Corporate Taxation: Taxation and Tax Changes Over the Last 20 Years - Term Paper Example

Corporate Taxation: Taxation and Tax Changes Over the Last 20 Years The economic impact of corporate taxation is one which is incredibly significantand influential in many regards, and the tax changes that have taken place over the last 20 years in particular have been incredibly impactful on corporate taxation in general. In order to gain a more informed and knowledgeable viewpoint on corporate taxation in general, and about the major tax changes that have taken place over the last two decades and how these have influenced corporate taxes overall, we will have to do several things. First, we must discuss the subject of corporate taxation so that we can understand what it is and what it is all about, and this includes surveying the principle features and recent history of corporate taxation, followed by the consideration of the incentives that tax systems provide for the behavior of corporations, and then as well we must discuss the scenarios that have taken place over the last 20 years in regards to tax changes, and finally, we must examine how these changes have affected corporate taxation, and all of the key and related issues as well. By doing this, we will be able to come to a much more aware and intelligent understanding on the subject matter at hand overall. This is what will be dissertated in the following. Corporate taxation is considered as being an incredibly important source of government revenue across the world, and as well it is a significant and major consideration in regards to the planning of business activities. Corporate tax is a term which refers to "a tax levied by various jurisdictions on the profits made by companies or associations. As a general principle, the tax varies substantially between jurisdictions. In particular allowances for capital expenditure and the amount of interest payments that can be deducted from gross profits when working out the tax liability vary substantially. Also, tax rates may vary depending on whether profits have been distributed to shareholders or not. Profits which have been reinvested may not be taxed" (Wikipedia, 2007). Bigger businesses are the businesses which end up spending the most attention and devotion to corporate tax however this is for good reason, as corporate income tends to be most highly concentrated in a relatively small number of large companies. The impact of corporate tax on economic behavior is very great and significant, and "The taxation of corporate income encourages entrepreneurs and managers to structure and conduct their business operations in ways designed to avoid taxes. Corporations generally reduce their tax obligations, and those of their shareholders, by using debt rather than equity finance, investing in assets that can be rapidly depreciated for tax purposes and those for which generous tax credits are available, and avoiding dividend payments or other tax-disadvantaged distributions to investors" (Hines, 2001). However, although corporate taxation is one of the most known forms of taxation, it is actually the least properly understood, and not only that, but most economists for quite some time now have considered it as being the least efficient and least defensible of all forms of taxation. Statistics show that corporate taxation has increased dramatically over the years, especially over the past few decades in particular, as "In the forties and early fifties the corporate income tax provided about a third of federal revenues, and as recently as 1966, the proportion was 23 percent. It declined steadily for the next twenty years, reaching a nadir of 6.2 percent in 1983. This was partly by design. The top corporate tax rates fell from 52.8 percent in 1969 to 46 percent in 1979" (Norton, 2002). There are more problems than just this however that are considered as being involved in regards to corporate taxation, and in particular, the central problem with the corporate tax, from an economic point of view, is that "ultimately, only people can pay taxes. Economists have had great difficulty in assessing the incidence of the corporate tax - that is, on which groups of people the burden falls" (Norton, 2002). Basically what this means is that there were - and still are - many problems in regards to deciding who has to carry the most burden of the corporate tax in regards to the general population. After all, if the wrong decisions are made, such as if there was a tax on corporate income, was thought to have been able to cause some firms to leave the business, and in fact this has taken place in various different situations. This is a critical issue, as "This reduces the demand for labor, which reduces wages and reduces the supply of goods produced by corporations. With the supply of goods reduced, prices rise. Thus, part of the corporate income tax is paid by shareholders, part by workers through lower wages and fewer jobs, and part by consumers through higher prices" (Norton, 2002). Thus it is quite easy to see just how affecting corporate taxation is worldwide, and how significant and influencing - perhaps mostly negatively - on the lives of the people in the general population. Corporate taxation has absolutely had various ramifications throughout the economy, and the biggest problem of all is that even if the actual main dilemma with corporate taxation was found and considered to be acted upon, this still would need to allow for all of the special and particular provisions that are set in the corporate tax code so that we could still be able to accurately measure the effects of corporate tax, not only by itself withstanding, but as well in combination with all of the other taxes. "Finally, any econometric approach seeking to measure the shifting of the corporate tax burden as a result of tax changes must first isolate the tax effects from the myriad nontax factors affecting business" (Norton, 2002). There are two major flaws in particular that corporate taxation is considered to have - and this is agreed upon by the majority of economists in general - and the first is that "penalizes the corporate form of business organization because income tax is taxed first at the corporate level and then again when paid to stockholders as dividends'The second major flaw in the corporate income tax is that it misallocates capital by favoring the issuance of debt over equity, because interest payments