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1、Prepared by:FERNANDO QUIJANO,YVONN QUIJANO,KYLE THIEL&APARNA SUBRAMANIAN24Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberPublic Finance and Public Policy,2/eJonathan GruberChapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Poli
2、cy,2/e,Jonathan GruberCorporate Taxation24.4 The Consequences of the Corporate Tax for Investment24.3 The Incidence of the Corporate Tax24.2 The Structure of the Corporate Tax24.1 What Are Corporations and Why Do We Tax Them?Chapter 2424.5 The Consequences of the Corporate Tax for FinancingTo its de
3、tractors,the corporate tax is a major drag on the productivity of the corporate sector,and the reduction in the tax burden on corporations has been a boon to the economy that has led firms to increase their investment in productive assets.To its supporters,the corporate tax is a major safeguard of t
4、he overall progressivity of our tax system.By allowing the corporate tax system to erode over time,supporters of corporate taxation argue,we have enriched capitalists at the expense of other taxpayers.24.6 Treatment of International Corporate Income24.7 Conclusion2Chapter 24 Corporate Taxation 2007
5、Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberCorporate Taxation3Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberWhat Are Corporations and Why Do We Tax Them?24.1shareholders Individuals who have purchased ownership stake
6、s in a company.Ownership Versus Controlagency problem A misalignment of the interests of the owners and the managers of a firm.4Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberChapter 24 Corporate Taxation 2007 Worth Publishers Public Finance a
7、nd Public Policy,2/e,Jonathan GruberExecutive Compensation and the Agency ProblemA P P L I C A T I O Nboard of directors A set of individuals who meet periodically to review decisions made by a firms management and report back to the broader set of owners on managements performance.6Chapter 24 Corpo
8、rate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberWhat Are Corporations and Why Do We Tax Them?24.1debt finance The raising of funds by borrowing from lenders such as banks,or by selling bonds.bonds Promises by a corporation to make periodic interest payments,as
9、 well as ultimate repayment of principal,to the bondholders(the lenders).Firm Financingequity finance The raising of funds by sale of ownership shares in a firm.7Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberWhat Are Corporations and Why Do W
10、e Tax Them?24.1dividend The periodic payment that investors receive from the company,per share owned.capital gain The increase in the price of a share since its purchase.Firm Financingretained earnings Any net profits that are kept by the company rather than paid out to debt or equity holders.8Chapt
11、er 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberChapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Structure of the Corporate Tax24.2RevenuesThe taxes of any corporation are:Taxes=(Revenues Ex
12、penses )Investment tax creditThese are the revenues the firm earns by selling goods and services to the market.10Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Structure of the Corporate Tax24.2Expensesdepreciation The rate at which capita
13、l investments lose their value over time.depreciation allowances The amount of money that firms can deduct from their taxes to account for capital investment depreciation.11Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberChapter 24 Corporate Ta
14、xation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Structure of the Corporate Tax24.2Expensesdepreciation schedules The timetable by which an asset may be depreciated.Depreciation in Practiceexpensing investmentsDeducting the entire cost of the investment from taxes
15、 in the year in which the purchase was made.13Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberChapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Structure of the Corporate Tax24.2Corporat
16、e Tax Rate15Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Structure of the Corporate Tax24.2Investment Tax Creditinvestment tax credit(ITC)A credit that allows firms to deduct a percentage of their annual qualified investment expenditures
17、 from the taxes they owe.16Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberChapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Consequences of the Corporate Tax for Investment24.4Theoretic
18、al Analysis of Corporate Tax and Investment Decisions18Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Consequences of the Corporate Tax for Investment24.4Theoretical Analysis of Corporate Tax and Investment DecisionsThe Effects of a Corpor
19、ate Tax on Corporate Investment19Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Consequences of the Corporate Tax for Investment24.4Theoretical Analysis of Corporate Tax and Investment DecisionsThe Effects of Depreciation Allowances and th
20、e Investment Tax Credit on Corporate Investment20Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Consequences of the Corporate Tax for Investment24.4Theoretical Analysis of Corporate Tax and Investment DecisionsEffective Corporate Tax Ratee
21、ffective corporate tax rate The percentage increase in the rate of pre-tax return to capital that is necessitated by taxation.21Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Consequences of the Corporate Tax for Investment24.4Theoretical
22、Analysis of Corporate Tax and Investment DecisionsEffective Corporate Tax RateMore generally,the effective corporate tax rate(ETR)is measured as:With depreciation and the ITC,the effective tax rate is:22Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan
23、 GruberChapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Impact of the 1981 and 1986 Tax Reforms on Investment IncentivesA P P L I C A T I O NTwo of the most important pieces of government legislation of the 1980s were the major tax reform ac
24、ts of 1981 and 1986.The 1981 tax act introduced a series of new incentives to spur investment by corporate America.Depreciation schedules were made much more rapid and an investment tax credit was introduced.Contributing to the low effective tax rates in the early 1980s were active tax avoidance and
25、/or evasion strategies by corporations.The Tax Reform Act of 1986 made three significant changes to the corporate tax code:First,it lowered the top tax rate on corporate income from 46%to 34%.Second,it significantly slowed depreciation schedules and ended the ITC.Finally,the 1986 act significantly s
