PART II. CORPORATIONS

SECTION 121. CORPORATION TAX RATES

The corporation income tax consists of a normal tax, which applies to all taxable income, and a surtax, which applies to taxable income in excess of $25,000. At the present time, the normal tax rate is 30 percent and the surtax rate 22 percent, giving a combined rate of 52 percent, but under existing law, the normal tax rate is scheduled to be reduced from 30 percent to 25 percent effective July 1, 1964, making the combined rate 47 percent. Under the bill, H.R. 8363, the normal tax rate is reduced to 22 percent for 1964 and later years. The surtax rate for 1964 is 28 percent, making the combined rate for that year 50 percent; for 1965 the surtax rate is 26 percent, making the combined rate 48 percent.

Since the first $25,000 of taxable income is exempt from the surtax, the corporations having taxable income of $25,000 or less pay only the normal tax. Reducing the normal tax rate by 8 percentage points (from 30 percent to 22 percent) as under the bill, while the overall rate is reduced by 2 points (52 percent to 50 percent) in 1964 and a further 2 points (50 percent to 48 percent) in 1965 gives the greatest percentage reduction in tax to those corporations which pay only the normal tax. Furthermore, these corporations have the benefit of the full reduction immediately in 1964, while corporations paying both normal tax and surtax have their taxes reduced in two steps, half the reduction in the combined normal tax and surtax rate being effective in 1964 and the full amount of the reduction in 1965.

Table I shows the tax liabilities for calendar year corporations at various income levels under present rates (1963), under the rates provided by H.R. 8363 for 1964 and 1965 and under the scheduled reduction of 5 points in the normal tax for 1964 and 1965. (Since the reduction provided in existing law is effective July 1, 1964, the calendar year corporations' liabilities for 1964 were computed by prorating.) The percentage reductions from 1963 liabilities are also shown for 1964 and 1965. As indicated in this table, those calendar year corporations which have taxable income of $25,000 or less have an immediate reduction of 26.67 percent in 1964 under the bill, while their reduction would be only 8.33 percent in 1964 and 16.67 percent in 1965 if the normal tax is reduced by 5 points. The bill provides greater reductions in 1964 and 1965 for corporations having taxable income below $100,000. For large corporations having taxable income of at least half a million the reductions under the bill for 1964 and 1965 are less than under the 5-point normal tax reduction. Table 2 shows effective tax rates (ratio of tax to taxable income) in 1964 and 1965 under present rates, under the bill, and under the scheduled reduction.

For calendar year corporations the tax liabilities under the bill will be computed for 1964 by applying the 22-percent normal tax rate and

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28-percent surtax rate, and for 1965 by applying the 22-percent normal rate and 26-percent surtax rate. Fiscal year corporations will compute their liabilities by prorating in the usual fashion.

Revenue effect

Under the bill, corporation tax liabilities for 1964 will be reduced by $1.3 billion and for 1965 by $2.2 billion, compared to liabilities under present rates. The 5-point reduction in the normal tax which would become effective July 1, 1964, would reduce corporate tax liabilities by $2.4 billion when fully effective. Since this reduction would occur in the middle of calendar 1964 the liabilities for 1964 would be reduced by about $1.2 billion and for 1965 by the full $2.4 billion. While the aggregate reductions under the bill and under the scheduled 5-point reduction in the norinal tax are approximately equal the benefits are distributed differently. Under the bill the corporations with taxable income of $100,000 or less would get 21 percent of the total amount of the reduction while under the scheduled 5-point reduction in the normal tax the same corporations would receive only 13 percent.

1 Prorated.

TABLE 2-Comparison of effective tax rates of calendar year corporations with selected levels of income under present rates, under H.R. 8363, and under scheduled reductions of July 1, 1964

[In percent]

SECTION 122. CURRENT TAXPAYMENTS BY
CORPORATIONS

This section of the bill will affect only those corporations whose tax liability can reasonably be expected to exceed $100,000. Under present law, corporations having a tax liability for a given year of $100,000 or less may pay their taxes in two equal installments on the 15th of the third and sixth months following the close of the tax year. Thus, a corporation which uses the calendar year for accounting purposes and which has a tax liability for 1963 of $100,000 would pay $50,000 on March 15, 1964, and $50,000 on June 15, 1964. The bill makes no change in the payment schedule for such corporations. For a corporation with tax liability greater than $100,000, present law requires two current taxpayments in the year the liability is incurred, each payment being 25 percent of the tax in excess of $100,000. If the anticipated 1963 tax for a certain calendar year corporation is $200,000 the schedule of payments would be as follows:

The September and December payments are each 25 percent of ($200,000-$100,000), and the final payments made in March and June of the following year are each half of the remaining tax liability or 50 percent of ($200,000-$50,000).

Under the bill such a corporation would continue to make the same current payments in September and December as required by present law, but starting in 1964 additional current payments of a portion of the tax in excess of $100,000 would be made in April and June of the year of liability. These additional payments would be gradually increasing percentages of the tax in excess of $100,000, starting with 1 percent in 1964 and reaching 25 percent in 1970. The schedule for April and June payments under the bill is shown below.