Average Effective Corporate Tax Rates: 1959 to 2005

CRS Report for Congress
Average Effective Corporate
Tax Rates: 1959 to 2005
Updated September 6, 2006
Steven Maguire
Analyst in Public Finance
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

Average Effective Corporate Tax Rates
Summary
This report examines average effective corporate tax rates of domestic
nonfinancial corporations. Generally, the average effective corporate tax rate is total
corporate tax receipts divided by corporate profits. The average rate is not
synonymous with other types of effective corporate tax rates — for example, the
marginal effective tax rate. Where analyzing the average effective tax rate over time
can indicate trends in the relationship between corporate profits and tax receipts, the
marginal effective rate describes the rate that influences corporate investment
decisions.
One finding of this report is a decline in the average effective corporate tax rate
at the state-local level in the 1990s, with a spike in 2005. There are many theories
as to why the state average appeared to decline through 2004 while the federal rate
seemed to have remained relatively constant. State tax competition, a process
whereby states attempt to lure businesses through favorable corporate income tax
laws, may have been the primary cause. Though not confirmed in this report, the
data suggest the possibility. Other findings of the report include a significant decline
in average effective corporate tax rates at both the federal and state level since the

1960s and volatility in the average effective corporate tax rates.

Recently, however, the average effective corporate tax rate, as defined here, has
increased. The series of tax law changes in 2002 and 2003 included several
provisions affecting the timing of corporate income tax liability. The most prominent
is the bonus depreciation as provided for in the Job Creation and Worker Assistance
Act of 2002 (JCWAA) and expanded by the Jobs Growth and Tax Relief
Reconciliation Act of 2003 (JGTRRA). This report will be updated as legislative
events merit.

Contents
In troduction ..................................................1
Methodology .................................................2
Corporate Tax Rates: 1959 to 2005................................3
Average Effective Corporate Tax Rates by Decade....................5
Appendix 1. Technical Detail: Calculation of Average Effective
Tax Rates................................................7
List of Figures
Figure 1. Average Effective Corporate Tax Rates, 1960 to 2005 .............6
List of Tables
Table 1. Average Effective Corporate Tax Rates, 1959 to 2005.............4
Table 2. Average Effective Corporate Tax Rates by Decade................5
Table 3. Corporate Tax Highest Rate Brackets...........................7
Table 4. Equation Variables and Definitions............................8

Average Effective Corporate Tax Rates
Introduction
There are several measures of the tax rate on corporations. Generally, they can
be split into statutory and either average or marginal effective rates. Statutory rates
are those that appear in the tax code and that apply to taxable income whereas
effective rates are derived from economic measures of income and provide a better
measure of the true burden of the tax. This report provides the federal statutory rates
along with an estimate of the average effective corporate tax rate for both the federal
and state and local governments.
Average effective tax rates have the advantage of being constructed from
observed historical data on the return to the average investment. On the other hand,
marginal effective tax rates are a better indicator of the anticipated tax consequences
of marginal investment decisions.¹ Most observers feel that investment decisions are
influenced primarily by the marginal effective tax rate, though the average effective
tax rate may be justified as a rough approximation of the tax rate on the marginal
investment.
In this report, we focus on the average effective corporate tax rate (AECTR) as
measured by corporate tax receipts divided by an adjusted measure of income
(profits) for all domestic nonfinancial corporations. Averaging corporate tax rates
across industries like this tends to minimize the potential for misinterpretation of the
fluctuations. Also, using decade averages or the average over several years further
reduces the probability of misinterpreting the data.
Two issues of current interest, the growing use of corporate tax shelters and
what some term corporate tax ‘welfare,’ are not addressed explicitly in this report.
The reports conclusions, however, can inform the related policy debate. Corporate
tax shelters refer to aggressive tax planning where corporations ‘shelter’ income to
avoid taxation. The difference between legitimate tax planning and illegally
sheltering income is often difficult to identify. Generally, the Internal Revenue
Service (IRS) identifies an inappropriate shelter as an activity which has no real
economic purpose and is primarily a device for avoiding tax liability. Average
effective tax rates, which rely upon reported income and tax receipts, would not

