Corporate Taxation

Corporate Taxation



Introduction

Taxes are compulsory payments to a government based on financial criteria that indicate capacity to pay. Tax payments differ from prices because they lack any connection to a specific purchase of a governmental good or service. Taxpayers do not contribute on the basis of their sense of civic pride or duty. Congress establishes tax statutes and administrative regulations through a political process. Some taxes may have quasi-market effects, especially those designed so that the heaviest users of a governmental good or service pay the majority of its cost (Charles, 1993).

Measures of the taxpayer's capacity

The three primary measures of the taxpayer's capacity to bear a tax burden include income, purchases or sales, and property ownership or wealth. The U.S. government relies on corporate and individual income taxes, and the Social Security tax, levied on payrolls, has become an additional income-type tax. The federal government levies neither a general sales tax nor a property tax; however, it does collect selective excise taxes on some items and customs duties on imported products. Taxes on the purchase or sale of goods and services remain the largest source of state revenues. All states have either a sales or gross receipts tax, and almost all have a general sales tax as well. A great majority of states also levy individual income taxes and/or corporate income taxes. Fewer than half levy a general property tax. Although property taxes constitute the majority of local tax revenues, localities also levy general sales taxes, selective excise taxes, individual income taxes, and corporate income taxes. State laws authorize municipalities to establish local tax rates (Wagner, 2007).

Some taxes discourage an undesirable individual or business activity, but a tax levied for revenue proves adequate if it can generate sufficient revenues at socially acceptable rates. A zero percent tax would raise no revenue. A 100 percent tax also would raise no revenue because no one would engage in an activity that delivered all of the proceeds to government. Thus, taxing agencies utilize a rate-to-revenue curve to determine or estimate any tax. Depending on the rate-to-revenue curve, either a tax increase or a tax reduction could generate greater or lesser revenues (Buchanan and Roger, 1998).

Tax adequacy has both long-term and short-term aspects. A tax with cyclical aspects will collect adequate revenues during short-term economic fluctuations. Property taxes have cyclical stability, whereas general sales taxes and corporate income taxes are less stable. Although a tax system must deliver adequate revenues during cyclical economic downturns in order to finance public assistance expenditures, it must also increase revenues as an economy expands in order to meet the growing demands for government services (Shughart, 1997).

Adam Smith's views on Taxation

In The Wealth of Nations, Adam Smith proposed four principles of taxation (italics added):

The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the ...