- Each sentence is true.
- But Sanders is intentionally making a straight up, outright lie when he talks about the changing share of corporate taxes.
- Politifact, the NY Times, the IRS, the Congressional Research Service, the Congressional Budget Office, Factcheck.org and the Center on Budget Priorities all recognize the problem with these statements.
- Can you spot the problem?
- Due to the creations of Subchapter S corporations after 1958, much – perhaps most – corporate income now flows through to individuals who pay individual taxes. Moving the profits from the corporation to the individual shareholders resulted in reduced corporate taxes and increased individual taxes. Taxes are still paid, but by the shareholder/owner rather than the corporate entity.
Because of this, we cannot compare the tax numbers in 1952 to today – they are not comparing the same items.
Goebbels once wrote that the most effective propaganda contains only true statements, yet guides the target to the desired conclusion. This is one of several examples this web site will use to show how a sequence of true statements can lead the viewer to a false conclusion.
Click through to read the full background and how Bernie Sanders is cleverly telling a lie to further his message.
The poster was shared into my Facebook news feed in 2015. When I began to look at the numbers, I assumed the poster was true. Much to my surprise, the logical conclusion is not true. The poster is, in effect, a lie, that relies on lack of knowledge about tax history in order to work.
In 1958, Congress established the S Corporation (“S” refers to subchapter S of chapter 1 of the IRS Code.). Prior to 1958, businesses used the traditional “C” corporate form.
In the “C” corporate form, corporations directly pay taxes on their income.
In an S corporation, the corporation pays no taxes but passes all profits through to the shareholders, who then pay the tax owed as part of their individual tax assessment. Large numbers of C corporations converted to S corporations – reducing the tax paid by “corporations” while increasing the tax paid by individuals.
According to the S-Corp Trade Association, “Today, most business income is taxed on the individual code,” (http://s-corp.org/our-history/)
From a propaganda perspective, this poster is outstanding – like good propaganda, it makes a true statement that leads the viewer to a false conclusion. The message sounds plausible and the viewer will not question its accuracy.
Politifact points out that 1952 is a cherry picked year for 3rd highest tax collection as % of GDP, and the peak year for corporate C tax collection in the post World War II era. But this is not a major factor (see http://www.politifact.com/truth-o-meter/statements/2014/aug/28/bernie-s/bernie-sanders-says-tax-share-paid-corporations-ha/)
In addition, the Sander’s poster rounds the numbers in favorable directions for his point. The actual figure of 9.9% was rounded by Sanders to 9%. And the actual figure of 32.1% was rounded up to 33%. But these are not the big problem with this poster.
More critically, Politifact notes many “C Corporations” are now “S-Corporations”. A major difference is that C Corporations pay corporate taxes on their profits, while S Corporations pass their profits through to the owners/shareholders, who then pay the tax as an individual income tax. This has the direct effect of shifting “Corporate taxes” (of 1952) to “individual taxes” of 2014, even though its the same tax money. The effect is to decrease the measured “corporate tax” and increase the “individual tax” collected metrics.
S Corporations and other non-C type business forms are popular for small businesses and account for up to half or more of total corporate income today. Even large corporations are Subchapter S corporations. For example, Bechtel is the largest construction and civil engineering firm in the U.S., but it is registered as a Subchapter S Corporation. Its profits flow through to individuals who then pay the taxes on their individual returns and these taxes are not included in the “corporate taxes” metric.
See the IRS explanation of S Corporations – https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations
“S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates”
The S Corporation did not exist until 1958, which is another reason using 1952 is cherry picking the date for comparison.
CONGRESSIONAL RESEARCH SERVICE (government agency)
“The significance of the corporate tax as a federal revenue source has declined over time. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In 2013, the corporate tax accounted for 9.9% of federal tax revenue. The decline in corporate revenues is a combination of decreasing effective tax rates, an increasing fraction of business activity that is being carried out by pass-through entities (particularly partnerships and S corporations, which are not subject to the corporate tax), and a decline in corporate sector profitability. “
CONGRESSIONAL BUDGET OFFICE
“The fall in capital income and the increase in business income may in part reflect a
recharacterization of income. Following the Tax Reform Act of 1986, which lowered
the top statutory tax rate on individual income below the top rate on corporate income, many C corporations (which are taxed separately from their owners under the
corporate income tax) were converted to S corporations (which pass corporate income through to their shareholders, where it is taxed under the individual income tax). As a result, corporate dividend income and capital gains from the sale of corporate stock were converted into S corporation income, which is counted here as part of business income. Business income jumped in the 1986–1988 period as those conversions began, and it continued to grow rapidly throughout the 1990s and 2000s as more conversions occurred and new businesses were formed as S corporations rather than C corporations” (Page 17)
In this context, “business income” is how the CBO tracked the transfer of business derived income from C Corporations to S Corporations. In plain English, as more businesses went from C Corporation structures to S Corporation structures, the “Corporate” income tax went down and the individual income tax collected went up.