¹ For a detailed explanation of the difference between average and marginal effective tax
rates, see Fullerton, Don, “Which Effective Tax Rate?,” National Tax Journal, vol. 37, no.
1 (March, 1984) p. 23-41 and Fullerton, Don, “The Use of Effective Tax Rates in Tax
Policy,” National Tax Journal, vol. 39, no. 3 (September, 1986) p. 285-292.

explicitly capture the prevalence of corporate tax shelters.² They can be, however,
a crude indicator. For example, growth in revenue losses from sheltering activities
would likely be reflected in a reduced average effective corporate tax rate (AECTR)
if fewer firms were paying taxes.
Corporate tax ‘welfare’, e.g., the special exclusion of certain types of income,
special exemptions, and accelerated depreciation, is partially observable through
comparison of the statutory tax rate and the average effective tax rate. Generally, the
wider the difference between the average effective tax rate applied to pre-tax
economic income from capital and the highest statutory rate implies a greater use of
tax benefits by corporations.
There are several sources of data for corporate profits and corporate taxes. For
this report, CRS uses National Income and Product Accounts (NIPA) data reported
by the U.S. Department of Commerce, Bureau of Economic Analysis. The NIPA
series provides historical data on federal and state-local corporate tax receipts as well
as corporate profits.³ From these data, an average effective tax rate can be calculated
as the ratio of taxes to pre-tax profits. However, the reported data is modified to
provide a more accurate estimate of economic income. The methodology is
explained first, then the estimated effective tax rates are presented and discussed.⁴
Generally, the analysis suggests that the federal average effective tax rate has
remained relatively constant over the 1990s, but has fluctuated significantly in the
2000s. The recession and changes to the tax laws were likely key contributors to the
fluctuations.
State average effective tax rates, which have also fluctuated in the 2000s, had
been drifting lower until 2005 when a sharp increase was realized. The cause of an
unusual spike in the AECTR in 2000 and 2005 is unclear. The 2005 spike, however,
is likely related to the changes in depreciation rules that shifted deductions from 2005
(and later years) to 2004. The bonus depreciation rules available in 2003 and 2004
generated a significant gap between the statutory rate and the average rate calculated
for this report.
Methodology
The first adjustment is relatively straight forward. By NIPA definition,
corporate tax receipts include payments the Federal Reserve district banks (the Fed)
make to the US Treasury. These payments represent the amount above a regular
profit the Fed earns from bank operations. The payments are not tax receipts in the

² Intuitively, if the income is ‘sheltered’ then the base of corporate tax is reduced though the
rate of tax would likely not change given the relatively flat statutory corporate tax rate
schedule.
³ NIPA is the official US government accounting system developed in the 1930s by, among
others, Nobel Prize winning economist Simon Kuznets. The accounts are used to track the
flow of goods and services as well as income through the economy.
⁴ For this memorandum, only domestic nonfinancial corporations were analyzed given the
constraints imposed by the methodology employed in determining average tax rates.

