9.5 Corporate Income Tax

Corporate income tax applies to entities such as C Corporations, while S Corporations are considered pass-through entities, meaning their income is taxed at the individual level rather than the corporate level. The corporate income tax base are the net earnings of incorporated businesses. The tax base includes retained earnings and dividends. The cost of earning income and interest payments on debt are tax deductible.

One of the key advantages of corporate income tax is that it allows for the taxation of out-of-state owners for the services consumed within a particular state. It also ensures that retained earnings, which would not be taxed under personal income tax, are captured within the tax system. This adds to the progressiveness of the overall tax structure, as corporations generally have higher incomes.

However, there are also disadvantages. Corporate income tax can have a negative effect on savings and investments and reduce the after-tax returns potentially discouraging these activities. It can also distort financing decisions, favoring debt financing over equity because interest payments on debt are tax deductible, while equity financing is not. Additionally, there is an issue of double taxation with dividends, as they are taxed once at the corporate level and again when distributed to shareholders.