How Does A Corporate Income Tax Affect Company Decisions?

Almost all corporations are required to pay a corporate income tax to the Internal Revenue Service. Furthermore, many states also charge corporate income taxes to corporations that do business in that state. While corporate income taxes are the same as personal income taxes in the fact that all companies must pay them, it is important that one understands that corporate income taxes can directly affect the decisions and policies of most companies and corporations.

Corporate Income Taxes and Corporate Hiring Decisions

One of the biggest ways that corporate income taxes may impact a corporation or company is when corporate income taxes are levied at such a high rate or percentage that it may hinder the growth of some companies. Often, if a corporation is unable to take advantage of corporate tax loopholes or does not have sufficient deductions or tax credits that can be claimed, corporate income taxes can eat away a large part of a corporation's earnings.

Therefore, when a corporation is forced to pay high amounts of income tax, the company may not be able to grow and offer employment to new employees. In fact, one of the most common ways that corporations respond to large corporate tax hikes or new types of corporate taxes is to begin to lay off workers or employees in order to cut costs and maintain profit margins.

While the increased amount of corporate taxes paid by corporations does help the average citizen in many ways with increased revenue being paid to the government, high corporate income taxes can also directly affect the jobs of people that rely on the corporation to earn a living.

Corporate Taxes and Business Relocation

In some areas, corporations are not only subject to federal corporate income taxes, they are often subject to state and local income taxes as well. Therefore, when the corporate income tax burden for a corporation becomes too much, the corporate directors and board of the corporation may choose to simply relocate the company to a state or locality where corporate income taxes are not assessed at such a high rate. Often times, these types of relocations will result in the loss of many jobs as well as revenue that is spent in the local economy.

Corporate Income Taxes and New Products

In order to maintain higher profit margins and reduce its corporate income tax liability, a corporation may choose to design products or services that allow them to take advantage of many types of federal tax credits and deductions.

Usually investing in new technologies or products and services that are eligible for federal tax credits and deductions will result in a shift in strategy or processes that leads to the cancellation of some types of products and services and the creation of others. Therefore, corporate boards of directors are often faced with difficult decisions in order to maintain a balance of profitability with current products and services and potential tax savings by creating new ones.

While new products and services that qualify for income tax credits and deductions usually benefit our society as a whole: in the short term, they could impact certain people's lives in a negative way. For example, by discontinuing certain products or services, corporations may need to lay off workers or employees or discontinue products that are relied upon by consumers or other businesses for a number of reasons.


blog comments powered by Disqus