An Essay on the Effects of Taxation on the Corporate Financial Policy

The taxation of corporate profits in the United States has been one of the most widely discussed issues in the area of public finance. Corporate revenues are currently subject to double taxation. Profits are taxed first at the corporate level and then, when distributed as dividends or when capital gains are realized, taxed a second time at the individual level. The share of tax revenues from corporate profits has been decreasing steadily over the past four decades. In 1962, corporate tax receipts accounted for 21 percent of all tax revenues, but, by 2003, their share dropped to 7.5 percent.1 In 2003, a proposal by the Bush Administration brought corporate tax integration back to the front pages. The final legislation, the Jobs and Growth Tax Relief Reconciliation Act of 2003, did not eliminate double taxation, but it did reduce the taxation of corporate profits at the individual level.2 Double taxation is still a reality; so, the discussion for corporate integration is clearly not over.