From President Barack Obama’s State of the Union address on January 25:
“Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change…So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years—without adding to our deficit.”
A relatively high corporate federal tax rate does discourage investment in the USA by domestic and foreign investment. Here is a chart of comparative rates:
- Australia: 30%, however some specialized entities are taxed at lower rates.[12]
- Canada: Federal 11% or 18% plus provincial 1% to 16%. Note: the rates are additive.[13]
- Hong Kong: 16.5%[14]
- Ireland: 12.5% on trading (business) income, and 25% on nontrading income.[15]
- New Zealand: 30%
- Singapore: 17% from 2010, however a partial exemption scheme may apply to new companies.[16]
- United Kingdom: 21% to 28% for 2008–2010.[17]
- United States: Federal 15% to 35%.[18] States: 0% to 10%, deductible in computing
However the ‘subchapter s’ provision allows stockholders of qualifying corporations, those primarily with 99 or less stockholders, to avoid federal income taxes on the corporate levels but to simply treat dividends as a source of regular income, the same as profits they might earn from running a business, up to a maximum of 35% per every added dollar over a certain amount.
Stockholders of standard corporations are taxed twice: Once on the corporate level, and a second time on their personal federal income tax return. However, there is a provision whereby the most tax they will have to pay on dividends is 15%, rather than a potential 35%.
Nevertheless, a wealthy individual could end up paying 35% plus 15% in combined taxes on income from corporate dividends as opposed as opposed to a wealthy individual investing in a ‘subchapter s’ corporation paying a maximum of 35%.
(Another factor, briefly described below, is capital gains taxes. Sometimes corporation grow more valuable without technically creating profits, so their stock value goes up. When their stock is sold, the profit is taxed at a maximum of 15%. This ‘loop hole’ also would need to be taken into consideration in modifying current corporate income tax structure.)
If all corporations were treated under ‘subchapter s’ status, they would become far more attractive forms of investment by both USA and foreign investors. A provision would be desirable to tax dividends to foreign investors with withholdings at the corporate level so that they would pay their fair share. Whether the boost to investments in corporations plus closing of loop holes would offset the lower total taxes is an important question.
Below are excerpts from articles taken from Wikipedia. Additional information can be obtained through using the links to the actual articles.
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Dividends
Many countries impose corporate tax or company tax on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. The taxes may also be referred to as income tax or capital tax. Entities treated as partnerships are generally not taxed at the entity level. Most countries tax all corporations doing business in the country on income from that country. Many countries tax all income of corporations organized in the country.
Company income subject to tax is often determined much like taxable income for individuals. Generally, the tax is imposed on net profits. In some jurisdictions, rules for taxing companies may differ significantly from rules for taxing individuals. Certain corporate acts, like reorganizations, may not be taxed. Some types of entities may be exempt from tax.
Many countries tax corporate entities on income and also tax the owners when the corporation pays a dividend. Where the owners are taxed, a withholding tax may be imposed. Generally, these taxes on owners are not referred to as corporate tax.
Examples of corporate tax rates for a few English-speaking countries include:
- Australia: 30%, however some specialized entities are taxed at lower rates.[12]
- Canada: Federal 11% or 18% plus provincial 1% to 16%. Note: the rates are additive.[13]
- Hong Kong: 16.5%[14]
- Ireland: 12.5% on trading (business) income, and 25% on nontrading income.[15]
- New Zealand: 30%
- Singapore: 17% from 2010, however a partial exemption scheme may apply to new companies.[16]
- United Kingdom: 21% to 28% for 2008–2010.[17]
- United States: Federal 15% to 35%.[18] States: 0% to 10%, deductible in computing
Most systems that tax corporations also impose income tax on shareholders of corporations when earnings are distributed.[19] Such distribution of earnings is generally referred to as a dividend. The tax may be at reduced rates. For example, the United States provides for reduced amounts of tax on dividends received by individuals and by corporations.[20] By contrast, the United Kingdom provides for reduced amounts of tax only on dividends received by individuals.[21]
http://en.wikipedia.org/wiki/Corporate_tax
An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.
In general, S corporations do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. This concept is called single taxation; if the corporation is taxed as a C corporation, it will face double taxation, meaning both the corporation’s profits, and the shareholders’ dividends, will be taxed.
Qualification for S corporation status
In order to make an election to be treated as an S corporation, the following requirements must be met:
- Must be an eligible entity (a domestic corporation, or a limited liability company which has elected to be taxed as a corporation).
- Must have only one class of stock.
- Must not have more than 100 shareholders.[1][2]
- Spouses are automatically treated as a single shareholder. Families, defined as individuals descended from a common ancestor, plus spouses and former spouses of either the common ancestor or anyone lineally descended from that person, are considered a single shareholder as long as any family member elects such treatment.[2]
- Shareholders must be U.S. citizens or residents, and must be natural persons, so corporate shareholders and partnerships are generally excluded. However, certain trusts, estates, and tax-exempt corporations, notably 501(c)(3) corporations, are permitted to be shareholders.[3]
http://en.wikipedia.org/wiki/S_corporation
Profits and losses must be allocated to shareholders proportionately to each one’s interest in the business. Under tax-cutting legislation passed in 2003, and extended by The Tax Increase Prevention and Reconciliation Act of 2005 until 2009, most ‘ordinary’ dividends are known as ‘qualifying’ dividends and are taxed at special low rates of 5% or 15%*. Qualified dividends are shown in box 1b of Form 1099-DIV.
http://www.usa-investment-tax.com/taxation_dividends.asp
This article is about Capital gains tax in the United States. For other countries, see Capital gains tax.
In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income. Capital gains are generally taxed at a preferential rate in comparison to ordinary income (26 U.S.C. §1(h)). This is intended to provide incentives for investors to make capital investments, to fund entrepreneurial activity, and to compensate for the effect of inflation and the corporate income tax. The amount an investor is taxed depends on both his or her tax bracket, and the amount of time the investment was held before being sold. Short-term capital gains are taxed at the investor’s ordinary income tax rate, and are defined as investments held for a year or less before being sold. Long-term capital gains, which apply to assets held for more than one year, are taxed at a lower rate than short-term gains. In 2003, this rate was reduced to 15%, and to 5% for individuals in the lowest two income tax brackets. These reduced tax rates were passed with a sunset provision and are effective through 2010. On Dec 17, 2010, President Barack Obama signed a bill extending this to 2012.[1] If they are not extended before the end of 2012, they will expire and revert to the rates in effect before 2003, which were generally 20%.
http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States
