Following an introduction, the paper is divided into two parts followed by a conclusion. Part II reviews a number of objectives of the corporate tax, arguing that they should carry more weight as arguments in favour of the corporate tax than they are often attributed. Furthermore, while it is conceded that the corporate tax is a second or even an nth best tax for achieving these objectives, there are simply no administratively feasible or politically acceptable alternatives to it. The arguments reviewed in the paper are as follows. First, by taxing income from capital, the corporate tax increases the comprehensiveness, progressivity, and fairness of the income tax. Second, since it falls, at least in part, on pure economic profits, the corporate tax, at least to this extent, raises revenue efficiently. Third, the corporate tax is a necessary support for the individual income tax since without it corporate - source income could accumulate tax - free. Of course, this familiar withholding function of the corporate tax would suggest that the corporate tax should then be refunded when corporate retained earnings are distributed and taxed in the hands of individual shareholders; however, the additional economic inefficiencies and administrative complexities created by all apparently politically acceptable systems of refunding the corporate tax make the effort not worth the costs. Fourth, the corporate tax is a justifiable, widely accepted and efficient method for source countries to levy tax on the business income earned by non - residents. Fifth, the tax serves as a benefit tax, requiring corporations to bear part of the cost of the government services from which their business operations clearly benefit. Sixth, the tax serves the pragmatic purpose of collecting a good deal of revenue in an administratively efficient and politically acceptable way. Seventh, since the corporate tax is in place, and the economy has adjusted to it, any changes in the tax will cause inequities and windfall gains. Economists and other critics have a long litany of complaints about the corporate tax. These arguments can be grouped under the traditional tax policy criteria of equity, efficiency, and administrative practicality. Part III of the paper argues that these arguments against the corporate tax are not as compelling as they might appear. The arguments addressed in this part of the paper are as follows. First, critics argue that the corporate tax amounts to double tax and therefore is inequitable. Second, they argue that the tax creates three types of distortions: distortions in corporate payout policies in favour of the retention of corporate earnings is compared with its distributions; distortions in the debt/equity ratios in favour of debt and against new share issues; and distortions in the legal forms of business organization in favour of non - corporate as compared with corporate forms. Third, they argue that the corporate tax is difficult to administer because it requires inherently arbitrary line drawing between legal concepts such as corporate and non - corporate business enterprises, and debt and equity. The conclusion reviews and dismisses the arguments made in favour of adopting the American proposal to exempt dividends from taxation, or some variation of that proposal. Also, it presents an optimistic prediction about the future role of the corporate tax. Some critics of the separate corporate tax have maintained that even if policy makers do not abandon the tax because they are not persuaded by the tax policy arguments in favour of its abolition, increasing globalization will force its demise. Instead of this pessimistic diagnosis of the future role of the corporate tax, the paper concludes by suggesting that the same factors that are relied upon to predict its ultimate rejection may in fact be the factors that dictate the survival of the corporate tax.
Kim Brooks, "Learning to Live with an Imperfect Tax: A Defence of the Corporate Tax" (2003) 36: 621