usual sense and thus are removed from total corporate tax receipts in our tax rate
calculations.
In addition to the adjustment for Fed payments, the implicit increase in
corporate profits resulting from the effect of inflation on net corporate debt is added
to corporate profit. Generally, the ‘cost’ of existing debt declines as the inflation rate
rises. Corporate debt holders typically receive fixed payments based upon the
coupon rate at the time of the debt issue and the term (time to maturity) of the
instrument. The payments to debt holders are worth less in periods of inflation
because the corporation is paying back the debt in ‘cheaper’ dollars. In short, the
firm realizes an explicit gain. To adjust for this explicit gain, we multiply the annual
rate of inflation by the net financial liabilities of the corporations and add the result
to reported profits.⁵ In years where net corporate debt is negative, or total financial
assets actually exceed financial liabilities, an economic loss from debt is realized.
Net corporate financial liabilities were negative from 2000 through 2005. Generally,
effective tax rates for heavily indebted corporations will be lower than what would
otherwise be the case. Conversely, relatively low-debt corporations would have
relatively higher effective tax rates.
The calculated average effective corporate tax rates in this report are for
domestic nonfinancial corporations. To calculate the average corporate tax rates
levied by federal, state, and local governments, we need data on the tax receipts of
nonfinancial corporations for federal as well as state-local governments.
Unfortunately, domestic nonfinancial corporate tax receipts are combined for federal,
state, and local governments in the NIPA data. Thus, for this analysis we assume that
the ratio of state and local tax receipts to federal corporate tax receipts of all
domestic corporations — not just nonfinancial corporations — accurately
approximates the nonfinancial ratio. This ratio is used to separate the combined
nonfinancial corporate profits tax liability into a federal share and a state-local share.
Corporate Tax Rates: 1959 to 2005
Three average tax rates are presented in Table 1 below. The first (in column b)
is the average effective tax rate for the federal corporate tax. The second (in column
c) is the state and local average effective corporate tax rate. The third (in column d)
is the combined average effective corporate tax rate for a hypothetical composite
government entity. The base (taxable profits) of the federal corporate tax does not
include taxes paid to state and local governments. Thus, the combined federal, state
and local tax rate, column (d), does not equal the sum of columns (b) and (c). Table

2 presents the AECTR by decade.

⁵ The Federal Reserve publishes aggregated annual balance sheet data for corporations (e.g.,
financial assets and liabilities).

