Wednesday, June 3, 2009

Raise marginal corporate tax rates

I had blogged earlier about raising marginal income tax rates. Same should be the case with marginal corporate tax rates.

As the incoming government prepares its budget, the clamour for reducing corporate taxes will become shriller. Proponents of tax cuts argue that India's marginal corporate tax rate of 33.99% (30% plus 10% surcharge and 3% education cess on both) is higher than the average global corporate tax rate of 25.9%.

Opponents claim that India has the second lowest marginal corporate tax rate among all the G-20 nations (China is lowest at 33%) and that our tax system is filled with exemptions that ensures that our corporates pay an effective tax rate of only 20.6%.

As I had blogged earlier, the corporate taxes foregone by the plethora exemptions provided was a staggering Rs 57,655 crore in 2007-08. The effective tax rate for public sector companies was 23.35% while that of the private sector was just 19.50%. The IT sector took away Rs 11,880 crore as deduction on export profits and the telecom sector took Rs 6,850 crore in exemption.

In any case the government needs tax revenues to fund its commitments. China’s government revenues have been growing by almost 17% each year since 1998, whereas India’s have been growing relatively slowly at 12% in comparison.

Update 1
Nancy Folbre has this post in Economix about raising marginal tax rates in the US.

Update 2
The Economist has an article that examines the trend in corporate taxes across developed economies and finds that the rates may have reached their bottom and may even inch upwards.

Update 3 (2/2/2011)

David Leonhardt talks about how US corporates avoid taxes by exploiting loopholes. He writes that over the last five years, Boeing paid a total tax rate of just 4.5 percent, according to Capital IQ. Southwest Airlines paid 6.3 percent. And the list goes on: Yahoo paid 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent.

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