Why tax business?

Hi. I'm Christopher Berg. I'm a lecturer at Trinity College University of Cambridge and I'm here to talk about business taxation.

First I just want to give a quick overview of the talks that we'll have in this topic. First I'll start talking a bit about why we should tax businesses at all. That's maybe not as obvious as it may sound like. Then in the second talk, I'll focus on taxing corporate income, which is a big topic these days. I'll go in the next to talk three, bit into the details of how to design the tax base or the corporate income tax. I talk four, I'll move on to taxing firm input that is labor and capital used in the production process. For example. Then talks five and six, I'll focus on international aspects of business taxation, in talk seven I'll focus on a specific aspect of international taxation which is apportionment. In talk eight, I'll focus on taxing sales, talk nine, I'll talk about taxing the shareholders. That's the people who hold shares in different businesses and last in talk ten. I'll talk about fairness in business taxation.

Let's start on the broad question, why tax business? What we already know is that all taxes that are paid physically by firms. You can imagine that a firm pays for example, a corporate income tax to the government. All of these taxes are in the end paid by persons. The firm is just a way to distinguish between the persons and the operation but all taxes that are physically paid by the firm have to in the end be paid by the persons, either their own or work or buy from this firm. The topic of tax incidence is about who pays how much of each tax. This is a very important topic. But since we know that these businesses are governed by people, we can be very sure that all taxes on businesses are in the end either implicitly or explicitly paid by the persons involved in the business. Let me might say that isn't taxing firms just an extra step in taxing persons? What is the point in taxing these firms rather than just taxing persons directly? Why not just tax persons instead? I think the two main reasons for why we see most tax systems also applying taxes to firms not just to persons. The first reason is about the ease of administration or information. Businesses will typically have some rules about their accounting that may be useful for applying taxes to businesses whereas in many developing countries, for example, there may be less information about the individuals or persons. Large firms in particular in multinational corporations will have strict accounting rules such that there would be information on their operations that the tax authorities can use. Especially in low information environments using factors about businesses, such that their accounting may be a way to gain the relevant information about what's going on. Then the second reason why we might want to tax businesses rather than persons is because it can be hard to apply taxes to people who don't reside in the jurisdiction. Imagine European country say for example, Germany has lots of businesses operating within Germany, has people living within Germany. But if Germany wants to apply taxes to individuals living abroad, they can't very directly do that. One way they may be able to apply some taxes to people living abroad is to tax businesses operating in Germany because when Germany tax businesses operating in Germany, part of those taxes may in the end be paid by shareholders living in other countries. Those are the two main reasons why you may want to tax businesses rather than directly taxing persons.