The Corporate Income Tax
Much of what was said about the individual income tax can also be said of the corporate income tax. But there are some differences. Whereas individuals can vote, corporations cannot, so politicians encounter less resistance when they advocate raising the corporate tax. But ultimately, only individuals pay taxes,1 so the corporate tax is a hidden tax, in the sense that those who ultimately pay it do not know that they are paying it. In that sense, then, taxing corporations is dishonest. It also seems unfair to assess a tax on persons who cannot vote, since they are being taxed without representation.
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- 1.If the corporation is able to pass on the tax in the form of higher prices, then the individuals who pay for the corporation’s products or services ultimately pay the tax. If the tax cannot be passed on, then the individuals who own the corporation’s stock have to settle for a lower rate of return on their investment, since the government siphons off a large chunk of the corporation’s pretax profits. Either way, individuals ultimately pay the corporation’s tax.Google Scholar
- 2.At some times in U.S. history, the situation has been much worse. There have been times when the top corporate rate was more than 50% and the top individual rate was more than 90%. With rates as high as these, the high bracket shareholder who received a dividend actually got to keep about 5% of the corporation’s pre-tax income.Google Scholar
- 3.The 1RS has more than 120,000 employees, some of whom are employed in the corporate tax area.Google Scholar
- 4.This study was cited by James L.Payne, at 20.Google Scholar
- 5.Id. The study Payne referred to was Jane G. Gravelle and Laurence J. Kotlikoff, Corporate Taxation and the Efficiency Gains of the 1986 Tax Reform Act, Working Paper 3142, National Bureau of Economic Research, October, 1989.Google Scholar
- 6.J. Gregory Balientine, Equity, Efficiency, and the U.S. Corporation Income Tax (1980).Google Scholar
- 7.Jeffrey J. Hallman and Joseph G. Haubrich, Integrating Business and Personal Income Taxes, Economic Commentary, Federal Reserve Bank of Cleveland, October 1, 1992, at 2.Google Scholar
- 8.A Coopers & Lybrand study of corporations having sales of $25 million or more found that the average company assigns 7.4 people to the state and local tax area and 9.3 to the federal tax area. Coopers & Lybrand, State and Local Taxes: The Burden Grows (1992), at 5.Google Scholar
- 9.Hallman and Haubrich, at 2. These authors evaluated five proposals to reform the corporate tax system to reduce tax avoidance costs and financial distortions caused by the present corporate tax system.Google Scholar
- 10.Although this chapter emphasizes the U.S. corporate tax, many of the same arguments can be made regarding the various European corporate tax systems. For a discussion that incorporates examples from the European experience, see John Chown, The Corporation Tax — a Closer Look, London: Institute of Economic Affairs, 1965.Google Scholar
- 11.J. Gregory Ballentine, Equity, Efficiency, and the U.S. Corporation Income Tax, Washington, DC: American Enterprise Institute, 1980.Google Scholar
- 12.Hallman and Haubrich point this out at 3. The study they referred to was the U.S. Treasury Department’s Report to Congress, titled Integration and Individual and Corporate Tax Systems: Taxing Business Income Once, January, 1992.Google Scholar
- 13.The U.S. tax system has been criticized for the adverse effect it has on foreign investment. For discussions on this point, see Gary Clyde Hufbauer, U.S. Taxation of International Income: Blueprint for Reform, Washington, DC: Institute for International Economics, 1992; U.S. Foreign Tax Policy and the Global Economy: New Directions for the 1990s, Institute for Research on the Economics of Taxation, 1989.Google Scholar