impact was most severe on more vulnerable workers such as women, low-skilled workers, and younger workers.

The Corporate Income Tax Is the Most Harmful Tax for Economic Growth

In a landmark study[4] of the impact of taxes on economic growth, economists at the Organisation for Economic Co-Operation and Development (OECD) concluded that the corporate income tax is the most harmful tax for economic growth, followed by, in order, individual income taxes, consumption taxes, and property taxes.

The reason, they found, is that capital is the most mobile factor in the economy and, thus, most sensitive to high tax rates: “Evidence in this study suggests that lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.”

The U.S. Corporate Income Tax Predates the Individual Income Tax

The U.S. corporate income tax was enacted in 1909 with a 1 percent rate on profits above $5,000. The rate climbed to as high as 53 percent during World War II and 52.8 percent during the Vietnam War.

For many years, the U.S. corporate income tax was progressive, with as many as eight brackets. For example, between 1993 and 2017, corporations faced a confusing progression of marginal tax rates of 15, 25, 34, 39, 34, 38, and 35 percent as their profits increased. (Yes, they faced a 34 percent rate twice at two separate levels of income.) The 2017 Tax Cuts and Jobs Act (TCJA) replaced the progressive system with a flat rate of 21 percent.

This reform happened partly because it’s illogical to levy a progressive tax on an entity that is owned by individual shareholders. As economist Andrew Chamberlain explained, “[T]he ‘ability to pay’ of workers, shareholders and customers who bear corporate tax burdens has no necessary relationship with the size of profits of the company being taxed.”[5]

Most U.S. States Also Tax Corporate Income

The United States and only a handful of other countries allow subnational governments to levy a corporate income tax in addition to the federal tax. The other major countries that do so are Canada, Germany, and Japan.

State corporate tax rates range from 2.5 percent in North Carolina to 11.5 percent in New Jersey. South Dakota and Wyoming don’t levy a corporate income tax. Nevada, Ohio, Texas, and Washington also don’t levy a corporate income tax but do levy gross receipts taxes. Some cities also levy a corporate income tax in addition to the state corporate income tax.

Adding the 21 percent federal corporate tax rate to the 4.8 percent average state tax rate gives the United States a combined rate of 25.8 percent.

Corporations Have Declined as a Share of Business Forms in the United States.

The number of corporations in the United States has been declining since 1986, when the number peaked at roughly 2.6 million. Today, the number of corporations stands at roughly 1.5 million, fewer than 4,300 of which are publicly traded.

Key changes in the Tax Reform Act of 1986 made it advantageous for entrepreneurs to organize their businesses as S corporations, limited liability companies (LLCs), or partnerships rather than a traditional C corp.

The first change was to lower the top individual tax rate to below the level of the corporate tax rate. For decades, the corporate rate was set well below the top rate for individuals. In 1980, for example, the top corporate tax rate was 46 percent while the top individual tax rate was 70 percent. Many successful business owners found ways to shelter their income in privately held corporations that were taxed at the lower rate.

The 1986 reforms cut the top corporate rate to 34 percent and the top individual rate to 28 percent. The difference between rates made pass-through business forms more attractive than C corporations. The 1986 Act also expanded the number of eligible shareholders for S corporations, which offer a single layer of tax for the owners.

As shown on Figure 1, fewer C corps existed in 2017 than at any time since 1980. And because of the growth of pass-through businesses since 1986, more business income is taxed on individual 1040 tax returns than on traditional 1120 corporate tax returns.

Figure 1
Source: Tax Foundation

Corporate tax revenues have also been declining as a share of all federal tax revenues. In 1962, for example, corporate tax revenues were 21 percent of federal tax collections. After the 1981 tax reforms, corporate collections fell to just 8 percent of federal revenues.

Corporate profits, and corresponding tax revenues, tend to rise and fall with the economy. In 2021, corporate collections stood at 9 percent of federal revenues.

The Global Trend Toward Lower Corporate Tax Rates

In the early 1980s, both the United States and the United Kingdom cut their corporate tax rates, sparking a global trend toward lower corporate tax rates as countries competed to be more attractive to business investment.

As Figure 2 illustrates, in 1980, the global average corporate tax rate stood at over 40 percent. As many of the larger industrialized countries reduced their corporate rates to stay competitive, smaller countries such as Ireland—which cut its corporate tax rate to 12.5 percent in 2003—used even lower tax rates as a strategic advantage to attract foreign direct investment (FDI).

