Question

analyse the economic incidence of corporation income tax in closed and open economies

Answer 1

The incidence of corporate income tax in closed and open economies vary depending on the dynamics governing some of the bais factors like cost of production, rate of wages and post tax rate of return on capital employed to name a few.

It may be noted that a higher corporate tax structure is adverse to new/additional investments which in turn affect the labour and employability. At the same time, while a lower corporate tax may help in encoraging expansion by corprates thereby increasing the level of economic activity, it still may not lead to the desired post tac return on equity employed.

To understand this further, we may break up the impact of tax on the few elemenatary factors that i started with like-Price, Labour rate, Cost of capital, Post tax returns.

In the case of a closed economy, there shall be supply of labour in a regulated manner at a regulated price.This means that what ever the investment or cost impacting the corporate, the firm has to utilize the same labour at which ever rate available. This virtually means that their flexibility to bring down costs on the labour shall be constrained. This would mean that the cost of the output shall be on the higher side of the curve and hence the margin may not be upto the level as targetted by the corporate. Under such a scenario a corporate tax at what ever rate shall bring down the earnings from a after tax perspective.

Similarly, in the case of capital employed, in case of an open economy, there shall be additional benefits that may be given to the corporate as we normally see in the form of tax breaks, export promotion zones etc. These measures enhances the corporates ability to bring down the cost of production to an optimum level and thereby retain the meargins. Under these circumstances, althought the taxation might be a bit ob the higher side with as compared to the closed economy, the propsensity to pay tax is higher because of the correspondingly higher margins.

Another factor that may impact the corporate-in case of both economies- may be the prioritazation that the Government in these economies give to the different industries.Generous subsidies, freebies, tax breaks, competitive wages etc all are affected in such a scenario and hence this may have its own ramification on tax incidences ,irresoective of the economy-clsoed or open.

To sum it up the incidence of corporate tax on closed economies and open economies may have different impact from an overall economic perspective. The impact of corporate income tax is relatively impacted and realise more by corporates in a closed economy than that of an open econmy for the reasons mentioned above. The freedom to operate and maneouvre the inputs with more flrxibility in an open economy definitely puts the corpoares in such economies betterly placed inspite of the relatively higher taxation than in the case of closed economies.