The Role of the Corporate Tax

Description

Existing corporate taxes distort many aspects of firm behavior. To the extent that the corporate tax rate is lower than personal tax rates, taxes favor corporate activity and favor retaining earnings rather than paying earnings out to employees and investors. Multinationals can avoid even these taxes by shifting income into tax havens. Given the ease with which multinationals can evade tax, the existing income tax structure faces major pressures, as reflected in average statutory corporate tax rates halving in recent decades. The Element speculates on alternative tax structures that will avoid these problems. Cover Title page Copyright page The Role of the Corporate Tax Contents 1 Introduction 2 Effects of Taxes on Corporate Behavior 2.1 Overview 2.2 Choice of Organizational Form 2.2.1 Notes on the Determinants of the Effective Capital Gains Tax Rate 2.2.2 Notes on the Determinants of t[sub(e)] 2.3 Taxes and the Choice of Debt vs. Equity Finance 2.4 Other Forms of Income Shifting 2.5 Taxes and Rates of Corporate Investment: Closed Economy Case 2.6 Taxes and Rates of Corporate Investment: Open Economy Case 2.7 Taxes and Reported Accounting Profits 2.8 Taxes and Business Risk-Taking 2.9 Use of “Sufficient Statistics” 3 Optimal Corporate Tax Structure 3.1 Setup of the Analysis 3.1.1 Initial Assumptions 3.1.2 Taxation of Noncorporate Businesses 3.2 Implications for the Corporate Tax Law: Closed Economy Case 3.3 Optimal Design of a Corporate Tax in an Open Economy 3.3.2 Taxation of Outbound Portfolio Investments 3.3.3 Taxation of Outbound FDI 3.3.4 Taxation of Inbound FDI 3.3.5 Comparison with Actual Tax Treatment of Cross-Border Activity 3.3.5.1 Assumptions Under Which Worldwide Taxation Is Optimal 3.3.5.2 But the Assumptions Supporting Worldwide Taxation Do Not Hold in the Data Possible violations of assumptions (1) and (2) Violations of assumption (3) 3.3.5.3 Assumptions Under Which a Territorial Treatment Can Be Appropriate 4 Possible Alternatives 5 Omissions from the Theory 5.1 Corporate Activity as a Signal of an Individual’s Earnings Ability? 5.2 Evasion of Tax on Business Income 6 Optimal Tax Policy Given the Presence of Market Failures 6.1 Lemons Problems in the Debt Market 6.2 Lemons Problems in the Equity Market 6.3 Taxes and Agency Costs 6.4 Tax Response to a Short Horizon of Managers 6.5 Taxes and Entrepreneurial Activity 7 Summary Appendix Dividends as a Signal of Longer-Run Cash Flow References Acknowledgments