Figure 2
Source: Tax Foundation

Once a leader, the United States fell behind by standing still. By 2006, the combined U.S. corporate tax rate of 39.3 percent was the highest rate among the major industrial countries in the OECD. The United States kept this distinction until 2017, when the federal rate was lowered from 35 percent to 21 percent. This lowered the combined U.S. rate to 25.8 percent, slightly above the worldwide average of 25.4 percent. The latest data for 2022[6] show that there are 144 countries with lower corporate tax rates than the U.S.


Broader Consequences of an Uncompetitive U.S. Corporate Tax System

Prior to 2017, the U.S. corporate tax rate was uncompetitive, and the way it taxed the foreign profits of American multinational firms had serious consequences both domestically and internationally.

The U.S. corporate tax system was unique among industrial countries in that it taxed companies on their worldwide profits at the (then) 35 percent federal rate. Most countries have “territorial systems” that tax their multinationals only on profits earned domestically and largely ignore profits earned abroad.

The U.S. worldwide system allowed for a tax credit on the taxes companies paid on profits earned in other countries, but if the foreign rate was lower than the U.S. rate, companies paid the difference up to 35 percent. For example, if a company had repatriated $100 in profits from Ireland (which levies a 12.5 percent corporate tax rate), it would have gotten credit for the $12.50 in Irish taxes. However, it would have then had to pay an additional $22.50 in U.S. tax to comply with the full 35 percent federal rate.

As the gulf between the U.S. rate and foreign rates grew, and as U.S. companies earned more of their income abroad, firms took various courses of action to avoid paying the 35 percent “toll charge” on their repatriated earnings. Many simply reinvested their foreign profits abroad instead of bringing profits home, what economists called the “lock-out” effect. By some accounts, the effect resulted in an estimated $1 trillion in unrepatriated corporate earnings held abroad.[7]

Many U.S. companies with significant foreign earnings took the route of “self-help” tax reform,  moving their headquarters to low-tax jurisdictions such as Bermuda, Ireland, or Switzerland. Others merged with foreign-based companies to take advantage of a more competitive tax system. Such relocations are called “inversions.”

Rising Worries about Tax Avoidance by U.S. Companies

Many multinational companies, not just U.S. firms, use legitimate planning techniques to lower their overall tax bill. Sometimes this activity is aided by countries that offer patent boxes or other provisions that tax certain types of profits, such as intellectual property (IP), at lower rates. For example, Ireland taxes IP at a 6.25 percent rate, while the patent box rate in Great Britain, France, and Spain is 10 percent.

Companies take advantage of such incentives as well as mismatches between the tax systems among countries to shift profits from high-tax jurisdictions to low-tax jurisdictions.

Some officials estimate that countries’ governments lose $100 billion to $240 billion in tax revenues each year due to profit shifting and legal tax avoidance. There is a loss of efficiency when companies move staff and headquarters in response to changes in tax policy rather than focusing on production.

Base Erosion and Profit Shifting Lead to Rule Changes

Rising concerns about corporate tax avoidance, and what some governments feared was a “race to the bottom” on corporate tax rates, prompted the OECD to launch the Base-Erosion and Profit-Shifting (BEPS) project in 2013. Its goal was to develop a common set of tax rules that countries could adopt to limit such practices. As many as 135 countries joined the effort in what was called the “Inclusive Framework.”

In particular, the proposed anti-avoidance measures would tighten rules concerning controlled foreign corporations (CFCs), require that patent boxes be tied to actual R&D activity, restrict the use of intra-company debt between the parent company and its subsidiaries, and require companies to report basic financial information on a country-by-country basis.[8]

Countries Were at Odds on How to Tax Digital Companies

One of the biggest challenges facing the BEPS project was how to tax digital companies in the new global economy. The concern many countries had was over the fact that a company could be based in a country such as Ireland and earn profits selling digital goods and services directly into another country, such as France, with no middleman or physical presence in the country in which its customers reside.

For more than 100 years, the global convention has been that companies are taxed where they are headquartered or have physical operations, not where the profits are earned. For example, a French winemaker pays French income taxes on the profits it earns selling wine to an American distributor. The U.S. government doesn’t demand a share of the French taxes the winemaker paid on its profits.

The growth of direct-to-consumer digital commerce, however, changed how governments viewed the taxation of large multinational companies that could do business in one country and earn profits from customers in another.

