¶ … Dropping or Lowering Corporate Taxes
This is a paper with two charts concerning corporate taxes. Corporations are taxed under a tax rate structure depending on the income. There has been talk about dropping the corporate tax. This paper will discuss the pros and cons of this. What methods can be used to drop or lower corporate taxes and why?
HOW CORPORATE TAXES HELP OUR ECONOMY
Where did the corporate income tax begin? How does it affect our economy? What is the future of the corporate income tax? Will deleting corporate income tax be the answer for the economy? What about cutting part of this tax? How does the corporate income tax help the economy? These are questions that will be answered in this paper as well as how the corporate tax is affecting our economy now.
The Beginning of Corporate Income Tax
How the corporate tax began is an example of why tax systems can be worse than they should be and how little influence the economic profession has on government policy (Norton 2). Sometimes ideals look great when they are not that sound. Corporate taxes were used during wartime until 1909, when Congress enacted a 1% tax on corporation income. The rate increased until 1932 to 12.5% when the rate was changed to the progressive rates. Norton stated, "Surtaxes on corporate income were added for "excess profits" during both world wars. The highest peacetime rate, 52.8%, was reached in the sixties" (2).
Back in the forties and fifties the corporate income tax provided almost a third of federal revenues. In 1966 it provided 23%. Over the next twenty years the tax declined. "The top corporate tax rates fell from 52.8% in 1969 to 46% in 1979. Tax laws gave generous deductions for capital expenditures. Corporate profits averaged 11% in the sixties and less than 5% from 1981 to 1985.
The 1986 Tax Reform Act
In 1986 the Tax Reform Act increased the share of federal revenues from the corporate income tax and decreased the share from the individual income tax. Both the corporate income tax and individual income tax was cut to 34%; however, deductions for expenditures were curtailed and the investment tax was repealed (Norton 2).
Most economist will agree that corporate taxes is one of the least efficient and least defensible of taxes. Most will recognize that no one knows who really bears the burden of corporate taxes. The man on the street will probably say, "Let the big companies be taxed." The corporations usually take the increase in taxes and place it on the consumer by raising prices on the product. Some companies decide to become an "S" corporation. If the company becomes an "S" corporation then it does not pay corporate tax. Its income is passed and taxed to shareholders. The growth of "S" corporations and the growth of the net income is an example of the measurement problems. Changing the "S" form of income taxes to corporate taxes is not the answer either.
How does taxes affect business
Research has shown that some firms will leave the business because of taxes. This will reduce the demand for labor, which reduces wages, and that reduces the supply of goods produced. When supplies of good are reduced, prices get higher. Looking at the corporate income tax,
Taxes close business Less labor
Reduced wages Reduced goods
Higher prices
Who pays the corporate tax?
Many feel the businesses pay the corporate tax; but looking at the above diagram, it seems the consumer may be the one paying the corporate tax. Economists feel that the corporate business is being taxed twice. First from the corporate level and again when stockholders pay dividends. If corporations are going to pay for taxes, all corporations should pay taxes. The next problem is corporate tax rates are high for many businesses. Corporate tax dates back to the eighteenth century when a corporate charter was given special state privileges such as exemption from specific laws or the power of a monopoly. Corporations today have private contracts with the government merely a tax collector.
Corporate Tax Rates
Corporations pay taxes on their net profits and this is under a graduated tax rate structure. If the corporation's net profit is under $50,000, then they pay only 15%. This helps small businesses. If the corporation makes over $15,000,000, then the amount of tax is increased by the either the lesser of 3% of the excess or $100,000. The chart shows the rate of corporate income tax:
Corporate Tax Rates
Taxable income
Tax rate
10,000,001 and up
The Learning Network Inc. 2001
The federal tax is shown at three rates with the lowest net income getting the beneficial tax breaks. Looking at a recent year, 90% of the corporations of 3.2 million corporate tax returns filed in one year were from corporations with less than $1 million assets. The lower rates had little economic significance. "Nearly 94% of all corporate tax revenue came from the 8.8% of corporations with assets greater than $1 million.
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