Table 1. Average Effective Corporate Tax Rates, 1959 to 2005
(estimates are for domestic nonfinancial corporations only)
^Hi^g^h^{est F}^e^d^eral^F^e^d^eral^S^t^ate-Local^Com^bⁱⁿ^ed
^Year^S^t^at^ut^ory^Corporat^e^{AECTR (b}⁾^{AECTR (c)}^{AECTR (d}⁾
^Ta^x^Ra^{te (a}⁾
¹⁹⁵⁹^52%^45.27%^2.43%^46.60%
¹⁹⁶⁰^52%^44.56%^2.54%^45.97%
¹⁹⁶¹^52%^44.22%^2.70%^45.72%
¹⁹⁶²^52%^39.34%^2.60%^40.96%
¹⁹⁶³^52%^38.56%^2.70%^40.22%
¹⁹⁶⁴^50%^36.59%^2.57%^38.22%
¹⁹⁶⁵^48%^35.21%^2.49%^36.82%
¹⁹⁶⁶^48%^35.02%^2.53%^36.66%
¹⁹⁶⁷^48%^34.08%^3.07%^36.10%
¹⁹⁶⁸^52.8%^37.71%^3.57%^39.93%
¹⁹⁶⁹^52.8%^37.98%^3.98%^40.45%
¹⁹⁷⁰^49.2%^36.77%^4.78%^39.79%
¹⁹⁷¹^48%^36.57%^4.95%^39.71%
¹⁹⁷²^48%^35.43%^5.34%^38.87%
¹⁹⁷³^48%^39.17%^5.71%^42.65%
¹⁹⁷⁴^48%^40.32%^6.42%^44.15%
¹⁹⁷⁵^48%^30.41%^5.52%^34.26%
¹⁹⁷⁶^48%^34.63%^6.39%^38.81%
¹⁹⁷⁷^48%^31.74%^6.12%^35.92%
¹⁹⁷⁸^48%^30.35%^5.44%^34.14%
¹⁹⁷⁹^46%^27.78%^5.49%^31.75%
¹⁹⁸⁰^46%^28.05%^6.50%^32.73%
¹⁹⁸¹^46%^23.48%^6.58%^28.52%
¹⁹⁸²^46%^20.43%^7.80%^26.64%
¹⁹⁸³^46%^22.41%^7.09%^27.91%
¹⁹⁸⁴^46%^21.89%^6.54%^27.00%
¹⁹⁸⁵^46%^20.20%^6.37%^25.28%
¹⁹⁸⁶^46%^28.02%^8.52%^34.15%
¹⁹⁸⁷^40%^27.21%^6.92%^32.25%
¹⁹⁸⁸^34%^25.74%^6.68%^30.70%
¹⁹⁸⁹^34%^26.78%^6.26%^31.37%
¹⁹⁹⁰^34%^24.89%^5.47%^29.00%
¹⁹⁹¹^34%^24.97%^6.17%^29.60%
¹⁹⁹²^34%^24.58%^5.61%^28.81%
¹⁹⁹³^35%^25.33%^5.27%^29.26%
¹⁹⁹⁴^35%^25.73%^5.26%^29.64%
¹⁹⁹⁵^35%^25.41%^4.88%^29.05%
¹⁹⁹⁶^35%^24.29%^4.53%^27.72%
¹⁹⁹⁷^35%^24.37%^4.43%^27.72%
¹⁹⁹⁸^35%^25.05%^4.60%^28.50%
¹⁹⁹⁹^35%^28.02%^4.95%^31.58%
²⁰⁰⁰^35%^33.80%^5.85%^37.67%
²⁰⁰¹^35%^26.43%^5.13%^30.20%
²⁰⁰²^35%^24.63%^4.99%^28.40%
²⁰⁰³^35%^22.54%^4.29%^25.86%
²⁰⁰⁴^35%^22.65%^4.17%^25.87%
²⁰⁰⁵^35%^30.31%^5.54%^34.17%
^S^o^u^rce:^C^R^S^c^a^l^c^u^la^tions^ba^s^e^{d upon da}^ta^c^o^lle^c^t^e^d^f^r^om^the^B^u^r^e^a^u^of^Ec^onom^ic^Aⁿ^a^l^y^s^is⁽^N^I^P^A⁾^{, Fe}^de^r^a^l
^R^e^s^e^r^v^e^B^a^nk^Flow^of^Funds^{, a}^{nd the}^B^u^r^e^a^u^of^L^a^bor^Sta^tis^tic^s^.
^Note:^Fr^om^{1993 f}^o^r^w^a^r^{d the}^r^e^is^a^hig^h^e^r^s^t^a^t^utor^y^r^a^te^f^o^r^pr^of^its^be^tw^e^eⁿ^{$100,000 to $335,000}^of^39%^{; a}ⁿ^d
^f^o^r^pr^of^its^be^tw^e^eⁿ^{$15,000,000 a}^{nd $18,333,333 of}^38%^.