Some Countries Go It Alone by Creating Digital Services Taxes (DSTs)

In 2019, France was the first country to enact a “Digital Services Tax” on the gross revenue streams companies generate from advertising online, providing a digital platform or interface, and selling customer data. The rate was set at 3 percent, but applied only to companies with worldwide revenues of more than €750 million and total European Union revenues of more than €50 million. Many other countries in Europe and Asia followed France’s lead in implementing their own versions of a DST.

U.S. trade officials maintain that Digital Services Taxes are discriminatory against American technology companies and are little more than tariffs on digital goods.

Unilateral DSTs Prompt the OECD to Launch BEPS 2.0: Pillar 1 and Pillar 2

Before assessing the effectiveness of the BEPS policy recommendations, the OECD launched a follow-up project to address the digital economy and to put a floor under tax competition and profit-shifting. The project has two proposed “pillars” targeted at companies with global income above €750 million.

Pillar One aims to reallocate some of a multinational company’s profits from the country in which it operates to the country in which it has sales or customers. This is intended to give countries with large consumer markets taxing power over a share of the profits earned by a foreign company.

Pillar Two aims to set a floor, or global minimum tax, under the effective tax rates paid by multinational companies in the countries in which they do business. The global minimum tax would be set at 15 percent and apply anywhere a company has an effective tax rate below that mark.

The minimum tax would rely on a series of complex rules for implementation. These rules are intended to prevent companies from funneling foreign profits through a low-tax jurisdiction or taking advantage of excessive tax incentives to minimize their domestic tax bill. If, for example, the subsidiary of a company had an effective tax rate lower than 15 percent, the home country could require the company to “top up” the subsidiary’s tax bill to the 15 percent minimum.

As of 2023, efforts to reach an agreement on how to implement Pillar One had stalled. The complexity of the proposal has raised more outstanding questions than the Inclusive Framework has been able to resolve.

However, Pillar Two is inching closer to implementation by EU countries despite the fact that the United States is not complying. The OECD hoped that once a major country, or block of countries such as the EU, implemented Pillar Two, it would force other countries to implement the minimum tax rules to maintain parity.

Changes to the U.S. Corporate Income Tax: 2017 Tax Cuts and Jobs Act

The 2017 Tax Cuts and Jobs Act made significant changes to the U.S. corporate tax code, including:

-Reducing the headline corporate tax rate. The TCJA replaced the multiple tax brackets and the top rate of 35 percent with a single rate of 21 percent. Unlike many of the provisions in TCJA, the 21 percent corporate rate was made permanent.

-Improving cost recovery. The TJCA allowed firms to immediately expense short-lived assets (with depreciation schedules of fewer than 20 years) on a temporary basis. The provision was scheduled to begin phasing out in 2022. The law also increased the expensing limit for small businesses from $500,000 to $1 million on a permanent basis.

-Broadening the tax base. The TCJA offset the revenue losses from cutting the corporate tax rate by eliminating several tax benefits, including the domestic production activities deduction (section 199), eliminating a firm’s ability to apply current losses to prior year profits, putting limits on a firm’s ability to apply current losses to future profits, and limiting the deductibility of net interest. The law also eliminated the corporate alternative minimum tax (AMT).

-Overhauling international tax rules. The TCJA moved to a territorial system, but with some complex guardrails on the treatment of foreign earnings. The first is the Global Intangible Low Tax Income (GILTI) which effectively puts a floor, or minimum tax, on the effective tax rate paid on foreign profits. The Base Erosion and Anti-Abuse Tax (BEAT) limits the ability of both U.S. and foreign multinationals to shift income out of the United States. The Foreign Derived Intangible Income (FDII) provision provides for a lower tax rate on the sale of IP held in the United States. Finally, TCJA put a one-time tax on the unrepatriated profits of U.S. firms, at a 15.5 percent rate on cash and an 8 percent rate on earnings that are reinvested in factories and facilities.

By most accounts, the changes made the U.S. corporate tax system more competitive and increased the incentive for capital investment, resulting in higher long-run GDP.

Changes to the U.S. Corporate Income Tax: 2022 Inflation Reduction Act

Five years after the sweeping changes made by TCJA, lawmakers enacted the Inflation Reduction Act (IRA) in 2022. The IRA raised taxes on companies by creating two new provisions in the corporate code, neither of which had been fully vetted:

A 15 percent minimum tax on corporate book income for corporations with profits over $1 billion. The intent is to discourage companies from reporting low profits to the IRS and large profits to shareholders. This is misguided because there are distinct policy and political reasons why tax and accounting procedures lead to different outcomes.

