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The current income tax system provides incentives to change economic behavior, and reduces effective tax rates on economic income, by allowing deductions and exclusions from the regular tax base that understate taxable income relative to economic income, and by allowing credits against regular tax liability. While most business incentives are available to noncorporate business (where they reduce the individual income taxes of the owners of noncorporate businesses), their impact on the tax system and on federal revenue is most noticeable with respect to corporate taxes.

The popularity of corporate tax incentives has contributed to a decline in the corporate tax share of unified budget revenues from about 21 percent in 1964 to less than 9 percent in 1984, and a decline in the effective income tax rate on corporate economic income from about 36 percent in 1964 to about 20 percent in 1984. Another result of the widespread use of tax incentives is the well-publicized ability of some major corporations to report profits and pay dividends to stockholders, while paying very low rates of federal income tax, or even receiving refunds against taxes paid in previous years. In this setting, a corporate minimum tax is being seriously discussed as a possible means both to increase corporate tax revenues and to reduce some of the variation in the burden of corporate taxes across companies, while minimizing the impact of reducing any of the incentives now in the code.

Section One of this paper analyzes some of the issues and technical details involved in the design and implementation of a corporate minimum tax. Section Two is a history of federal corporate and individual minimum taxes from the original proposals and their enactment in 1969 through the changes made in the Deficit Reduction Act of 1984. The appendix includes data on the revenues raised by minimum taxes in effect between 1969 and 1982, and revenue estimates for examples of three different kinds of corporate minimum taxes. This paper does not describe or analyze any of the specific minimum tax proposals that have been introduced during the current session of Congress. A description of some current proposals was included in a recent Congressional Research Service report.¹ A future report of the Joint Committee on Taxation will discuss current minimum tax proposals.

This document is available in its entirety in PDF.

1. "Corporate Minimum Tax Proposals in the 99th Congress" by David L. Brumbaugh, Congressional Research Service, May 23, 1985. 15P.