The Lithuanian Free Market Institute has pointed out on many occasions that one of the most defective taxes – the corporate income tax – should be abolished. The following outlines, without detailed theoretical explanations, eleven conclusive arguments why this tax should be scrapped and what benefits this move would provide.
1. The removal of the corporate income tax along with its complex accounting procedures would allow businesses to allocate more of their time, resources and energy for the creation of value and jobs, investment, and business growth. Freeing businesses from the futile task of fulfilling bureaucratic requirements – a job that does not create any wealth – would provide more favourable conditions for investment.
2. If VAT is used, the same value added is taxed twice: once by income taxes, and then by VAT. If corporate taxes are charged along with VAT, this results not only in double taxation of the same value added, but also in taxation of taxes paid.
3. Legal persons (including firms) do not exist all by themselves. They represent organisations of natural persons. The income of a legal entity is the income of individuals who constitute it. Taxation of corporate income means taxation of an artificial object and subject as well as double taxation of the same income. Mechanisms that are used to avoid double taxation do not always achieve this purpose.
4. The object of the corporate income tax – taxable profit – is an artificial, derivative item. When the tax is to be computed, taxable profit should be calculated first. Despite being refined and perfected year by year, the rules of calculating taxable profit are, and will always be, imprecise and incomplete for one simple reason: It is impossible to describe in rules all possible cases. Therefore, the tax is charged not on the actual result of a business activity, financial profit, but on an artificial value, a hybrid of profit and costs.
5. Computation of taxable profit is a lengthy, labour consuming process. It compels businesses to keep double accounting – one for financial purposes and the other for tax purposes. This inflicts a heavy burden of tax administration. Business people complain that accountants spend three fourth of their time on tax accounting and only one fourth on financial accounting and management.
6. In the absence of explicit, clear-cut rules of tax computation, the lowest level administration – the tax inspector – plays the decisive role in enforcing tax rules. Under such conditions, opportunities for loose interpretation of tax rules coupled with the human factor make taxes less neutral and administration less transparent. They discredit both the administrative institution and the tax system itself.
7. The removal of a corporate income tax means the elimination of the defective tax accounting, but not taxation of income. The remaining tax is charged on an objective base: paid dividends and distributed profits.
8. The corporate income tax is not only an instrument for raising budget revenues but also a regulatory tool. The authorities in Lithuania have recognised that regulation through taxes is ineffective. A government-adopted programme for revising the tax code provides that taxes should be used to generate budget revenues. However, as long as the corporate income tax is used, this principle is violated and tax neutrality cannot be achieved. Regulation is inherent in the corporate income tax, because the tax is imposed on successful businesses. Punishing success has never been a good example of incentive-giving or regulation. Moreover, as long as the corporation tax exists, the state has a discretionary power to define income and costs. So if the regulatory role of taxes is to be scrapped and tax neutrality achieved, the removal of the corporate income tax is necessary.
9. It is a common fallacy to think that the burden of the corporation tax falls on corporations. If a company sells its production, the tax burden is shifted onto the consumer, the buyer of the products. When the conjuncture of a firm’s goods and services gets more complicated, the tax burden is transferred to employees. The owners of businesses bear the tax burden on very rare occasions, when all possible ways in which the tax incidence occurs have been exhausted and the company still has some profit left.
10. The abolition of the corporation tax correlates with the ongoing processes in other countries whereby tax accounting is being aligned with financial accounting. In this case, a similar result is being sought in a roundabout, more complicated way by recognising more costs as tax-deductible.
11. The removal of the corporation tax is included in the government’s programme and the programme for revising the tax code. This is an obligation to business. For businesses, there is nothing new about fulfilling their liabilities. It is time politicians fulfilled theirs.