Is Corporate Tax Progressive?
Taxes can be classified based on which class of the population pays the most. The purpose of taxation is to redistribute wealth from the rich to the poor. Taxes that help the government do the same are called progressive taxes. The corporate tax has been levied on the premise that it is a progressive tax. However, many critics believe that it is not so.
In this article, we will have a closer look at this issue. However, before that, we need to understand the different types of taxes.
Classification of Taxes
- Progressive: A tax is called a progressive when a larger portion is collected from the higher income groups. For instance, income tax increases as the income go up. Hence, it called a progressive tax.
- Proportional: A tax is called proportional when it is paid equally by all sections of the society.
- Regressive: Similarly, a tax is called regressive when it collects a larger portion of the income from the lower-income groups. Taxes on groceries are considered to be regressive in nature since these items form a large proportion of the household budget of a poor person.
Are Corporate Taxes Progressive?
Corporate taxes have been levied on the pretext of being progressive. However, expert opinions vary widely on the degree of the actual progressiveness of these taxes. There are many experts who believe corporate taxes are progressive. This is because they believe that corporate taxes are paid primarily out of the capital gains, which accrue to the organization.
However, there are others who believe that corporate tax is regressive. Their belief is that the money paid out as taxes actually reduces the wages of the people working in the organizations. Hence, it falls on the lower sections of society. There are many who argue that people who work in many of these high rates organizations can be included in the high-income groups, and hence the tax would still be progressive even it comes out of taxes.
Finally, there are still others who believe that corporate taxes are paid equally by the workers in the form of reduced wages and the owners in the form of reduced capital gains. These theorists believe that corporate taxes are actually proportional.
The Pass-through Structure Debate
There are several economists who argue that corporate tax can only be classified as progressive or regressive based on the company that it is being levied upon. This is because companies themselves can pay no taxes. They are only fictional entities that have been created for legal purposes. These companies have no assets or income of their own and hence cannot pay taxes. Therefore, everything that a company has is actually owed to people in the end. Hence, any form of taxation is levied on the people i.e., the customers, investors, and shareholders of the firm.
In order to understand this argument, we need to look at two types of companies. Letís take one company that creates high tech instruments for electric vehicles. This company hires highly paid employees. Its products are used by higher class people. Also, the company is financed by rich venture capitalists. If this company does not make any profit, it will not have to pay any taxes even though a lot of wealthy people are generating incomes out of this company.
On the other hand, we can consider a retail company. This company primarily employees a lot of poor people. Also, people who shop at these stores are looking for lower prices and hence generally belong to the lower-income groups. Finally, since this is a large corporation, it trades on the exchange. Hence, a lot of its stock is held by middle-income groups in their pension and retirement funds. However, this company does make a profit and is taxed.
In such a case, it would be wrong to assume that the tax is progressive. We need to remember that the company is just a pass-through structure i.e., a piece of legal fiction. The reality is that taxes are being levied on the poor people associated with the big retail companies, whereas the rich people associated with the high tech company do not have to pay! In such situations, the income tax does not remain progressive.
The Big Company Debate
Another common reason why taxation is not considered to be progressive is that empirically big corporations pay fewer taxes than smaller corporations. Companies like Amazon are famous for paying zero taxes. This is because the laws create a lot of ways using which it is possible to reduce the tax base. These loopholes are created for companies in certain preferred sectors. However, the companies operating in these sectors are often big in size. Also, big companies can incorporate offshore and use complex corporate structures in order to avoid taxes. This privilege is not available to smaller companies.
The bottom line is that corporate tax is assumed to be progressive. However, there is no proof that it is, in fact, progressive. Many theories have been formulated to the contrary. A lot of these theories make very credible arguments, which make it difficult to believe that corporate taxes are indeed progressive.
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- History of Corporate Taxation
- Why must corporations be taxed?
- Different Forms of Corporate Taxation
- How Corporate Taxes Impact Corporate Behaviour?
- Is Corporate Tax Progressive?
- The Rise of Flat Tax
- Understanding Tax Terminology: Tax Base
- Understanding Tax Terminology: Tax Rates
- Arguments in Favor of Tax Competition
- Arguments against Tax Competition
- Tax Co-operation: A Primer
- Elasticity of Taxes
- Strategies Used by American Companies for Tax Avoidance
- How Corporate Dividends are Taxed?
- Capital Gains Taxes
- State Corporate Taxes
- A Primer on Tax Deferral
- The Corporate Alternate Minimum Tax
- Sales Tax and Use Tax in the United States
- Why Amazon and Netflix Pay $0 in Corporate Taxes?
- How are Losses Treated in Corporate Tax?