Question

a)

Explain how the taxation of corporations protects the integrity of the personal income tax. What are the other grounds on which a corporation tax may be justified?

b) Explain the possible impact of the corporation tax on resource allocation, tax incidence, and excess burden using the different views of the corporation tax. Which view do you think is more realistic? Justify your answer.

Answer 1

Answer:-

a)Corporate tax rates have plunged since the 1980s, worldwide, meaning that an ever-smaller share of soaring corporate profits are being used to finance schools, roads, hospitals and the rule of law.

Corporate tax revenues make up roughly a tenth of all taxes in rich countries, worth many hundreds of billions of dollars each year. The share in developing countries is higher. These taxes are irreplaceable.

Corporate income taxes are a fundamental backstop to the personal income tax. Many countries set up their corporate taxes for this reason.

If the corporate tax were abolished, this would tear a giant hole in the personal income tax for wealthy people. They would simply form shell corporations and escape their income taxes by claiming that their earnings are not ordinary personal income but the income of the corporation.

As more people used the corporate vehicle as a tax shelter, tax authorities would be pressured to cut top personal income tax rates, to try and deter this behaviour.

The entire tax system would become compressed, subsidising the rich at the expense of the poor.

Corporate prof i ts are soaring as corporations muscle in on economic returns which, in an earlier age, would have gone to employees and society generally through wages, benef i ts and taxes.

These soaring prof i ts translate into steadily growing corporate political power. So corporate taxes curb both economic and political inequalities.

Most corporate wealth is owned by wealthy people, in every country. In the United States, for example, nine tenths of corporate stock is owned by the top tenth of the income distribution. These wealthy capital owners are the ones who ultimately pay most of the corporate income tax.

So the tax is one of the most progressive taxes a state can levy. It reduces inequality within and between countries.

A state that taxes corporations needs accurate information about their fi nancial affairs. The corporate income tax spurs states to require corporate transparency and accountability, helping them track taxable prof i ts, not to mention nefarious activity. It is no coincidence that in many tax havens a lack of a corporate income tax goes hand in hand with a lack of good information about corporate owners and corporate finances.

b)Corporation tax ,when we talk of resource allocation , they are a good kind of tax system which holds the corporations accountable while keeping their profit thing stable in their business.

Also,the burden caused due to the corporation tax increases the net cost of the goods and services in and outside the economy,it can also affect the foreign trade but at the end it concludes to the responsibility of the corporates to maitain the balance and thus accounts for an economy to grow sound.

Also,tax incidence and excess burden can be justified by the view that these taxes bring the economy together and keeps a check and balance mechanism maintained .

All the views and perceptions that we know regarding the corporation taxes are all unique in the sense of economic welfare of the people ,they may be different in the profit-loss or good - bad perspective but the economic welfare of people is everywhere settled .

So , where it be the resource allocation or tax incidence , corporation tax is more or less good when charged in lesser or balanced quantity (rate) .

The more realistic view can also be seen through the eyes of common people where there should be accountability, equality, responsibility and fair economic decisions and these all can be given a picture through enabling the corporation tax.

Moreover a noted point here is that the developing nations or economies of the world need more precised and definite corporation tax so as to grow sustainably.