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Lecture note Public finance (10th Edition) - Chapter 19: The corporation tax

In this chapter, the following content will be discussed: Distinguish between the private and public sector approaches to project evaluation; explain the net present value approach to project evaluation and compare it with the internal rate of return and the benefit-cost ratio; show why, under ideal conditions, public sector projects should strive to maximise consumer (and producer) surplus;. | THE CORPORATION TAX Chapter 19 I’ll probably kick myself for having said this, but when are we going to have the courage to point out that in our tax structure, the corporation tax is very hard to justify? President Ronald W. Reagan 19- Corporations Corporation – A state-chartered form of business organization, usually with limited liability for shareholders (owners) and an independent legal status Limited liability Corporations are “artificial legal persons” 19- Why Tax Corporations? Only real people can pay a tax Justifications Corporations are distinct entities Corporations receive special privileges from society Protects integrity of personal income tax 19- Structure Revenue - Expenses incurred earning revenues Taxable Income * Tax rate (15% - 35%) Tax - Credits Total Tax Alternative Minimum Tax Treatment of Losses 19- Allowable Expenses Employee Compensation Except compensation in excess of $1,000,000 Options do not have to be included Cost of | THE CORPORATION TAX Chapter 19 I’ll probably kick myself for having said this, but when are we going to have the courage to point out that in our tax structure, the corporation tax is very hard to justify? President Ronald W. Reagan 19- Corporations Corporation – A state-chartered form of business organization, usually with limited liability for shareholders (owners) and an independent legal status Limited liability Corporations are “artificial legal persons” 19- Why Tax Corporations? Only real people can pay a tax Justifications Corporations are distinct entities Corporations receive special privileges from society Protects integrity of personal income tax 19- Structure Revenue - Expenses incurred earning revenues Taxable Income * Tax rate (15% - 35%) Tax - Credits Total Tax Alternative Minimum Tax Treatment of Losses 19- Allowable Expenses Employee Compensation Except compensation in excess of $1,000,000 Options do not have to be included Cost of Material Inputs Taxes including employer contributions to Social Security Repairs and advertising Interest but not dividends Depreciation No investment tax credit k = investment tax credit q = acquisition price of asset (1 – k)q = effective price of asset 19- Considerations Depreciation Economic depreciation: The extent to which an asset decreases in value during a period of time Accelerated depreciation: Taking depreciation allowances faster than true economic depreciation Expensing: deducting the asset’s full cost at time of acquisition Tax life: the # of years an asset can be depreciated 3, 5, 7, 10, 15, 20, 27.5, and 39 years Most 5 years Intangibles Treatment of Dividends versus Retained Earnings Double taxation 19- General Analysis of Depreciation Tax Savings T = tax life D(n) = proportion of asset that can be written off against taxable income in nth year θ = corporate tax rate Present value of tax savings: ψ = θ * D(1) + θ * D(2) + + θ * D(T) 1 + r (1 + r)2 .