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prob_set_07 - University of California Davis Department of...

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University of California, Davis Department of Economics ECONOMICS 131 Spring 2008 L. Jay Helms Problem Set #7: Corporation Income Taxes 1. The Corporation Income Tax and Corporate Finance a. The corporation income tax can be viewed as a tax on equity capital (capital supplied by shareholders) but not on capital raised through borrowing. Explain what features of the tax base make this the case. b. What effect does this feature of the tax system have on the firm’s decision on how to raise money? Why might this pose a problem for the economy? c. Although all returns to equity are subject to the corporation income tax, the burden imposed by the overall U.S. tax system depends on whether profits are paid out as dividends or not. Explain why certain stockholders would prefer to have their corporation pay zero dividends, while others do not care whether profits are distributed or not. d. Explain how full integration of the corporation and individual income taxes
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