Budget Office Sees Corporate-Tax Slowdown

Because of high growth in corporate profits, the United States was realizing high growth from corporate income taxes. Now both rates are tapering o...
Sarah JohnsonAugust 24, 2007

After years of notable increases, the government’s revenue growth from corporate income taxes has significantly slowed this year and will continue to decline, according to the Congressional Budget Office.

That forecast may sound promising to financial executives who feel their employers are overtaxed. But the reason for the declining growth rate isn’t good news: the CBO attributes the tax dip to a decline in corporate profits. Indeed, in its most recent forecast for the U.S. economy and the federal budget, the CBO notes that corporate profits peaked in the middle of calendar year 2006.

Until then, the government was pulling in higher corporate receipts, which grew by an annual average of 40 percent during the past three years. Now, compared with the prior fiscal year, the government’s corporate-tax revenue has “slowed progressively” in 2007 and declined from 22 percent in the first quarter to 11 percent in the second and 4 percent in the third.

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To be sure, the government is still nabbing year-over-year increases in corporate-tax payments: CBO reports that receipts from corporate income taxes will rise by more than 6 percent this fiscal year, to $376 billion, because of a projected 4 percent bump-up in domestic corporate profits. For 2006 and 2007, corporate tax receipts as a share of the Gross Domestic Product will be at the highest level since the late 1970s, the CBO adds.

The agency says corporate income taxes as a percentage of the GDP will stay level. Before this year, however, the increase in the government’s corporate income tax receipts was “disproportionately” improving its total revenues. Now, for 2007, government revenue growth is coming mostly from individual income taxes.

Released on Thursday, the CBO report predicts the 2007 deficit will total $158 billion — a decline of $90 billion from 2006 — but still calls the deficit “daunting.” Despite the summer’s taint on the housing industry and the financial markets, the CBO expects the U.S. economy to once again gain solid footing by early next year.