26、trengthened the corporate version of the Alternative Minimum Tax(AMT).Corporate use of legal loopholes in the tax codes seems to have rebounded in the late 1990s and continues to the present day.24Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan Grube
27、rThe Consequences of the Corporate Tax for Investment24.4Evidence on Taxes and InvestmentThere is a large literature investigating the impact of corporate taxes on corporate investment decisions.The conclusion of recent studies is that the investment decision is fairly sensitive to tax incentives,wi
28、th an elasticity of investment with respect to the effective tax rate on the order of 0.5:as taxes lower the cost of investment by 10%,there is 5%more investment.This sizeable elasticity suggests that corporate tax policy can be a powerful tool in determining investment and that the corporate tax is
29、 very far from a pure profits tax.25Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Consequences of the Corporate Tax for Financing24.5The Impact of Taxes on Financing26Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and
30、Public Policy,2/e,Jonathan GruberChapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberThe Consequences of the Corporate Tax for Financing24.5The Dividend ParadoxEmpirical evidence supports two different views about why firms pay dividends,as reviewe
31、d by Gordeon and Dietz(2006).The first is an agency theory:investors are willing to live with the tax inefficiency of dividends to get the money out of the hands of managers who suffer from the agency problem.The second is a signaling theory:investors have imperfect information about how well a comp
32、any is doing,so the managers of the firm pay dividends to signal to investors that the company is doing well.How Should Dividends Be Taxed?An important ongoing debate in tax policy concerns the appropriate tax treatment of dividend income.28Chapter 24 Corporate Taxation 2007 Worth Publishers Public
33、Finance and Public Policy,2/e,Jonathan GruberThe 2003 Dividend Tax CutA P P L I C A T I O NOne of the measures President Bush signed into law on May 28,2003,under the Jobs and Growth Tax Relief Reconciliation Act,was a reduction in the rate at which dividends are taxed.The 2003 law reduced both the
34、dividend and capital gains rates to 15%,making dividends significantly more attractive for investors.Proponents of the dividend tax cut believed it would both stimulate the economy and end what they perceived as the unfair practice of taxing corporate income and then taxing it again when that income
35、 was paid out in the form of dividends.Opponents of the dividend tax cut argued,however,that dividends are primarily received by higher income households and that such a tax cut would both worsen the countrys fiscal balance and make the tax burden less progressive.Several recent papers have studied
36、the impacts of the 2003 tax reduction and there has been a clear rise in dividend payouts.The key question of whether this tax cut actually raised investment,however,remains unanswered.29Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberChapter 2
37、4 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberTreatment of International Corporate Income24.6multinational firms Firms that operate in multiple countries.subsidiaries The production arms of a corporation that are located in other nations.31Chapter 24
38、Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberTreatment of International Corporate Income24.6territorial tax system A tax system in which corporations earning income abroad pay tax only to the government of the country in which the income is earned.glob
39、al tax system A tax system in which corporations are taxed by their home countries on their income regardless of where it is earned.How to Tax International Income32Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberTreatment of International Corp
40、orate Income24.6foreign tax credit U.S.-based multinational corporations may claim a credit against their U.S.taxes for any tax payments made to foreign governments when funds are repatriated to the parent.How to Tax International IncomeForeign Dividend Repatriationrepatriation The return of income
41、from a foreign country to a corporations home country.33Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberA Tax Holiday for Foreign ProfitsA P P L I C A T I O NThe proper taxation of foreign profits was the focus of the debate around the passage
42、of the American Jobs Creation Act of 2004.The bill was intended to rejuvenate the economy and create jobs.One of its most important provisions was a one-year reduction of the tax rate on repatriated profits from 35%to 5.25%.Critics of the bill voiced a number of concerns.One of these was the difficu
43、lty in controlling how companies would spend the repatriated money.Others were skeptical of the bills ostensible intention of stimulating the economy.By October 2005,U.S.companies had announced the repatriation of roughly$206 billionan amount representing nearly$37 billion in lost revenues due to th
44、e lower tax rate.However,it was clear that the expected surge in hiring and job creation was not materializing.As of this writing,a final evaluation of the bills effects has not yet been compiled because many companies operate according to the fiscal calendar and thus have been able to extend the de
45、adline for repatriation well into 2006.34Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberTreatment of International Corporate Income24.6transfer prices The amount that one subsidiary of a corporation reimburses another subsidiary of the same co
46、rporation for goods transferred between the two.How to Tax International IncomeTransfer Pricing35Chapter 24 Corporate Taxation 2007 Worth Publishers Public Finance and Public Policy,2/e,Jonathan GruberConclusion24.7Despite the declining importance of the corporate tax as a source of revenue in the U
47、nited States,it remains an important determinant of the behavior of corporations in the United States.The complicated incentives and disincentives that the corporate tax creates for investment appear to be significant determinants of a firms investment decisions.And both corporate and personal capit
48、al taxation substantially,although not completely,drive a firms decisions about how to finance its investments.The United States faces a difficult set of decisions about how to reform its corporate tax system.Despite repeated calls for ending“abusive corporate tax shelters,”there has been little movement to end the types of corporate tax loopholes that cause such activity.This lack of interest should not be surprising:corporate tax breaks have highly concentrated and powerful supporters,with only the diffuse taxpaying public to oppose them.36