L13: Corporate and International Taxation

Question 1

how does corporate tax work?

Answer 1

businesses organised in many forms: partnerships, sole proprietorships, c corporations (traditional corporations), s corporations (corporations with <100 shareholders)

for all but c corps, earnings included on owners’ tax returns
- no separate entity-level tax

for c corps, earnings taxed separately and owners taxed when company distributes earnings through dividends
- unique because there’s a tax on the corporation and on owners
- argument of double taxation

Question 2

distortions associated with the corporate tax

Answer 2

corporations can lower taxes by retaining earnings
- earnings taxed when paid out as dividends but not if they’re not

corporations can lower taxes by borrowing from low-rate or tax-exempt investors, as interest payments are tax deductible

corporations want to operate outside the corporate sector if possible to reduce taxes (worsens economic outcomes)

Question 3

effective tax rate

Answer 3

tax rate that imposes the same tax on new investment, in present value, as the system does

Question 4

bonus depreciation as an illustration of effective tax rate

Answer 4

normal measurement of income from investment includes a deduction for depreciation
- loss in value of an asset due to its use and declining productivity

accelerated depreciation
- faster write-off than true/economic depreciation
- lowers the firm’s effective tax rate by increasing the present value of depreciation deductions

Question 5

taxation of multinational enterprises

Answer 5

MNCs did not use to be so important
- multinationals as companies producing in more than one country and jurisdiction

enhanced tax competition - race to the bottom
- inducing countries to compete with each other by lowering corporate tax rates as a way to remain competitive on the international stage

worldwide approach:
- tax imposed by the country where the company resides, regardless of where profits are earned

territorial approach:
- tax imposed by the country where the company produces/earns profits

Question 6

changing economic setting

Answer 6

share of IP in US nonfinancial corporate assets has more than doubled

share of before-tax US corporate profits from overseas nearly quintupled

share of cross-border ownership of equity increased

Question 7

implications for tax policy of this changing economic setting

Answer 7

increased pressure on tax systems based on corporate residence
- easier to engage in inversion with a change in corporate structure which facilitates a change in residence

increased pressure on tax systems based on where companies produce

increased pressure on tax systems based on where companies report profits
- companies adjust where they report profits to a certain extent independently of where they actually earn them

Question 8

American response

Answer 8

lowered corporate tax rate substantially, reducing incentives for profit/production shifting and inversions

moved away from worldwide taxation

lowered tax rate on US profits attributable to IP

Question 9

world response

Answer 9

OECD inclusive framework
- 15% minimum tax on domestic profits to eliminate incentives to shift production and profits

no US response so far

Question 10

why keep the corporate tax

Answer 10

main justification based on corporate tax incidence
- view that the corporate tax is very progressive, falling primarily on corporate profits

corporate tax falls on wealth, not just corporate capital