CENTER FOR BUDGET AND POLICY PRIORITIES
Further, non incorporated businesses, as a share of tax receipts grew from 13% in 1980 to 34% in 2007 (http://www.cbpp.org/research/six-tests-for-corporate-tax-reform?fa=view&id=3411 Figure 4)
This trend toward non-incorporation is a significant contributor to the erosion of the corporate income tax base. A CRS study explained:
“While a large fraction of the decline in corporate tax revenues is associated with [changes] in rates and depreciation, other causes may be more liberal rules that allow firms to obtain benefits of corporate status (such as limited liability) while still being taxed as unincorporated businesses and tax evasion, particularly through international tax shelters.”
“When Sanders compares 1953 corporate taxes to today, he’s leaving out information about how businesses paid taxes back in 1953 and how they pay taxes now. A greater percentage are now taxed at the individual level through owners, a trend that has occurred largely since the early 1980s.
Sole proprietorships and other unincorporated businesses have paid taxes at the individual level since the individual income tax was created in 1913, according to a 2012 report on pass-through business income by the nonpartisan Congressional Budget Office. But in 1958, S corporations were created, enabling businesses to have liability protection and pass profits through to their owners. There were certain requirements for businesses to meet to qualify for S corporation status, such as a limit on the number of shareholders, and in the 1980s, the requirements were loosened. This “pass-through” structure is how partnerships and LLCs, which came about largely in the 1990s, are also organized.”
MEDIA AND THE NEW YORK TIMES
Media often fails to understand this distinction and reports that corporate income taxes have disappeared – see https://finance.yahoo.com/news/corporate-taxes-10-percent-federal-015650314.html The author makes this vague reference: “The decline is the result of the rise of untraditional business structures...” Heh, no kidding.
The NY Times is the source of that original article: http://dealbook.nytimes.com/2014/08/28/businesses-find-ways-to-avoid-corporate-taxes-but-a-fix-seems-unlikely/?emc=edit_th_20140829&nl=todaysheadlines&nlid=69039820&_r=1
While the NY Times spins the story as corporations are no longer paying taxes, the NY Times does note the impact of the S Chapter corporate form and agrees we shifted “corporate” taxes to individual tax returns:
“Only 6 percent of businesses are traditional corporations subject to the corporate income tax, according to the Congressional Research Service. That is down from 17 percent in 1980. The result is less than half of the government’s business income comes from corporations, down from about 80 percent in 1980.
And while most S-corporations are small to midsize businesses, as was intended, some of the country’s largest private companies, including Bechtel, one of the country’s largest engineering firms, are also organized as S-corporations.
“A lot of the income that used to be earned at the corporate level is now being moved to the S-corp level,” Mr. Pomerleau said.”
The NY Times acknowledges we’ve moved corporate taxes from the corporate tax column to the individual tax column. The government still collects those taxes on corporate income but now counts them as individual tax collections.
- In 1986, 1/4th of US corporations were Chapter S corporations.
- In 1997, 1/2 of US corporations were Chapter S corporations.
- In 2001, Chapter S corporations accounted for 25% of before-tax profits.
By shifting corporate income to Chapter S and reporting that on personal income tax returns, the amount of personal income tax collected went up while the amount of corporate income tax went down. (Source)
Tax deferred retirement accounts were introduced in the 1980s and the investment income within those accounts was not counted as personal income, also skewing the income tax ratios.
This poster is technically true – but like good propaganda, leaves out critical details.
There are reasons to debate the amount of taxes paid by corporations, businesses and individuals, and their use of tax dodges. But this data point – the drop from 32% to 10% – is intentionally misleading, perhaps half or more of the drop is an accounting change that moved business taxes from C corps to S corps that appear on individual returns, thereby decreasing the C “corporate taxes” while simultaneously increasing individual tax collected.
Afterword: When I began to research this item, I thought it was going to be entirely true. I had not realized the S Corporation structure was created in 1958, and that today most corporate income has migrated to individual income categories, rendering this comparison useless. Certainly there remain many corporate “tax dodges” and tax reduction schemes and it is fair to question those. But to directly compare “corporate taxes” in 1952 to today is deliberately and intentionally misleading.
The use of this propaganda poster by the Sanders campaign is not a positive one for Sanders, once you know about the C to S Chapter conversion and the impact that had on taxes. This poster was carefully designed to accomplish its goal of guiding the viewer to a false conclusion; this is by design and is not an accident.
Sanders is intentionally making a straight up, outright lie when he talks about the changing share of corporate taxes.
The poster works as propaganda because:
- The media – and social media posts – routinely leave out context and historical background.
- Extensive pre-propaganda has been asserting that “corporations no longer pay their fair share”. After an onslaught of stories that corporations do not pay taxes or do not pay “their fair share”, the numbers presented seem plausible.
- The use of historical numbers – without context – lends authenticity to the claim. Numbers always lend authority to any claim, even if wrong.
- In the mind of the target, the claim being made is plausible and therefore is true.
Even though the intended conclusion from the poster is not true, this poster is extremely effective as propaganda.
Update March 2019
In March of 2019, an Oregonian news story had a story about pension issues in Oregon. A comment to that story regurgitated Sanders’ false claim, illustrating how propaganda messaging essentially creates “facts” out of thin air that live forever.