Question

Answer the following questions briefly.
(a) When can the corporation income tax be treated as a tax on profit?
(b) Explain why the current tax code induce more earning to be retained rather than to be
paid out as dividend.
(c) Who will bear the burden of property tax on land according to the view taking it as an
excise tax? Explain.

Answer 1

Answer a :-

A corporate income tax is treated as a tax on profits of the corporation when they are not taxed as " pass through entities ". Pass through taxation includes owners allocated share of business profits in their taxable income under individual income tax .

To calculate tax on profits at an effective rate on 21% , permissible deduction of business expenditure, current expenses, purchase of investment , salaries , benefits , reimbursement , bonuses, legal fees, , book keeping fees and advertising cost are allowed to be deducted.

Answer b :-

The current tax code induces more earning to be retained rather than paying out as a dividend by not taxing retained earnings due to the following reasons :-

1) To avoid double taxation of income by taxing both retained earnings and the dividend from retained earnings .

2) To motivate the company to increase their stock value .

3) To motivate the company to acquire new companies or expand their operations.

Answer c :-

The tax on reproducible capital is equivalent to an excise tax on housing services.

According to traditional empirical approach the this property tax is passed forward in the form of higher pricing for housing services .

However according to modern approach this property tax will produce an excise tax effect which will be borne by the owners of the capital through a decrease in the average rate on return on capital .