Corporate Taxation (ch 24) In the US, corporations are taxed on their _____ earnings.

By statute, most corporations face a ____% marginal tax rate. In practice, the _____________ tax rate is much lower for many firms. A. What are Corporations and Why do we Tax Them? Not all firms are corporations. Non-corporate sector consists of The non-corporate sector accounts for about ______% of all sales in the US. Within the corporate sector, most of the production is done by firms owned by _________________. Major advantage: 2 types of corporations: The major difference between the two is:

We will focus on C-corporations. 1. Ownership vs Control Ownership means: Control means: The agency problem refers to:

2. Executive Compensation and the Agency Problem How can execs receive such high compensation? -

Stock options:

3. Firm Financing Debt Finance:

Bonds: Equity Finance: Dividends: Capital Gain: Retained Earnings:

4. Why do we have a corporate tax? a. Pure Profits Taxation

This is not the way corporate taxation works for two reasons: -

Economic profits vs Accounting profits

b. Retained Earnings

B. The Structure of the Corporate Tax Formula for the taxes of a corporation:

1. Revenues

2. Expenses a. Three components Cash-flow costs of doing business:

Interest payments:


Depreciation allowances:

b. Economic Depreciation

c. Depreciation in Practice

straight-line depreciation: accelerated depreciation:

The value of depreciation deductions rises with the __________________ with which they are allowed. The PDV of any tax break is _______________________ the sooner you get the break.

3. Corporate Tax Rate

4. Investment Tax Credit

C. The Incidence of the Corporate Tax Rate

D. The Consequences of the Corporate Tax for Investment 1. Theoretical Analysis of Corporate Tax and Investment Decisions

a. Effects of a Corporate Tax on Corporate Investment

b. Effects of Depreciation Allowances and the Investment Tax Credit on Corporate Investment

c. Effective Corporate Tax Rate The effective corporate tax rate refers to

2. Negative Effective Tax Rates

3. Policy Implications of the Impact of the Corporate Tax on Investment (The Impact of the 1981 and 1986 Tax Reforms)

4. Evidence on Taxes and Investment

E. Consequences of the Corporate Tax for Financing 1. Impact of Taxes on Financing

2. Why not all debt?

3. Dividend Paradox

Empirically, 2 reasons: -

4. How should dividends be taxed? Dividends have three effects on firm financing decisions: -

The 2003 Dividend Tax Cut:

5. Corporate Tax Integration An alternative approach to corporate tax policy:

F. Treatment of International Corporate Income Multinational firm: Subsidiary: 1. How to Tax International Income Territorial system:

Global system:

About half of OECD nations, including the US use the ___________________ approach.

A foreign tax credit refers to:

a. Foreign Dividend Repatriation

b. Tax Holiday for Foreign Profits

c. Transfer Pricing Transfer Pricing refers to:

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