Question

Incidenceofthecorporateincometaxistheoreticallycontentious,dependingonwhetheroneviews it as a tax on economic pro?ts or a tax on capital in the corporate sector: a. What is the incidence of the corporate income tax if it is viewed as a tax on economic pro?ts? Explain carefully. b. What is the incidence of the corporate income tax if it is viewed as a tax on capital used in the corporate sector? Explain carefully. c. What is the excess burden of corporate income taxes if it is viewed as a tax on economic pro?ts? Explain your answer.

Answer 1

Answer:-

Who ultimately bears the burden of the corporate income tax plays an important role in the distributional analysis of tax policy. A tax on economic profits or benefits affects the investment decisions on capital and labour much lesser. The incidence of taxation is based on deadweight loss and reduction of producer surplus. The taxation burden can be shifted to the consumers but not fully, depending on the elasticity of demand curve since taxation shifting would raise the price.

Whereas taxation on the amount of capital used in corporate sector significantly affects the investment in capital. Capital can be mobile which makes tax incidence difficult. Taxation increases the production cost which can affect supply.