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
Corporations aren’t simply earning profit. They’re also not dismissible/repressible, like a single person would be.
1) corporations try to grow. That means reinvestment. If you bleed every dollar or pound they earn, they won’t grow. And that’s bad, because
2) corporations – or businesses in general – are lifeblood of free market society. They provide taxes, workplaces for people (thus income) and so on. If you scare them away or won’t let them grow – as a local authority of some sort – jobless people and poor tax income will be *your* problem at some point. And unlike a corporation, you have no way of fixing this. And in democracy, it means the crowds will be very mad at you.
Plus, if that disappointed corporation agitates others over unfair taxation or whatever, they have real power to impoverish entire regions and make life suck for everyone. A smart politician wouldn’t risk with this.
Generally, only small-to-medium businesses work in fair social balance, taxation included. A major automobile factory or mining company having tens of thousands of employees and erecting entire towns when they need so, usually breaks all sorts of rules and nice thoughts. Because they have so much power. Nobody really knows how to handle that.
For almost entirety of history, business has been in that small-to-medium scale (a craftsman selling their produce), and we know how to work with this. Exploration era (transoceanic shipping and colonization) and advances in banking made it possible for mega corporations to exist and nobody in the world has really figured out how to stop them from absorbing everything else or get directly into politics. So it’s sort of keeping smiling while in a bad company.
It currently is… sort of. £50k or less is 19%, £250k or more is the “main rate” of 25%, and anything in between is marginal (sliding scale).
So it’s not quite as brutal as the personal tax steps but it is there.
Remember that profits from a corporation are paid to shareholdees and are taxed with regular rules. For an individual shareholders that is different rules than say a pension plan.
Whether you tax the company, or the owner of the company receiving the profits doesn’t really matter. It’s the same money.
There are certain incentives and benefits to taxing corporations or their shareholders, or a bit from both. You can encourage different types of structures or favour pension plans over large individual shareholders etc. It’s not that it makes no difference to how the company operates, and governments generally want consistent revenue, or at least some consistent revenue. But it is still just one pool of money being taxed.
One reason that graduated tax brackets are important for individuals is that you are taxed, essentially, on gross earnings. Minus a few pretty limited deductions. So someone with a lower salary as far, far less discretionary income than someone with a much higher salary. A graduated income tax structure is just much fairer in a society with pretty massive income inequality.
A business or corporation is somewhat different. Essentially all of its taxable profits are after all expenses have been written off. So you are talking about pure profit at that point. It’s not like a corporation that only nets $50,000 a year still has to pay for rent and food out of that amount . So it makes a bit more sense to have a flat tax rate on all corporate profits.
In Canada, there is a Federal Tax Rate for corporations of 38%. Then there is a 10% rebate for income earned entirely in Canada, so for resident corporations, this reduces the tax rate to 28%. Then there is a further General Tax Reduction rebate of that reduces the Canadian sourced income rate to 15%. For small businesses (under $500K income) instead of the General Tax Reduction, there is a Small Business Deduction of 19% which would bring the small Canadian small business tax rate down to 9%. Both the GTR and SBD only apply to active business income – i.e. not passive investment income.
Tax corporations on revenue not profit. Make tax rate 1% in stead of 20% would bring in roughly same tax. Much harder to cheat. Would cover the nondom corps like Amazon etc
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