Visualizing Economics (just graphs)

Part 8 of a series about Taxing Businesses

After the 1980s tax reform the decline in savings and the increase in consumption caused domestic investment to fall, swamping any increase due to incentives from lower taxes on high incomes.

Data source: Federal Reserve Economic Data

The codes used to download data: 

W171RC1Q027SBEA .   Net domestic investment, Billions of Dollars, Quarterly, Seasonally Adjusted Annual Rate

Part 4 of a series about Taxing Businesses

This is an intriguing graph showing the decline of companies listed in the United States on the stock exchange. (These companies would be corporations whose's stocks are freely traded on a stock exchange, not pass-throughs).

The tax changes in the 80s provided a tax incentive to change the business structure from C corporation to pass-throughs like LLCs. Originally, the IRS was very strict as to when a business could be treated a pass-through entity, however, that changed on January 1, 1997. That is when you see the ratio of listed companies the stock exchange drop dramatically.

Data Notes: Federal Reserve Economic Data (FRED); Historical Data for listed companies The U.S. listing gap Craig Doidge, G. Andrew Karolyi, and René M. Stulz 

FRED code for Number of Listed Companies for the United States (DDOM01USA644NWDB)

Part 3 of a series about Taxing Businesses

Combining the different scenarios from the previous two posts in the series, I highlighted the lowest marginal rate available to US businesses (one version with pass-though business income taxed as earned income the second taxed as unearned income). These graphs, showing how different business structures are taxed a different top rate and that the business structure that offered the lowest marginal rate has changed over a 99-years.

Lowest Marginal Rate: Earned Income Scenario

After 1970, pass-through businesses taxed as earned income via the individual tax code offered the lowest marginal rate.

1935-1939; 1952-1970 the lowest option was the effective top rate on C corporate profits & capital gains. 

Before 1935; 1940-1951 the lowest option was the effective top rate on C corporate profits & dividends. 

Lowest Marginal Rate: Unearned Income Scenario

After 1981, pass-through businesses taxed as earned income via the individual tax code offered the lowest marginal rate.

1935-1939; 1952-1981 the lowest option was the effective top rate on C corporate profits & capital gains. 

Before 1935; 1940-1951 the lowest option was the effective top rate on C corporate profits & dividends.

Part Two of a series about Taxing Businesses

A C corporation is subject to the corporate income tax. While the income from business structures like S corporations, partnerships, LLC's and sole proprietorships are taxed under the individual income tax and therefore not subject to the corporate tax code.  

However, when owners want to extract income from a C corp, they are subject to a second level of taxation, either though taxes on dividends payments or through a capital gains tax on the sale of their share of the business.

Double Taxation: Scenario I

A C corp first pays taxes on their profits through the corporate tax code then distribute dividends to their owners. These dividends are taxed through the owner's individual income tax. 

Double Taxation: Scenario II

C corporation pays taxes on their profits through the corporate tax code then owners pay tax on capital gains from sale of their stock shares (or the business itself)

   Double Taxation: Scenario I and II

A comparison of the two options available to corporate owners to extract income from the corporation (dividends payments vs through sale of shares). During 1950s, 1960s, 1970s and parts of the 30s, 80s, and 90s, the tax code favored the owners who paid taxes on long-term capital gains. Since 2002, the effective rate for these two options mirrored each other.

Data Notes

Federal Income Tax Rates - Citizens for Tax Justice (through 2012)

Tax Topics - Topic 409 Capital Gains and Losses (recent data)

Federal Individual Income Tax: Exemptions and Treatment of DividendsIncome Years 1913­-2006 (historical rates)

Publication 17 (2016), Your Federal Income Tax (check for more recent rate)  

Corporate Top Tax Rate and Bracket | Tax Policy Center (with download of excel file)  

Part one of my series: Taxing Businesses

In my earlier post on the number of returns and net income by business structure, you can see the share of business returns filed by C corporations has dropped 16.6% to 4.9% 1980-2012 with pass-through businesses filing the majority of business returns. However, sole proprietorships, although the majority of pass-through businesses, are less than 10% of net business income.

So, I have created a series of graphs looking at the top tax rates on C corporations vs pass-throughs, focused on the effective top rates for high incomes businesses. Since pass-through businesses don’t pay the corporate income tax, their profits and investments are taxed through the individual tax code as either earned or unearned income.

The different business structures that "pass-through" business income to the individual include: 

Partnership's partner

S corporation's owner

LLC's member

Sole Proprietor's individual owner

The effective tax rate on pass-through businesses has drop dramatically since the 1950s. While rate was the same for earned and unearned income except in ‘70s, ‘90s, early ‘00s.

Earned Income

In this scenario of treating the business income as "earned income" that means top individual tax rate combined with the medicare top rate (since the 1990s) when the cap on max income tax by medicare was removed. To help pay for ACA an additional Medicare surcharge was added for high income earners in 2013.

Unearned Income

“Pass-through” business’s profits and investments taxed as unearned income through individual tax code. 

In this scenario of treating the business income as "unearned income" that means taking the top individual tax rate add combine it with the net investment income tax on high income earners. (to help pay for ACA)

Data Notes

Income Tax Parameters | Tax Policy Center (check their footnotes in the table for unearned rates)

Table of social insurance rates

Notes on removal of upper limits in 1994 and Additional Medicare Tax starting in 2013 | Topic 751 - Social Security and Medicare Withholding Rates 

What caught my attention with this Federal revenue dataset was the reversal of the social insurance taxes and the corporate taxes in their relative importance to the Federal government. So what are the tax rates? I revisited my tax poster from a few years ago to make a companion graph about the highest tax rates but that is not the whole story. What is missing is who (and how many) actually paid these top rates. BTW, the individual and corporate rates are the top marginal rate, while the Social Insurance and Retirement tax is capped beyond which you don't pay any additional taxes (it was $118,500 in 2015).

Data from Office of Management and Budget, Historical Tables, Table 2.3 and from Tax Policy Center statistics and their tax fact site.