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Taxing Corporations

a. Many citizens who believe that the rich should pay more in taxes argue that the taxes levied on corporations should increase. Is it likely that increased taxes on corporations will increase taxes paid by the rich? In your answer make sure you consider all possibilities for the incidence of the tax and make your assumptions explicit.
b. Assuming that corporations maximize profits and investors maximize the return to their investment, explain how the corporate income tax will prevent efficiency from being attained.

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a) Citizens who believe that the rich should pay more in taxes say that taxes on corporations should increase. It is not likely that increased taxes on corporations will increase taxes paid by the rich. The assumption made by the citizens is that the rich are the main shareholders in corporations and so increasing corporate tax will lead to higher taxes. However, a large number of shares are held by employees, small investors, and financial institutions. Shares are also held by insurance companies, and pension ...

Solution Summary

The answer to this problem explains how taxing corporations can have undesirable consequences. The references related to the answer are also included.

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