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Corporation Tax



What is corporation tax?

Definition:

Tax levied on companies' profits.

What really is corporation tax?

Corporation tax, effectively makes the Government a shareholder in all companies. But this shareholder has special rights.
It gets its income before the other shareholders, and has no risk to capital, as it has provided none.

Why do we tax company profits?

In the affirmative, there could be 2 potential reasons to have a corporation tax.
  1. The Government has income streams from various sources. Any good investment advisor will tell you, you should diversify your income streams. This income stream has different properties from other income streams.
  2. Corporation tax, forces companies to release tax returns in a standardised format, and ups the game for fraudsters, as they can be done for tax evasion as well as fraud if they are dishonest.
  3. Elctorally its an easier sell to the public, than taxing the public directly.
Point 1 is only affirmative, if you beelive the government deserves and should have this money.
Point 2 could be addressed by exchanges where the companies are listed requiring accounting standards being met, and tougher laws.


In the negative, corporation tax is a mirage, a construct. A corporation is just a representation of other players in the system.
There is no free lunch here. If a corportation pays tax, someone else picks up the bill.
  1. Shareholders pay. There is less profits to distribute.
    There may be a feeling that shareholders don't need the money, but think about all the pensioners relying on income to fund their long retirement.
  2. Extra compliance costs, reduce profitability, and reduce any staff flexible pay. They distract the company from its purpose, making it suseptible to competitors.
  3. Lower profits, reduce staff job security, and provide less jobs. Less money will be reinvested into the business or being int he businesses rainy day fund, increasing the chance of redundancy.
  4. Lower profits, reduce reinvestment in productve capacity, making the goods and services more expensive, and keeping a lid on workers wages. We tend to find that when productivity goes up, so can wages. (think Henry Ford and the model T)
  5. lower profits, mean its harder to raise capital, and the share price is lower than it otherwise would ahve been, as investors favoured model of discounted cash flow, would value the company less.
  6. The company under pressure, could decide to screw down suppliers, as their cashflow is worse than it otherwise would have been.
  7. The company will purchase less off other suppliers than it otherwise would have. This hurthing them too, this will reduce their profits, and any tax the government could ahve got off them too.
  8. The country pays, as capital moves offshore.
So we have customers, shareholders, and workers worse off!

Whats wrong with taxing company profits?

  • Cars don't pay road tax.
  • Your house doesnt pay council tax
  • TVs dont pay licence fee.
  • Do companies really pay tax?

A company that is taxed, is most likely profitable. A profitable company is most likely growing, as it reinvests those profits. So a tax removes needed funds from a company just as it is creating value for everyone.
A better way to do this, is to tax distributions from a company, these are likely to happen when the company is matrue, and profits are no longer growing so much. It is when the company has excess capital.
Its a way of trying to hide who is really paying taxes.

Who really pays for this tax varies by company, industry and time.

Tax encourages companies to take on more debt and become risky, as debt interest reduces tax the company has to pay.
Companies spend vast amounts of money trying to avoid and navigate the tax, whereas if it was just the dispersments colected by compnaies for the tax office, all that could be dropped.

The existing tax system is a result of years of tinkering, reflecting the influence of political views and special interest lobbying.

Sources

References


Links

Link323 If corporation tax didn’t already exist it would be madness to introduce it 

More content coming to this page, until then please visit Capital Taxes
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