Should Corporate Income Tax Be Abolished
Q: Years back, somebody told me there had been a study that showed that corporate income tax is really a disguised sales tax. The argument was that corporations have no difficulty in raising their prices to pay for the corporate tax, which therefore is effectively paid by their customers. Believe it or not as you like, but that's the theory. Anyway, it seems to me that a lot of the hassle surounding taxation of corporate earnings could be avoided by taxing them from the shareholders direct. Thus, if a person owns 10,000 shares of Corporation X, and the corp earns $1 a share, the shareholder is deemed to have earned $10,000 and pays tax on it, whether or not the corp pays a dividend. Effectively, the corporation gets treated as a partnership. But remember, the principle of incorporation appeared before income tax. It was not originally conceived as a tax-avoidance tool. I expect this is an old idea. What are the pros and cons of it
A: Lower taxes can boost government revenue: U of T study Lowering corporate taxes may be a good strategy for provincial governments, University of Toronto economists have found, because firms with subsidiaries in multiple jurisdictions are more likely to shift their profits to a province with lower tax rates. "If there is a lot of income shifting that goes on, this suggests that when a government cuts corporate income tax rates, there won't be a big revenue loss because companies will move their profits into that province," says U of T economist Jack Mintz. "If governments raise corporate income taxes, they may not get as much revenue." Mintz is lead author of the study, Income shifting, investment and tax competition: theory and evidence from provincial taxation in Canada. Mintz adds that lowering provincial corporate income taxes may attract investment from foreign countries. Using data from the Department of Finance, Mintz and co-author Professor Michael Smart of the Department of Economics analysed tax records of 900,000 Canadian firms from 1986 to 1999. The companies were divided into three groups: single firms operating only in one province, firms with subsidiaries in more than one province and firms that operate in multiple provinces that allocate their profits according to a formula set by the federal and provincial governments. The researchers found