18. Corporate Income Tax—Design and Evidence

The corporate income tax has become increasingly complex across the globe. This reflects the complexity in measuring business income, divergence of tax law from accounting law, designing rules to depreciate capital assets or make inflation adjustments to ensure a correct tax base. The financial sector has particular characteristics that render it difficult to be taxed in a congruent manner with other sectors, so that special rules are needed to tax it. A narrowing of tax base has led countries to legislate different minimum taxes to avert revenue depletion from tax incentives and tax avoidance. Incentives distort equilibrium resource allocation in the economy. Protecting the tax base from becoming too distorted by measuring the marginal effective tax rate becomes a necessity so that subsequent corrective structural improvements can be made. Other considerations include the relationship between corporate and individual income taxes. Some countries attempt to integrate them. However, most countries tax individuals and corporations separately. Countries have considered alternatives to taxing corporate income such as taxing their cash flow, though the narrowness of the cash-flow tax base has obviated its introduction anywhere. Elaboration of some of these considerations is the subject matter of this chapter.