The US Federal government collects more taxes each year from individuals than corporations in the form of income taxes. This may be surprising to some people since the US corporate income tax is one of the highest in the world and companies earn far higher earnings as profits than most individuals.

The following chart shows that nearly half of the Federal revenues come from individual income taxes:

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Source: The Heritage Foundation

To put the above figures in perspective, in the fiscal year 2015 the total federal revenues were expected to be $3.18 trillion according to the National Priorities project. Out of this, individuals paid $1.48 Trillion in income taxes (47% of total). Corporations on the other hand paid just $341 billion (11% of total revenues).

Why do corporations pay less income taxes than individuals?

Though the corporate tax rate is 35%, most US companies pay much less.  This is because of the millions of legal loopholes that are available for corporations in the tax code. Using an army of corporate lawyers, tax attorneys, accountants, lobbyists, consultants and other professionals whose only job is figure out how to legally reduce the taxes owed by a corporation to the minimum possible. Unlike corporations most individuals do not have the resources to hire all these folks to prepare their taxes. In addition, many of the thousands of loopholes that are afforded to corporations are not available to individuals. For example, Uncle Sam allows firms to use tax-avoidance tools like a Dutch Sandwich, Double Irish arrangement, etc. to shelter billions in taxes owed. As a results, corporate income taxes as a percentage of total federal revenues have declined year after year since the 1940s compared to individual income taxes.

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Source: Federal Revenue: Where Does the Money Come From, National Priorities Project

Emerging markets have still a long way to go before they catch up with developed markets in terms of GDP per capita. This figure is calculated by taking the overall GDP of a country and dividing it up for each individual in the country.

Despite explosive growth in emerging markets in the past few decades, the GDP per capita in those countries as still low relative to developed markets. For example, Germany’s GDP per capita is over $40,000 but China’s GDP is still under $10,000. China was and is still considered one of the top fast growing emerging countries. Hence most people in China are still poor financially speaking relative to developed countries.

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Takeaway for investors:

Because emerging countries have lower GDP per capita investors should not assume that people in those countries would be able to consume goods and services like those residing in developed countries. So for instance, though someone in the US may easily spend $4 or $5 for a cappucino at Starbucks(SBUX), the same may not be true in Brazil, China, India, Indonesia, etc. That does not mean nobody can afford to spend that much on a coffee in those countries. It is just the majority of the population cannot afford to spend that much on a coffee. Hence investors must consider carefully before investing in developed world companies that cater to emerging market consumers.

Source: 2017 GLOBAL INVESTMENT OUTLOOK, Franklin Templeton Investments

Disclosure: No Positions