Economics
Introduction
Understanding the drivers of the amount that is paid by companies in the form of corporate income tax has transformed into an interesting and highly debated topic in the recent past; more so, with the various policies that are being adapted by the governments for stimulating growth, while also factoring in the imminent need for increase revenue in order to fund the various developmental programs while also to successfully repair the public finances, considering the global economic recession.
It is of crucial important to study and construe the impact that tax policies have upon government revenues, upon which government depend heavily to discharge most of their obligatory responsibilities like funding infrastructure projects, education or public health. It is also equally important to make sure that the system of taxation offers an economic environment that promotes overall economic development, while also assisting in boosting the economy’s size from which revenues can be generated.
Understanding Corporate Income Tax better: The Harberger Analysis
Arnold C. Harberger offers a classic economic analysis of the concept of corporate income tax. The key insights that were offered by Harberger in his analysis were essentially aimed at recasting the traditional Heckscher-Ohlin model of international trade tariff in the form of a general equilibrium for a nation with two primary sectors namely the corporate entities who are mandated to pay corporate income tax and the second sector comprising of entities that are unincorporated. A vast amount of literature spawns this theory proposed by Harberger for addressing the plethora of questions related to the subject of public finance.
According to the Harberger analysis, both the above set of entities essentially produce two types of goods, ostensibly making use of the same constant as in Cobb-Douglass technology, namely the labor as well as capital. While labor can freely move between these two sectors, installed capital on the other hand do not have free movement. Because of the free movement of labor, the payments continue to be the same in both the sectors. However, in case of capital, while installed capital cannot freely move, fresh capital investments get diverted to areas of higher returns.
The utility functions are also the same for all consumers as in the Cobb-Douglass technology. The corporate income tax is essentially a flat tax which is seen as a return to the corporate capital. “The flat rate might vary from the top rate in the field of personal income tax, the marginal tax rate to which the return on unincorporated capital is subject. There is no integration of the corporate and personal income taxes, so that any dividends are taxed twice.”
As proposed by Harberger , the corporate income tax increases the cost of utilizing the capital for production of produce corporate goods and has effects upon incidence and efficiency that are further based on the differences in the production technologies used to produce both the corporate as well as the non-corporate goods..
Harberger finally concludes that corporate income tax diminishes the after-tax marginal product for all the capital investors in an equal manner. Also, if the corporate sector is taxed and the second sector is left without any tax obligations, in the due course, the output of the sector that is taxed would slowly diminish in order to reach an equilibrium of the marginal revenue products and reaches the pre-tax levels that are higher.
The formulation made by Harberger has actually dominated the analysis of corporate-tax for more than half a century now, regardless of its disengagement with three important facts. The first among the three important aspects is that practically all goods are produced by both the corporate as well as the non-corporate entities with the help of almost the same methods that are product-specific in nature. The second fact is that the choice of the form of organization has for decades been a business decision, and it had never been a technologically significant one. The last but not the lease is the fact that sectors, like for instance agriculture, which were identified by Harberger as being “non-corporate” on the basis of their output shares, have become transformed into increasingly “corporate” with the passage of time, while a few sectors like transportation, that were classified as being “corporate,” as Harberger have turned out being less corporate in nature.
Global Analysis of Corporate Income Tax
‘Paying Taxes Study,’ is a study conducted by Pricewaterhouse Coopers (PwC) for determining the ease of paying taxes and the study was conducted across 183 global economies on the basis of three important indicators namely the Total Tax Rat, the number of hours that the company takes in order to adhere to the various tax affairs, and lastly the number of tax payments that the company has to make.
According to the above study, it was identified that corporate income tax is charged upon the profits accrued by the companies in almost 95% of the economies that participated in the study. It was further revealed by this report that only 10 out of the total 183 economies that participated in the study did not charge any sort of corporate income tax or any other similar profit tax.
The average statutory rate that was identified through this study was 24.2% and the lowest is 14.2% that was identified in the Middle East which was followed up closely by Europe and Central Asia with a 14.9% statutory rate. The highest average rate was identified in the African Union with a rate of 28.04% and Latin American and the Caribbean following this with a rate of 28.0%.
With the global trend that is rushing towards economic globalization, surprisingly, the statutory rates on corporate income tax are also converging as the competition to draw more businesses as well as investments also accelerates at a similar pace.
Corporate Income Taxation and Economic Development
Revenue accrued through taxation and customs offers the governments with the necessary funds for investing into development, decrease poverty as well as also to carry out a number of activates related to public by way of investments into both physical as well as social infrastructure that are highly necessary for enhancing the long term economic growth.
The corporate tax policies that are followed by one nation might have an impact upon other nation in a plethora of ways. If a nation’s domestic tax burden is relatively high when compared to the other nations, the tax base might shift to those nations with less onerous and arduous regimes of tax and taxation policies, eventually denoting outward flows of the foreign direct investment (FDI). Nations can compete for attracting inward flow of foreign investment too. Taxes might also play a pivotal role in decisions made by the global multinationals about the areas where they can declare profits. Actually, circumstantial evidence points to the fact that global firms spend substantial amount of resources upon transfer pricing as well as several other techniques used for tax-planning which also comprise of cross-border transactions for reducing the tax liabilities.
Conclusion
Globalization along with the eventual boost in the capital mobility has given rise to myriad range of opportunities in relation to potentially detrimental tax competition among the various global economies that are keen on attracting increased investments. By merely repositioning and transferring their mobile capital, large multinational organizations can conveniently minimize the burden of corporate income tax.
While this kind of activity by itself may not be essentially detrimental, the complexity for the national fiscal establishments in applying the tax rates upon the capital of such global multinationals might lead to misrepresentations and biases in the structure of trade and investment.
Solidification and reinforcement of the domestic resource mobilization is not merely related to amassing revenue. It also deals with establishing a system of revenue generation which fosters comprehensiveness, promotes good governance, enhances the governments’ accountability for the nation’s citizens, while also promoting social justice.
The design and delivery of a revenue system also has close association with the decision, both domestic as well as international, investment decisions that encompass aspects like transparency and objectivity. This is because such a design and deliver mechanism would help in the improvement of the structure for attracting enhanced private investment.
Bibliography
Andrew Packman, N. H. &. J. K., 2012. Corporate Income Tax - A Global Analysis, б.м.: PwC.
Auerbach, A. J., 2006. Who Bears the Corporate Income Tax? J. В: J. M. Poterba, ред. Tax Policy and the Economy. Cambridge, Massachusetts: The MIT Press, pp. 1-40.
Harberger, A. C., 1962. The incidence of the Corporation Income Tax.. Journal of Political Economy, Том 70, pp. 215-240.
Kostial, R. G. a. K., 2001. FDI and Corporate Tax Revenue: Tax Harmonization or Competition?. [В Интернете] Available at: FDI and Corporate Tax Revenue: Tax Harmonization or Competition?[Дата обращения: 03 March 2016].
Kotlikof, L. J., 2013. What Does the Corporate Income Tax Tax? A Simple Model Without Capital. Analysis of Economics and Finance, 14(1), pp. 1-19.
Summers, L. J. K. &. L. H., 1987. Tax Incidence. В: Handbook of Public Economics. Amsterdam: North Holland Publishing Company.
