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Chapter 18: Problem 5

(Related to the Apply the Concept on page 615 ) Business historian John Steele Gordon noted in a Wall Street Journal column that the first federal corporate income tax was enacted in 1909 , before passage of the Sixteenth Amendment made a federal income tax constitutional. According to Gordon, Congress enacted the corporate income tax because of "the political pressure to tax the rich." Is the corporate income tax an efficient means of taxing the rich? Briefly explain.

Short Answer

Expert verified
The efficiency of corporate income tax as a means of taxing the rich can be subjective and is dependent on one's point of view. While it was initially enacted under political pressure to tax the rich, the economic impacts of corporate tax can be wide reaching, affecting individuals from various economic classes.

Step by step solution

01

Understanding Corporate Income Tax

Corporate income tax is a levy placed on the profit of a firm to raise taxes. After operating earnings is calculated by deducting expenses including the cost of goods sold (COGS) and depreciation from revenues, income tax is deducted. The net income is then distributed among shareholders as dividends or held within the company as retained earnings.
02

Reflecting on The Economic Impact

It's important to note that corporations are owned by shareholders who can belong to any economic class - not just the rich. When corporations are taxed, they may offset these costs by reducing employee wages, increasing product prices, or reducing dividends - all of which can negatively impact people from all economic classes.
03

Examining the Historical Context

The historical context given in the question outlines that the federal corporate income tax was enacted before the passage of the Sixteenth Amendment because of political pressure to tax the rich. This suggests an initial intent to use the tax as a tool to redistribute wealth from corporations (presumably owned by the rich) to the federal government.
04

Formulating an Argument Based on Analysis

Deciding whether corporate income tax is an efficient means of taxing the rich based on this information is subjective. Some could argue that it isn't efficient, as it also impacts people of all economic classes through reduced wages, higher product prices, and reduced dividends. Others might argue that it is an efficient means, citing the initial political pressure to tax the rich as justification for the tax's existence.

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Most popular questions from this chapter

Briefly explain whether you agree with the following argument: The median voter theorem will be an accurate predictor of the outcomes of elections when a majority of voters have preferences very similar to those of the median voter. When the majority of voters have preferences very different from those of the median voter, the median voter theorem will not lead to accurate predictions of the outcomes of elections.

Cecil Bohanon, an economist at Ball State University, and Brian Pizzola, an economist with the accounting firm Ernst \& Young, used a proposed tax on income earned by credit card lenders in Minnesota to explain how tax incidence is determined. The tax, which state lawmakers did not pass, would have been imposed on lenders who charged credit card customers more than 15 percent interest on their balances. Bohanon and Pizzola explained that many of those who paid high interest rates were consumers with fewer other sources of credit, and there was nothing to prevent lenders from further raising interest rates after the tax was imposed. John Spry, an economist at St. Thomas University, stated that the proposed tax was "highly regressive \(\ldots\) twenty percent of the new tax would be paid by Minnesota families with the lowest 10 percent of income. Thirty-seven percent of the tax would be paid by families with the lowest 20 percent of income." a. Explain why John Spry believed that the proposed tax would have been "highly regressive." b. Do Bohanon and Pizzola believe the elasticity of demand of those who would have been most affected by the tax was more or less elastic than the elasticity of supply of credit card lenders? Briefly explain.

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What is the difference between a marginal tax rate and an average tax rate? Which is more important in determining the effect of a change in taxes on economic behavior?

(Related to Solved Problem 18.4 on page 621 ) Evaluate the following statement: "Policies to redistribute income are desperately needed in the United States. Without such policies, the roughly 13 percent of the population that is currently poor has no hope of ever climbing above the poverty line."
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