Table 2. Average Effective Corporate Tax Rates by Decade
(estimates are for domestic nonfinancial corporations only)
^{Federal Average}^St^a^t^{e a}^{nd Lo}^ca^l^Co^m^b^{ined Av}^era^g^e
^Decade^E^{ffective Corporate}^{Average E}^ffective^C^o^rp^{orate T}^a^x^R^a^te
^Ta^{x R}^a^t^e^C^o^rp^{orate T}^a^x^R^a^te
^1960s^37.57%^2.83%^39.34%
^1970s^33.93%^5.56%^37.60%
^1980s^23.61%^6.71%^28.74%
^1990s^24.45%^4.98%^28.21%
^{1990 t}^o¹⁹⁹⁴^24.17%^5.37%^28.24%
^{1995 t}^o¹⁹⁹⁹^24.18%^4.52%^27.61%
^{2000 t}^o²⁰⁰⁵^25.48%^4.97%^29.16%
^Source:^C^R^S^calcu^lation^s^bas^e^{d u}^pon^{data collected f}^r^om^t^h^{e Bu}^reau^of^Econ^omⁱ^c^Aⁿ^al^y^sⁱ^s^(N^IPA⁾^,
^F^e^deral^R^e^s^e^rv^{e Ban}^k^F^l^ow^of^F^uⁿ^d^s^,^an^{d t}^h^{e Bu}^reau^of^L^a^{bor S}^t^atⁱ^s^tⁱ^c^s^.
Average Effective Corporate Tax Rates by Decade
Focusing on the last 15 years, the annual combined average corporate tax rates
have fluctuated significantly with a slight drift downward in the last half of the 1990s
followed by spikes upward in 2000 and 2005. The combined annual average
corporate tax rate for the 1980’s of 28.74% is just slightly greater than the annual
average for the 1990’s of 28.21% (see Table 2). However, in the last half of the
1990s, the combined average corporate tax rate is almost two-thirds of a percentage
point lower than the in first half of the decade. The reason could be state-local rates:
if the average tax rates for state and local governments are separated from the federal
portion, a large part of the drop in the combined average corporate tax rates can be
attributed to a drop in state-local average rates. The general trend down in rates
continued through 2004 before a spike up to 34.17% in 2005.
The drop in corporate tax rates of state-local governments can be explained by
a variety of factors. Perhaps the most obvious explanation is the tax competition
among states to attract businesses. Typically, state corporate tax liability is based
upon an apportionment formula that calculates tax liability as a function of the state
presence of three factors: labor, physical capital, and sales. A weighted average of
the three is then used to determine how much of the firm’s profits are allocable to the
state for tax purposes. States, in an effort to attract new manufacturing and other
businesses, will often double the sales factor or even use a ‘single sales factor’ to
allocate income. Firms that manufacture a product in one state that sell throughout
the country (or world) would minimize home-state tax burden in this scenario.
The federal average effective corporate tax rate decreased from approximately
38% in the 1960s to about 24% in the 1990s. In the first half of the 2000s, through
2004, the rate continued a gradual decline. The state and local average effective
corporate tax rate increased from just under 3% in the 1960s to just about 5% in the

1990s. Like the federal tax, the state-local AECTR had been gradually declining
since its relative peak in the mid-1980s until 2005 when it jumped to 5.54%. Aside
from spikes upward in 2000 and 2005, the combined AECTR seems to have
gradually declined.
Changes in statutory corporate tax rates and brackets — the rates that the tax
code applies to taxable income — affect the average tax rates most directly. These
changes are the likely cause of AECTR decline from 1974 to 1982 (clearly exhibited
in Figure 1). Statutory federal corporate tax rates have gradually declined since 1959
with a slight jump in the late 1960s to help finance the Vietnam War effort and more
recently in 1993 to help close the budget deficit.
Figure 1. Average Effective Corporate Tax Rates,

1960 to 2005

^50%
^40%
^30%
^20%
^10%
^0%
⁰⁹⁷⁵⁸⁰⁸⁵⁹⁹⁰⁹⁵⁰⁰⁰⁰⁵
¹⁹⁶⁰¹⁹⁶⁵¹⁹⁷¹¹⁹¹⁹¹¹⁹²⁰²
^Co^mbⁱⁿ^e^d^A^E^CT^R^Fe^d^e^r^a^l^A^E^CT^R
^St^at^{e &}^L^o^cal^A^E^C^T^R
The relatively dramatic jump in 2005 is a likely artifact of the bonus
depreciation provision included in the 2002 tax cut bill, The Job Creation and
Worker Assistance Act of 2002 (P.L. 107-147), and not changes in statutory rates.
The bonus depreciation was expanded by the 2003 tax cut bill, The Jobs and Growth
Tax Relief Reconciliation Act of 2003 (P.L. 108-27). The tax cut legislation allowed
firms to accelerate depreciation in 2003 and 2004, reducing tax liability in those
years. The accelerated depreciation, however, reduces the available depreciation
deduction for 2005 (and later years), increasing taxable income and thus tax liability.
In addition to changing statutory rates, the brackets that determine which rate
applies have also been adjusted over the years. Table 3 presents the taxable income
level that begins the highest tax bracket from 1959 to present. After remaining
constant from 1959 through 1974 (at $25,000), the brackets have risen significantly
since. Raising the hurdle for entry into the top bracket has the effect of lowering the
tax rate. Or, less profit is taxed at the highest rate. The large drop in the average
effective tax rate between 1974 and 1975 may be partly attributed to the increase of
the highest bracket to $50,000 from $25,000. Alternatively, bracket creep, or the
move into higher tax brackets by virtue of inflation, would tend to increase average
tax rates.