This new minimum tax adds another level of complexity to the corporate code, requiring companies to calculate their tax burden twice. Since the tax is levied on adjusted book income, the policy politicizes independent accounting standards.

A 1 percent excise tax on the value of stock repurchases. This provision was motivated by the belief that companies should reinvest their cash surpluses in the business or raise employee salaries rather than distribute the cash to shareholders through stock buybacks. Economists cautioned that the policy would likely raise little tax revenue and could motivate firms to increase dividend payouts to shareholders, thus making no difference to the allocation of capital.

Which Country Has the Most Competitive Corporate Tax System?

The Tax Foundation publishes the annual International Tax Competitiveness Index[9] ranking the tax systems of the 37 countries in the OECD. The Index has consistently pointed to Estonia as having the most competitive tax system of the leading industrial countries.

The Estonian corporate tax system—which has also been adopted by Latvia and Georgia—is a distributed profits tax. In other words, firms can retain profits in the business and pay the 20 percent corporate tax only when they distribute those profits to shareholders. Individuals pay a 20 percent tax on personal income but do not pay a second layer of tax on dividends they receive, though they do pay a 20 percent tax on their capital gains. Estonia also has a territorial tax system that exempts 100 percent of the foreign profits earned by Estonian companies.


The corporate income tax is, perhaps, one of the most misunderstood taxes. Lawmakers and the public frequently complain that corporations don’t pay their “fair share” of taxes, while failing to understand that the true economic incidence of the tax falls largely on workers through lower wages.

Moreover, the corporate income tax is the most harmful tax for economic growth because corporate capital is the most mobile factor in the economy and, thus, very sensitive to high tax rates. After decades of chasing this fugitive resource with lower taxes, many countries’ governments have banded together to prevent a “race to the bottom” by enacting global minimum tax.

Time will tell what this global minimum tax will do to global capital flows, foreign direct investment, and global economic growth. But economics strongly suggests that neither a global minimum corporate tax nor corporate taxes in general are good for global growth.


About the Author

Scott A. Hodge is the president emeritus and senior policy advisor of the Tax Foundation.


[1] York, Li, Bunn, Watson, and Kallen, “The Economic, Revenue, and Distributional Effects of Permanent 100 Percent Bonus Depreciation,” Tax Foundation, August 20, 2022. Available online at

[2] Alex Durante, Who Bears the Burden of Corporate Taxation? A Review of Recent Evidence. Tax Foundation, June 10, 2021. Available online at

[3] Clemens Fuest, Andreas Peichl, and Sebastian Siegloch, “Do Higher Corporate Taxes Reduce Wages: Micro Evidence from Germany,” American Economic Review, Vol, 108, No. 2, February 2018 (pp. 393-418) at:

[4] Asa Johansson, Christopher Heady, Jens Arnold, Bert Brys, and Laura Vartia, “Taxation and Economic Growth,” Organization for Economic Cooperation and Development, Economics Department Working Paper No. 620, July 3, 2008 at:

[5] Andrew Chamberlain, “What is Corporations’ Fair Share of the U.S. Tax Burden?,” Tax Foundation, February 20, 2007, at:

[6] Christina Enache, “Corporate Tax Rates Around the World, 2022,” December 13, 2022, Tax Foundation. Available online at

[7] Smolyansky, Suraez, and Tabova, “U.S. Corporations’ Repatriation of Offshore Profits: Evidence from 2019,” August 6, 2019, Federal Reserve Bank FEDS Notes. Available online at

[8] International collaboration to end tax avoidance, OECD Better Policies for Better Lives. Available online at

[9] International Tax Competitiveness Index 2022. Available online at

Related Entries

Capital Gains Tax


Corporate Financial Structure

Corporate Taxation

Foreign Investment in the United States

Progressive Taxes



 Related Links

Pierre Lemieux, The Economics of Tax Dodging, at Econlib, January 5, 2015.

Robert P. Murphy, Accounting for Capital and Income, at Econlib, July 7, 2014.

John Cochrane on Economic Growth and Changing the Policy Debate, an EconTalk podcast, September 26, 2016.

Tammy Frisby on Tax Reform, an EconTalk podcast, August 13, 2012.

Scott Sumner on Growth and Economic Policy, an EconTalk podcast, June 21, 2010.