All corporations in the United States and Canada must pay
tax on their net income (profits) to the federal government and also
to most state or provincial governments. U.S. corporate tax rates generally
increase with income. For example, in 1997 corporations with profits
of up to $50,000 paid 15 percent in taxes, whereas corporations with
profits greater than about $18.3 million were taxed at a flat rate
of 35 percent. In Canada the basic rate for corporations was 38 percent
in 1996. In 1994 corporate income taxes accounted for about 9 percent
of all tax revenues in the United States and about 6.5 percent of all
tax revenues in Canada.
The corporate income tax is one of the most
controversial types of taxes. Although the law treats corporations
as if they have an independent ability to pay a tax, many economists
note that only real people-such as the shareholders who own corporations-can
bear a tax burden. In addition, the corporate income tax leads to double
taxation of corporate income. Income is taxed once when it is earned
by the corporation, and a second time when it is paid out to shareholders
in the form of dividends. Thus, corporate income faces a higher tax
burden than income earned by individuals or by other types of businesses.
Some
economists have proposed abolishing the corporate income tax and instead
taxing the owners of corporations (shareholders) through the personal
income tax. Other students of the tax system see the corporate income
tax as the price corporations pay in return for special privileges
from society. The most important of these privileges is limited liability
for shareholders. This means that creditors cannot claim the personal
assets of shareholders, because the liability of shareholders for the
corporation's debts is limited to the amount they have invested in
the corporation.
