Hi all
This may be a bit more UK focused, but from what I can see it applies to a good few other countries too.
In the UK, personal income tax is graded based on income, with a tax free threshold, then the basic income tax level between £~12,000 to £50,000, then a higher rate above £50,000, then another band too. This seems fair as the more you earn, the more of that ‘higher’ income gets taxed.
Why isn’t this the same for corporation tax? This is a flat rate regardless of turnover/profit, with small companies having to pay the same proportion of their profits as large multinational companies. Wouldn’t it be fairer to have bands like personal income tax?
In: Economics
In the US I think it used to be.
The problem with doing this for a corporation is that you can subdivide a corporation arbitrarily. You can’t do that with a person.
Corporation going to get pushed into the new tax bracket by making over $1 million? Nah, it’s now Royal Dutch Shell A and Royal Dutch Shell B, and the CEO splits his time between the two. We now make $500,000 in each corp.
I saw a John Olivier video that discussed US corn subsidies that were capped per farm. Understand that many larger corporate farmers got around this by just subdividing their farmers into smaller legal entities.
An additional point is that – by and large- corporations get to offset all their costs and only pay tax on pure profits. People don’t get to do that. One argument for graduated tax rates is that if you’re earning $12k, you probably need all that just to survive. Whereas, as you earn more, you’re paying a lower proportion of your income on necessities.
The same doesn’t apply to corporations. A corporation with only a few hundred thousand dollars of revenue could be netting almost all of that as profit, or they could be making a huge loss. They might even be making more profit than a corporation with millions of dollars of revenue. So, taxing them both the same, but only on their *profit* makes most sense.
Another thing is that corporate tax is trying to stimulate self-investing and reinvesting, so you usually see tax on the money that goes “out” of the corporation (e.g. profits), but not if it’s spend on improving the business itself.
Of note for the UK. There is a VAT limit where companies selling less than £90,000 worth of VAT taxable goods in a year don’thave to pay VAT or get that money returned to them.
Because corporate tax has deductions for expenses, and corporations have wildly different expense situations. In addition, there aren’t that many corporations to keep track of. This means it makes sense to keep track of exact expenses for corporations and only tax them on their exact profit. If you tried to tax them on estimated profit, then you’d be wayyyy off in either direction for most companies.
For individuals, most people have fairly similar expense situations, so instead of keeping track of exact expenses for individuals, we use stuff like the standard deduction and graduated tax brackets to create a similar effect where people are only taxed on ‘estimated’ profit. And for most people, this ‘estimate’ is fairly accurate. People who have particularly non-average expense situations can choose to itemize, but this generates a ton of paperwork to keep track of because there’s just so many people, so we don’t want everyone to itemize.
The difference is that corporations are taxed on **profit** while individuals are taxed on all income.
If you make £50,000 a year, most of it will go towards rent, food, utilities and all other basic survival needs. If you make £500,000 there will be a lot more left over after your needs are met. So it makes sense to tax that extra money at a higher rate.
If a corporation has £1M in revenue and spends £800K to earn it, they have £200K in pure profit. It doesn’t hurt them to tax it at a flat rate because it is anyways “extra” money.
Corporate profits also go to stockholders, who pay personal income tax on that. This is the so called controversial “double-tax” that makes this a bit trickier issue.
Since nobody else has said it corporation tax in the uk is graduated since 1 April 2023, it’s a sliding scale from 19% to 25% if above 250k and accounts for any dividing of companies to keep the effective scale and thresholds the same
Ireland has graduated corporate tax since it ended most of its tax haven loopholes in recent years. 12.5% standard rate and 15% rate on large multinationals with revenue over a certain amount.
Latest Answers