Why must corporations be taxed?

We live in a capitalist world today. This is the era of multinational corporations. Today, there are many companies that are more powerful as compared to entire nations. This is the reason that they sometimes lobby hard to avoid taxes. Many times, when these companies are in a dominant position, they even threaten governments that if they are not given tax breaks, they will exit a certain country.

Corporations do not seem to like taxes. However, they still have to pay the lions’ share of taxes worldwide. In most parts of the world, governments depend upon tax revenue generated by corporations. Most people believe that taxing corporations, within reason, is fair and that this system is just.

In this article, we will look at some of the arguments which are made in favor of levying taxes on corporations:

  1. The first principle of taxation is that it must be progressive. This means that people who make more money should pay a higher percentage of that money towards the public good. This is one of the foremost reasons used to justify corporate taxation. Corporations are generally held by wealthy people. In most parts of the world, the top 10% of the people own 90% of the corporations. Hence, when a corporation is taxed, the wealthy 10% of the people are the ones being taxed. Governments all over the world want to tax high earners. This is the reason that they levy heavy taxes on corporations.

  2. Corporations tend to use a lot of public goods. For instance, corporations only become successful after they use the services of intelligent and capable employees. Also, corporations are highly dependent upon this workforce being healthy. Similarly, corporations also want a healthy legal system in order to survive. Unless contracts are being reasonably enforced, corporations will not be able to survive. Corporations are also dependent upon the government to provide services such as the free and uninterrupted supply of water, electricity, and other services that aid in production. Compared to an individual, a corporation gains much more from the social order which is created by the government. As a result, it should not be surprising that governments want corporations to share the bill. When these corporations try to evade taxes, they are actually consuming services and not paying for them. There are many critics who believe such actions are simply unethical!

  3. Limited liability corporations are separate legal persons. Hence, they enjoy certain privileges that a legal person has the right to. For instance, in many cases, when these corporations are not able to pay their employees, the government has to take care of them. Also, the personal property of their equity investors is protected by the government. They are only liable to the extent of their exposure to the company. Hence, if limited liability companies are treated as legal persons, they should also be held responsible for paying their taxes as one! Many critics argue that this amounts to double taxation. However, this is not the case. When it comes to discharging liabilities, the shareholders argue that the company is different from the shareholders. However, when it comes to taxation, these same shareholders argue that they are being taxed twice. Governments all over the world, tax corporations separately, since these corporations are given certain privileges in lieu of those taxes.

  4. Taxation is simply a transfer of wealth from one party to the other. Hence, when a government taxes a corporation, it is transferring wealth from the few wealthy people to the general population. In many cases, this is desirable and must be done. For instance, consider the case of a corporation that is in the business of mining. These corporations are extracting resources from the ground and selling them. Now, the ground and the natural resources it contains are the shared resources that belong to the community at large as well. Hence, when a corporation is using these resources, it ought to pay a certain sum of money to the general public to compensate them for their fair share.

  5. Corporations are also the largest pollutants. It is a known fact that manufacturing companies release harmful chemicals and dyes into rivers and other water sources. Similarly, corporations also pollute the air and are responsible for high carbon emissions. Corporations have also been responsible for rapid deforestation. This deforestation causes rainfall to reduce and causes water shortages. The bottom line is that corporations are responsible for a lot of environmental degradation. Such activities are not performed by individual humans. The governments have to spend money in order to sustain the environment and clean the pollution. Now, since pollution is being caused by corporations, it is only fair that the governments ask them to pay up for the same.

The bottom line is that higher corporate taxes are justified for two reasons. Firstly, corporations are owned by rich people, and secondly, corporations are given certain extra privileges that common people are not.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.