Effects of corporate tax avoidance


Assignment:

Overall, good job reading the literature. Your specific research question listed on the title page is still a bit too broad. You should focus on either CEO compensation or corporate tax rates, or clarify a specific relationship between the two.
 
You have other smaller research questions embedded throughout the paper. For instance, you ask “what effect does CEO compensation have on business performance?”

That is a reasonable question, and would require differentiating between whether business performance drives CEO compensation, or whether better compensated CEOs drive better business performance.
 
You also note that CEO’s increase pay and boost profits through corporate tax avoidance. You could propose to measure the effects of corporate tax avoidance on specific economic indicators (GDP growth, government revenue, employment rates, public goods, etc. – pick 1-3, not all).

What are the effects of corporate income tax avoidance and CEO compensation on the economy as a whole?

Research question and literature discussion

The Federal corporate income tax is a tax on the income of corporations in the United States. The Corporate income tax is among the major sources of the federal revenue, raising about $320.7 billion in the 2014 fiscal year,which was 10.6 percent of all the Federal Government’s tax revenue and 1.9 percent of the United States gross domestic product (Gabaix and Landier 2006). 

Worldwide profits are paid by the U.S multinationals while the tax on profit for the foreign subsidiaries is paid by the parent corporation within the U.S. Corporate profits are also subject to a layer of taxation on the shareholder.Shareholders can be taxed for dividend distributions by the corporation, as well as for short or long term capital gains from the sale of their shares.

The maximum tax on capital gains and dividends is 23.8 percent which includes a net investment income of 3.8 percent (Stiglitz and Rosengard 2015).

From previous literature on how the gap between employees and the CEO pay affects the performance of the firm, research shows that the size of the gap is generally determined by the size of the firm in the industry (Carpenter and Sanders (2002).  Vertical pay disparity has negative effects on the firm, for example, in Korean firms.

This is based off of research on how firm performance affects the CEO compensation beyond what average employees make. Between 1978 and 2014, after the inflation adjustments, CEO pay increased by about 1,000 percent while employees in the same period saw their pay increase by only 11 percent.

However, in this research there are several factors which influence the firms pay apart from the individual CEO which implies that the CEO is not to blame here and should be paid despite the firms' performance (Pathak et.al 2014).

Many CEOs have been able to avoid corporate income tax and switched to being taxed as flow-through entities. Examples of these flow-through entities are sole proprietorships and partnerships (Warren 2015). 

The business is not faced with an entity level tax; the owners are supposed to include the business's profits together with their taxable income at the individual level under the income tax specifications.

Between the 1950s and 1980s, the relative benefit of corporate tax been a source of revenue decreased with a very big margin. One way that CEOs increases their pay and boost companies' profits is by avoiding corporate income taxes (Conyon and Murphy 2000). For example, in 2005 the CEO ofMandelez International Irene Rosenfeld received$19,674,812 in total compensation.

In this research proposal, we will be able to question the roles that CEOs play in the economy as a whole by examining the effects of CEO compensation on business performance, while also taking into account the effects of business performance on the economy. Several scholars have done research on how the avoidance of corporate income tax has increased their pay as well as the corporations' profits.

They have not, however, explained the deeper implication on how these pay and profit increases effect the economy. When these corporate income taxes are avoided, the amount of money available to provide public goods and services decreases, whereas consequently, the economy increased relative to it, making it out of balance.

Again, corporate income tax has contributed to budget shortfall. Corporations are complaining that there has been increased tax rates in the Federal income tax but what this has led to is the failure of many corporations to pay taxes on a number of profits they make (Lebergott 2015).

We will use questioners and interviews, as well as gathering statistics so as to get the relevant information on our topic. The target population would be several CEOs in selected corporations, unions which deal with different corporations, the Fed which controls the country’s accounting and finances and lastly, workers within those selected corporations.

The importance of this research proposal will be to educate the relevant individuals on the effect of the act of corporate income tax avoidance relative to CEO pay has on the economy. After gathering and analysing data, the expected measures and proposals could be taken to ensure that the economy is under control and tax rates are more fairly associated but also better regulated (Onji and Tang 2015).

References:

Carpenter, M. A., & Sanders, W. M. (2002). Top management team compensation: The missing link between CEO pay and firm performance?Strategic Management Journal, 23(4), 367-375.

Conyon, M. J., & Murphy, K. J. (2000). The prince and the pauper? CEO pay in the United States and the United Kingdom. The Economic Journal, 110(467), 640-671.

Gabaix, X., & Landier, A. (2006). Why has CEO pay increased so much? (No. w12365).

National Bureau of Economic Research.

Lebergott, S. (2015). The American Economy: Income, Wealth, and Want. Princeton University Press.

Pathak, S., Hoskisson, R. E., & Johnson, R. A. (2014). Settling up in CEO compensation: The impact of divestiture intensity and contextual factors in refocusing firms. Strategic Management Journal, 35(8), 1124-1143.

Onji, K., & Tang, J. P. (2015). A nation without a corporate income tax: Evidence from the nineteenth century Japan. ANU Centre for Economic History Discussion Paper Series, (2015-09).

Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.

Warren, A. G. (2015). Enough is Enough: Business Tax Cuts Fail to Grow the Economy.

Attachment:- research_proposal_and_project._presentation.revised_1.zip

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