The global wave of economic recession has brought with it a greater scrutiny of taxation as major economies of the world go into deficit. Corporate taxation is one of the most poorly understood topics of economics and therefore the taxation system has many times been misused or strategically avoided. For new company owners venturing into business or anyone interested in economics, understanding the current corporation tax rates is a must.
In simplistic terms, corporate taxation is tax levied on the income of corporations or legal entities. However, corporate taxes are different from regular income taxes in that they are imposed on the net income or profits generated by a particular company vs. an individual. More importantly, corporate tax rates are different than regular income tax rates. As is the case with other forms of taxation, there are certain rules that are essential for the proper functioning of the system.
Corporate tax has a graduated taxing system that is specific to the earnings made by a company. For example, smaller corporations are charged fairly low rates in comparison to larger corporations with greater net income. The rate steadily increases as a companies’ profit starts to grow.
Although this appears to be a reasonable method of taxation, there are certain loopholes that work in the interest of large scale corporations. Firstly, there is the issue of the taxable income calculation. Corporations realize that taxes are imposed on the income that is generated through business ventures inside a particular state. Realizing this, these companies regularly shift their profits abroad or even relocate the business to states with lower corporate tax rates. This is one of the basic flaws in the current corporate tax rate system.
It must also be mentioned here that corporate taxes amounted for a large portion of total federal revenue in the early 1950s. However, with the passage of time, multinational corporations have learned new methods of deceiving the tax system, thus leading to a significant drop in the percentage of federal revenue that is generated by corporate taxes.
Another very significant aspect of corporate taxation is the type of corporations that are taxed. As is often the case, foreign companies are only charged for the income generated by businesses they profit from within a state, while local companies are taxed on their total worldwide earnings. This has actually prompted many foreign multinational companies to invest in states with less stringent corporate tax rates. It has also led many experts to suggest that this tax form is just a political gimmick that is used to attract loads of foreign investments into the country. The sad state of the economy and failure to make the budget’s ends meet certainly make this argument seem plausible.
Another very interesting point about corporate taxation is whether it is actually a burden on the corporations paying it or not. Certain economic theorists believe that the owners of the big firms actually do not feel any pressures of increase in corporate tax rates as the burden is actually shifted to the consumers. The complexity of the system provides room for corporations to charge even higher prices for their products thus allowing higher profits that can cover up the possible losses from higher tax rates. It is quite discomforting to know that taxes levied on corporations are actually paid in part by the consumers.
The US Government has tried to increase corporate tax rates over the past few years to try and bolster government revenue. However, this has not helped in extracting higher collection from corporate taxes as companies can easily relocate taxable income off-shore.
Among the countries with the largest corporate tax rates, Japan leads the way with 39.5 % followed by United States with 35%. Such a high corporate tax rate would actually act as a repellent for corporations seeking to establish themselves inside the US. But the loopholes in the tax system have enabled corporations that function inside the US not be too perturbed by the high tax rates. Recent reports in the news suggest an even more unbelievable fact, that certain top companies have paid more to their CEOs than to federal income taxes.
Proper understanding of the dynamics, method, and effectiveness of corporate taxation is a must for everyone from a policy maker to a fresh graduate in economics. In the context of the current wave of economic recession as well as the recent wall-street protests, familiarizing oneself with the various concepts of corporate tax rates has become even more relevant.