Table 3. Corporate Tax Highest Rate Brackets
Period or YearEffective on TaxableIncome Above
1959 to 1974$25,000
1975 to 1978$50,000
1979 to 1986$100,000

1987(a)

1988 to 1992$335,000
1993 to Present$10,000,000
a. 1987 averaged the 1986 and 1988 brackets and thus is
not directly comparable to previous or later years.
Appendix 1. Technical Detail:
Calculation of Average Effective Tax Rates
This section provides a brief overview of the mathematics behind the tax rate
calculations. The formula for the calculation that yields the data appearing in Figure
1 above and Tables 2, 3, and 4. Generally, superscripts identify the level of
government, F for federal and SL for state and local, and the subscript i is simply an
index for the year. Table 1 presents the source of the data for each of the variables
as well as a brief description. The equations are provided as a reference tool rather
than a substantive addition to the previous analysis. As such, the reader can move
directly to the result of these calculations in Tables 2 through 4 without loss of
context or understanding.

Table 4. Equation Variables and Definitions
^V^a^ri^ab^l^e^M^e^anⁱⁿ^g
^AEC^T^R^A^u^th^{or calcu}^{lated av}^erag^{e ef}^f^ectiv^{e corporate tax}^rate.^Fⁱⁿ^dicates^f^e^deral;^SL^sta^t^e
^an^{d local.}
^TR^T^o^{tal corporate tax}^receipts^.^Sour^ce^:^Bu^reau^of^Econ^omⁱ^c^Aⁿ^al^y^sⁱ^s^(BEA⁾
^FRP^{Federal res}^e^rv^{e pay}^m^en^ts^{to th}^{e US T}^r^eas^u^r^y^.^Sour^ce^{: B}^E^A^.
^NF^R^Non^fⁱⁿ^an^{cial corporate tax}^receipts^.^Sour^ce^{: B}^E^A^.
^NFB^Non^fⁱⁿ^an^{cial corporate prof}^its^(tax^bas^e^).^Sour^ce^{: B}^E^A^.
^CP^I^Co^nsum^e^r^p^rⁱ^c^eⁱⁿ^d^e^x.^Sour^ce^{: B}^u^r^eau^o^f^L^a^b^o^r^{Statistics (}^B^L^S⁾^.
^L^{Net liab}^{ilities o}^f^d^o^m^{estic n}^oⁿ^fⁱⁿ^an^{cial co}^r^p^o^r^atioⁿ^s^.^Sour^ce^{: th}^{e Fed}^e^r^a^{l Reser}^v^e
^Ban^k^s^F^l^ow^of^F^uⁿ^d^s^report^.
ⁱ^In^dex^f^o^{r y}^ear,ⁱ^{=1959,..., 2005}
Equations for the average effective tax corporate tax rate calculation (AECTR)

()TR FRPⁱ^Fⁱ^F^SL^F−⎡ ⎤^,
NF R^SL^Fⁱ−⎢ ⎥1*
TR TR^SLⁱⁱ+⎣⎢ ⎦⎥
AECT Rⁱ^NF=
()NF CP I Lⁱⁱⁱ+ *π
()TR FRPⁱ^Fⁱ^F^SL^F−⎡ ⎤^,
NF R^SL^Fⁱ⎢ ⎥ *
TR TR^Fⁱⁱ+⎣⎢ ⎦⎥
AECT Rⁱ^NF^SL=
()NF CP I L NFRⁱⁱⁱⁱ++*π
NFR^FS^Lⁱ^SL^F^,^,
AECTRⁱ^NF=
()NF C P I Lⁱⁱⁱ*+π