are tax deductible while dividend payments are not. This favors investments in assets more readily financed by debt, such as buildings and structures (which can be used for many purposes and thus are used more easily as collateral for loans) over investments more logically financed by stock, such as specialized equipment or research and development" (Norton, 2002). There are many tax changes that have taken place over the past 20 years, and particularly so in regards to corporate taxation. For instance, there was the Tax Reform Act of 1986, which was designed primarily for the purpose of increasing the amount of share of federal revenues that were collected through the corporate income tax and as well, to work to decrease the actual share from that of the individual income tax. The basic reason that the Tax Reform Act was brought about was so that it could simply the income tax code overall, as well as so that it could broaden the tax base itself at the same time. There have been many other changes in this regards as well, such as the Omnibus Budget Reconciliation Act of 1990, which was a statute which resulted in increasing income taxes by creating a new 31 percent individual income tax rate. Then there was the Taxpayer Relief Act of 1997, which was used in order to reduce several of the federal taxes that were present at that time; "Starting in 1998, a $400 tax credit for each child under age 17 was introduced, which was increased to $500 in 1999. This credit was phased out for high income families. The Act exempted from taxation profits on the sale of a personal residence of up to $500,000 for married couples filing jointly and $250,000 for singles'The Act also provided tax relief for education savings and retirement accounts. Some expiring business tax provisions were extended" (Wikipedia2, 2007). In the year 2001 there was the Economic Growth and Tax Relief Reconciliation Act, which "made significant changes in several areas of the US Internal Revenue Code, including income tax rates, estate and gift tax exclusions, and qualified and retirement plan rules. In general the act lowered tax rates and simplified retirement and qualified plan rules such as for individual retirement accounts, 401(k) plans, 403(b), and pension plans" (Wikipedia3, 2007). In the year 2002, there was the Job Creation and Worker Assistance Act of 2002, which was used to increase carryback of net operating losses to 5 years. Following up the next year, there was the Jobs and Growth Tax Relief Reconciliation Act of 2003, which accelerated certain and specific tax changes that were passed in the Economic Growth and Tax Relief Reconciliation Act of 2001; this included several different things in particular, including that of the exemption amount for the individual Alternative Minimum Tax, and as well did it lower the taxes of income from that of dividends and capital gains. From this review, we can make several different major conclusions, namely the fact of how drastically corporate taxation has changed over the years, particularly so in regards to the past two decades in particular. We have also seen how corporate tax has been able to survive all efforts to reform, repeal, or be replaced, and "there is little reason to expect a change in the near future. The simplest fix would be to equalize the treatment of interest and dividends, either by allowing corporations to deduct dividends or by granting an offsetting deduction or credit to stockholders. Most other large industrialized nations use the latter method. A more far-reaching reform, one recommended by economists for decades, would be to completely integrate the corporate and individual taxes" (Norton, 2002). There are several different ways that this could be done, however the best yet conceived method would be to treat all corporations as partnerships, for tax purposes anyway, thus imputing all of the resulting profits to shareholders and then taxing them under the individual income tax. Although corporate taxation is now considered as being basically a necessity in the world, there are many drawbacks and negative influences that come from it, and although some of the key issues and problems have already been identified, even the most knowledgeable and experienced economists are not sure if there is actually any method that is available that can be used in order to mend these problems, which leaves us with a basically larger conundrum. However, there are also certain benefits of corporate taxation, and from this review we have been able to see that this is largely due in part to the changes that have been made in regards to tax in general, especially of course in regards to corporate tax in particular. From here, in order to make any positive changes - or any changes at all for that matter - we are going to have to use reviews such as this in order to add on to the research and studies that have already been completed, so that we may be able to come to more advanced solutions in regards to how the problems within corporate taxation can be properly and quickly mended. Through an analysis of the given research that we have available in regards to this matter, as well as the opinions of economists and government members alike, we have been able to gain a much more knowledgeable and informed viewpoint on this subject matter overall, not only in regards to corporate taxation itself, but as well in regards to the changes that have been made in regards to corporate taxation, and how these changes have affected this form of taxation in general. Works Cited Bailey, Steve. Patrick Eyes Corporate Tax Changes. 2007. 1 March 2007 < http://www.boston.com/business/taxes/articles/2007/02/16/patrick_eyes_corporate_tax_changes/>. Hines, James R. Corporate Taxation. 2001. 1 March 2007 < http://72.14.205.104/search'q=cache:6qsKKxsl9g4J:www.bus.umich.edu/OTPR/WP2001-6paper.pdf+corporate+taxation&hl=en&ct=clnk&cd=1>. Lederman, Leandra & Oliver, William W. Understanding Corporate Taxation. ISBN: 0820563404, 2006. Norton, Rob. Corporate Taxation. 2002. 1 March 2007 . Wikipedia. Corporate Tax. 2007. 1 March 2007 http://en.wikipedia.org/wiki/Corporate_tax. Wikipedia2. Taxpayer Relief Act of 1997. 2007. 1 March 2007 http://en.wikipedia.org/wiki/Taxpayer_Relief_Act_of_1997. Wikipedia3. Economic Growth and Tax Relief Reconciliation Act of 2001. 2007. 1 March 2007 http://en.wikipedia.org/wiki/Economic_Growth_and_Tax_Relief_Reconciliation_Act_of_2001. Read More