In 2019, President Donald Trump created outrage when he decided to lower the tax rates of corporations. Donald Trump was of the opinion that high corporate tax rates in the United States are making domestic companies uncompetitive. As a result, companies are choosing to incorporate out of America. Donald Trump enacted a law that allowed the tax rate in the United States to be lowered from 35% to 21%.

This caused outrage as this move was viewed as being Donald Trump’s gift to his capitalist friends in corporate America. This only goes to show that people in America have started taking corporate tax as a given. However, this has not always been the case.

In this article, we will have a look at the history of corporate taxes in America.

• During the early days of America, there were no corporate taxes. This is because there were no corporations at all! There were no limited liability companies. This meant that American business was dominated by sole proprietorships and partnerships. In both these cases, it is impossible to divide the income earned into two parts viz. the income attributable to the labor and the one attributable to capital. As a result, in the case of partnership firms, the income was directly imputed to the individual level and taxed there. Also, the tax was levied on the total income regardless of whether it was retained or it was distributed.

• However, the same was not the case once corporations came into the picture. A corporation could have millions of shareholders. These same shareholders could also be shareholders of other corporations. Lastly, shares could be owned by foreign shareholders, as well. Due to the sheer complexity of the operation, it was not possible to impute the income to the shareholders. One needs to remember that it was still not the digital age, and keeping track of the shareholders was still a tedious process. Hence, when corporations came into existence, the government decided to treat them as a separate legal entity and tax the profits at the corporate level rather than at the individual level. However, there are different types of corporations in America. Some of these corporations are taxed on the income that they make, whereas others are charged tax on the dividend, which is distributed.

• The United States first introduced the corporate tax in the year 1894. However, the tax was not taken well by American corporations, who immediately challenged it in court. The tax could not sustain for very long and was repealed within one year since it was found to be unconstitutional.

• The corporate tax was reintroduced in the year 1913. However, this time the legislators were careful. Hence, they kept the tax rate abysmally low at 1%. This continued for some time. However, the government slowly started raising tax rates over time. Within a decade, the tax rate has grown to 15%! This was commendable given the fact that the American public has generally been averse to any form of taxation.

• The corporate tax rate in America saw a major jump during the World War 2 period. During this period, the tax rates rose sharply and remained high till the 1960s. This was a period when national security was a priority for the American government. Hence, people agreed to higher rates of taxation. During this period, corporate taxes were the single highest contributor to the American budget. Corporate taxes contributed close to 20% of the total revenue of the United States government. This is the period when the American tax rate had peaked. The tax rate was highest in 1968 when it was over 50%!

• The corporate taxes in developed nations was then reduced. For the most part, America was charging tax rates between 30% and 40%. This was also the case with all other developed western economies. In fact, the tax history of most developed western economies is remarkably similar. They were generally charging taxes between 30% and 45%. Germany was the only other developed western nation where the peak tax rate for corporations was below 40%. Till 2018, the total corporate tax collected in America had reduced to 9.9% of the total revenues and accounted for 2.2% of the gross domestic product.

• Meanwhile, other developing nations, where countries were choosing to relocate, had tax rates that were closer to 20%. This is the reason that Trump had decided to lower the tax rate in order to make America competitive. The above-mentioned history clearly shows that America has been steadily moving towards socialism in the past few years. This is the reason why corporations are handing over higher proportions of their hard-earned money to the government.

The bottom line is that Donald Trump’s cut in tax rates is not exactly unprecedented. America has seen a wide variety of tax rates from 1% to 50% during the hundred years that corporate taxation has been present in the United States.