This is an important source of federal revenue all over the world and a major consideration in planning business activities. The USA imposes one of the highest federal corporate income taxes in the globe. This aspect is through enticement of corporations to outsource where there are more favorable tax rates (Abraham, Howard, Richard, 5). The article focuses on the economic incentives created by taxation of the corporate and further review available evidence of their behavioral impact.
History of Corporate Taxation
The 1894 Revenue Act established the principles of taxing available corporations in a way that is separate from their owners. The Federal tax on the corporate income was imposed in 1909.The Act recommended a 2% income tax levy on any incomes that were totaling more than $4000 to make up on the lost federal revenue. The Court considered the Act unconstitutional in the next year claiming it did not consider population distribution and size of each state. The Congress in 1909 passed the corporation Excise Act using the same principal that lie within the 1894 Revenue Act. The Act imposed a 1% corporate income tax on income more than $5000.In the 1913, the 16th amendment was created which allowed Congress to put levies on income tax not allocated to population of each state.
Impact on economic behavior
The aspect of taxing cooperates income has encouraged managers and entrepreneurs to conduct and structure their business operations in ways designed to avoid taxation. Most corporations reduce their tax obligations and those of shareholders by applying the debt rather than equity finance. In addition, the corporate further invest in assets that depreciate rapidly for tax purposes and those for which generous tax credits are available (Abraham, Howard, Richard, 10). One the major tax consideration in the world of corporate finance is that the payment of interest on bondholders is deductible from taxable income. At the same time, the payment of dividends to corporate shareholders is not deductible. Due to this, the corporations often have the tax incentives to issue more debts than usual. Since the payment of dividend generates the tax obligations or its recipient, the federal corporations also can buy back the shares apply other methods of effectively distributing income to its shareholders. The incentives to give out debts are mitigated in circumstances n that firms predict non-refundable tax losses. Another case is where there is a great preference by the investor for returns in the form of dividends and capital gains rather than interest income. The aspect of corporate taxation affects the business and firms by discouraging incorporation of profitable business that can be organized in no corporate form. In the federal government of the United States, the organizations that have income not subjected to corporate tax include the sole proprietorship and the limited liability companies.
Taxation of multinational corporations
For those with active business operations in different countries, that tax system is often a problem. This aspect is because it if often difficult to focus on the character and location of taxable income as well as how double tax relief is to be provided. It is essential to focus on the double tax relief aspect since the home country claims the right to taxation of all the corporate income while the host countries often insist on their rights to tax affiliates incomes. Without the special tax relief the income gained by foreign affiliates are subjected to taxation by both countries at a cumulative rate, sometimes exceeding 100%.There exist two practical systems of multinational double tax relief which permit federal governments to tax any income earned through any economic activity undertaken within the borders fully. There is a small fraction of foreign affiliates in American firms, which pay a dividend to their parent companies at the end of every year. In most cases, the pretax profit of foreign affiliates is negatively correlated with the tax from the host country.
Incidence of the Federal corporate income tax
The owners of corporations do not necessarily have to bear the huge burden of the corporate tax because of the requirements that corporations pay taxes (Abraham, Howard, Richard, 15). This is because the burden might be entirely or partially be shifted to the consumer in the form f high prices or to corporate workers in the form of lower wages. In some circumstances, there are enough reasons to justify situations in which the existence of corporate tax enhances the returns on capital including the major owners of the corporations. The obligations of corporate tax often contribute to the cost of investment, encouraging substitution of other productive factors for capital used by corporations in the process. The expenses incurred in labor are deductible against the taxable income. Therefore, this deduction enables the corporate tax not to affect the marginal conditions that characterize the decision of the corporate firm as to whether or not to employ additional labor.
Conclusion
The corporate taxation plays a vital role in increasing the cost of production of corporate output. This aids in raising output prices, shifting output from corporate to non-corporate sector and depressing demand (Abraham, Howard, Richard, 23). The reallocation affects the factor demand to the extent that the input factor ratios differ between the non-corporate and the corporate economic sectors. Therefore, corporate taxation improves the after-tax profitability of owning corporations.
Works Cited
Abrams, Howard E., and Richard L. Doernberg. Federal Corporate Taxation. 5th ed. New York: Foundation, 2011. Print.
