Businesses need a stable society to which to contribute. They pay taxes on production, people, real estate and environmental impact, as well as on their income. A tax system must be designed to encourage investment and growth, through dialogue with all stakeholders.
- To quote American judge Oliver Wendell Holmes Jr., “Taxes are our toll on civilization.” While one can argue about the optimal size of state, it is clear that all governments need stable sources of income to provide their people with the social goods and services they expect.
- When it comes to taxing businesses, opinions run from one extreme to the other: some believe that corporate tax is the one that generates the most economic distortions, and that it should be reduced as far as possible. Minimum, or even deleted. For others, companies, especially multinationals, do not contribute equitably and constitute an under-exploited source of income.
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As so often, the truth is halfway. It is a matter of controversy who actually bears the cost of corporate tax – shareholders, employees or customers. By some estimates, up to 70% is borne by employees, but for others it is only 20%, if at all.
Nonetheless, it is clear that businesses benefit from the infrastructure of the countries where they are established and there are fair, practical and political reasons why they should pay taxes. However, while the tax is not only a cost to be minimized, it is also a burden that reduces investment and economic output. Plus, businesses pay more than just corporate tax. Therefore, there is a need for governments to reflect on the design of a tax system that supports investment, without ignoring the issue of the total tax burden borne by businesses. The professional tax preparation software is important there.
Does the corporate tax rate matter?
Corporate tax rates fell from a significant 40-50% in the 1980s to 21.4% in 2018, according to the OECD, which surveyed 88 countries. Part of the reason is the belief that lower rates encourage foreign investment and business in general. Research, such as the IMF’s working paper “Death and Taxes: Does Taxation Matter for Firm Survival,” also shows that the higher the marginal effective tax rate, the more likely the business will fail financially.
- However, as rates have fallen, the share of corporate tax in total tax revenue, and also in GDP, has increased as countries have broadened their tax bases. OECD tax statistics show that corporate tax fell from 12% of total tax revenue in 2000 to 13.3% in 2016; and from 2.7% to 3% of GDP.
In addition, numerous surveys show that when deciding where to invest, companies place more importance on other factors, such as political stability and access to labor and markets, than tax incentives. Stability and certainty in the tax rate usually takes precedence over a low overall rate. Therefore, despite its importance, the corporate tax rate is not the main driver of investment.