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In the first instance, businesses send the government a tax check. In fact, businesses pass this taxon to consumers in the form of reduced after-tax dividends, lower market wages, or higher product pricing. There is widespread agreement that product price increases should be kept to a minimum. The tax’s split between better returns for resident owners, non-resident shareholders, and employees, as well as the government’s net income loss, is a source of controversy and empirical disagreement.
The time interval, the mix of equity returns to internationally mobile investment options versus geographic immobile investment options, the response of international capital inflow to higher after-tax investment returns, and the response of business investment to a lower required before-tax rate of return are all key parameters affecting the distribution of benefits.
Corporate Income Tax
The corporate income tax base is a tally of profits made through shareholder equity investments. It is the difference between product sales and the costs of labor, materials, depreciation, debt interest, and other taxes, such as state taxes and royalties. Economic rent on geographically immobile natural resources and domestic markets, monopoly power, and government-provided services and infrastructure; and quasi-rent on firm-specific and likely long term internationally mobile technology and management skills are all included in the return on shareholder funds.
First Round Effects
Under the imputation system, the reduction in company tax returns credits is offset by an increase in personal income tax paid on personal dividend income in the case of resident shareholders and business profits distributed as dividends. That is, there will be no change in shareholder dividend income or government revenue after taxes. A lower corporate tax rate indicates a higher sum to reinvest for the part of resident shareholder business profits retained by the company for subsequent investment. The government will eventually reclaim a portion of the extra revenue from the greater investment through capital gains tax on the higher share price and income tax on future dividends.
Longer-Term Effects
In numerous methods, the government recovers some, but not all, of the initial revenue cost of a reduced corporate tax rate. The operation of the imputation system, along with higher capital gains taxes, recaptures the majority of the first-round advantage for domestic shareholders. Non-resident shareholders benefit from lower tax rates on current investments and pay lower rates on returns on induced investments. A portion of the higher wage bill is taken into account by the labor income tax.
A bigger economy means bigger tax bases for GST, PAYE, and other taxes. There will be a revenue gain to the extent that a lower corporate tax rate reduces the incentives and benefits for multinational firms to relocate their income.
