Question

Describe how corporate taxes (income and dividend) might hinder the growth of corporations. Also, why do economists differ as to whether or not a corporate tax is essential? Finally, what deductions are available to corporations thereby reducing the official rate levied to an “effective rate” paid?

Answer 1

Corporate Taxes are levied at generally flat rates(unlike Slab rates for Individuals) over the income earned by Corporates. Hence, a large amount of Income Earned by corporates before being available for its shareholders, goes to the Exchequer by way of Corporate Income Tax. Even for payment of Dividend, Dividend Distribution Tax is levied which further reduces the Income Distributed to the Stockholders.

As per views of economists, Corporate Tax is not essential. It is because of the belief that if corporate tax is not deducted, then higher income would be distributed to the shareholders which in turn will increase their Consumption Level and hence the GDP would rise as a result. It implies the growth and development of economy even without any Corporate Taxes.

It is important to note that various deductions are available to Corporates which reduces their taxable income.

The Deductions are:

-Operating Expenses

-Employee Expenses

-Insurance, Travel,Interest,Bad Debt

-Professional Services, Advertising.

-Donations, Indirect Taxes etc.