Question

a) Explain how the taxation of corporations protects the integrity of the personal income tax. What are the other grounds on which a corporation tax may be justified?

b) Explain the possible impact of the corporation tax on resource allocation, tax incidence, and excess burden using the different views of the corporation tax. Which view do you think is more realistic?

Answer 1

Answer (a) Corporation tax is very important for protecting the integrity of personal income tax .If there is no corporation tax then retained earnings which is insulated from personal income tax would have permitted the other corporation to accumulate the tax free savings. Even the revenue which is lost by the government is compensated by the corporation tax .Revenue lost by government by the virtue of fact that the profit of the corporate are not subject to individual or personal income tax as long as they are not distributed to the shareholders of the company.

Answer (b) The fact is the corporate tax in general aggravates the resource misallocation.It is found the the firms in order to shift their Burden of taxation they just shift their variable markups Which results in creating a gap between the social optimal level and the marginal product of the firm. on contrary the firm with higher Shifts their burden of tax in lesser amount resulting in less misallocation of resources. so the moderate tax actually creates more the revenue in corporate profits .So the corporate tax on allocation resources is considered to be the more elastic in comparison to other views