Chapter_19_v2(1)

Chapter_19_v2(1) - Part 5 The United States Revenue System...

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Part 5 – The United States Revenue System Chapter 19 – The Corporation Tax 1. This statement implies that it makes more sense to have a tax treatment that prefers dividends rather than retained earnings so that corporations don’t grow so large that good management is difficult. 2. If the corporation tax is abolished, then corporate income is not taxed if it is retained. Tax would only be paid when the earnings are paid out to individuals, allowing those earnings to grow at the before-tax rate of interest. This encourages accumulating income within the corporation. 3. a. The real value of depreciation allowances, Ψ of equation (19.1), falls when inflation rises. This is because as inflation rises, the real value of the series of deductions declines. b. When Ψ falls, the user cost of capital increases because Ψ enters negatively in the numerator of equation (19.5). c. A policy that permitted depreciation allowances to be inflation-indexed would undo the effect of part a. 4. Corporate tax revenues rise and then fall after an increase in the tax rate because it takes time for firms to adjust the location of their capital. As the capital flows out, tax
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Chapter_19_v2(1) - Part 5 The United States Revenue System...

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