Deck 15: Taxation of Corporate Income 

Question 1

During periods of inflation historic cost overstates replacement cost.

Answer 1

False

Question 2

Inflation causes an understatement of true depreciation cost.

Answer 2

True

Question 3

Imputed interest from retained earnings are not deducted when computing taxable corporate income.

Answer 3

True

Question 4

Corporate dividends are paid from post-tax income.

Question 5

The corporate income tax in the United States is levied on the sum of economic and normal profits.

Question 6

Accelerated depreciation allows a firm to deduct more than the actual economic depreciation from its income each year.

Question 7

When the supply of savings is not perfectly inelastic, the corporate income tax can be shifted to workers.

Question 8

Assuming that the corporate income tax is not shifted to consumers in the short run, the long-run effect will be a reduction in the return to investment in both the corporate and noncorporate sector.

Question 9

In general, the shorter the depreciation period allowed for tax purposes, the higher the tax burden on corporations.

Question 10

The Tax Cut and Jobs Act of 2017 replaces the top marginal tax rate of 35 percent with a new flat rate corporate tax rate of 21 percent .

Question 11

The tax base for the corporate income tax in the United States is:

A)the sum of normal and economic profits of corporations.
B)economic profits of corporations.
C)normal profits of corporations.
D)retained earnings of corporations.

Question 12

If the corporate income tax is not shifted in the short run, then in the long run it will reduce the return to capital in the corporate sector only.

Question 13

The corporate income tax is levied only on retained earnings with dividends paid out exempt from taxation.

Question 14

In the long run the corporate income tax has no effect on the price of products produced by corporations.

Question 15

The excess burden of the corporate income tax stems from a misallocation of investment between the corporate and noncorporate sectors when the supply of savings is perfectly inelastic.

Question 16

Because the corporate income tax base includes dividends, those dividends are taxed twice if they are also included in the personal income tax base.

Question 17

Depreciation is based on historic cost.

Question 18

Because the opportunity cost of a corporate equity is not tax deductible, the corporate income tax encourages borrowing, which allows interest cost to be deducted from corporate income.

Question 19

Accelerated depreciation allows corporations to:

A)earn more interest on their capital costs.
B)reduce capital costs to zero.
C)reduce labor costs.
D)increase the time period over which assets are depreciated.

Question 20

The corporate income tax in the United States is levied only on economic profits.

Question 21

If interest on corporate debt is tax deductible, a firm's return on equity increases because:

A)after-tax income increases with the presence of debt.
B)generally, the presence of debt reduces the amount of equity to a greater effect than the reduction in after-tax.
C)debt reduces equity and increases after-tax income.
D)the presence of debt to lead to increases in dividends.

Question 22

According to the Harberger model of the incidence of the corporate income tax, the tax:

A)reduces the return to capital in the corporate sector of the economy only.
B)reduces the return to capital in all uses.
C)has no effect on the return to capital.
D)increases the return to capital.

Question 23

Inflation affects corporate income by:

A)understating depreciation and inventory costs.
B)overstating capital gains.
C)always increasing taxes.
D)both (a) and (b) are correct.

Question 24

The double taxation of dividends under U.S.tax code means:

A)dividends are taxed while not being adjusted for inflation.
B)dividends are paid from after-tax corporate income and then taxed again as personal income.
C)dividends are deducted as an expense at the corporate level, but as a gain at the personal level.
D)both (a) and (b) are correct.

Question 25

Explain how business income is measured.Why can an increase in the rate of inflation increase the effective tax burden of corporations?

Question 26

If the supply of savings is not perfectly elastic, the corporate income tax is likely to:

A)increase investment.
B)decrease investment.
C)increase the supply of labor.
D)decrease the supply of labor.

Question 27

Assuming there is no change in the payout structure, what measure would reduce corporate financing costs?

A)Allowing dividends to be deducted from income prior to assessing tax.
B)A reduction in the tax rate.
C)Limiting the amount of interest that can be deducted from income prior to assessing tax.
D)Both (a) and (b) are correct.

Question 28

If corporations maximize profits, the short-run incidence of a tax on its profits will be borne by:

A)consumers.
B)all investors.
C)corporate shareholders.
D)workers.

Question 29

Under the corporate income tax,

A)dividends paid out to shareholders are deducted from corporate income.
B)dividends are included in corporate income.
C)retained earnings are included in corporate income.
D)both (b) and (c) are correct.

Question 30

Assuming that the supply of savings is perfectly inelastic, the corporate income tax prevents the attainment of efficiency by:

A)reducing annual savings.
B)reducing annual investment.
C)reducing wages.
D)causing a misallocation of investment between the corporate and noncorporate sectors.

Question 31

Assuming that corporations maximize profits and investors maximize the return from their investments, a corporate income tax is likely to:

A)increase the price of corporate goods.
B)decrease the price of noncorporate goods.
C)have no effect on output prices.
D)both (a) and (b) are correct.

Question 32

Which of the following is true about the economic effects of the corporate income tax?

A)Its incidence is likely to be borne entirely by workers.
B)Its incidence is likely to be borne only by shareholders of corporations.
C)Its incidence is likely to be borne only by consumers of corporate products.
D)Its incidence is likely to be shared by owners of capital, workers, and consumers of corporate products.

Question 33

Under the corporation income tax in the United States,

A)interest on borrowed money cannot be deducted from the tax base.
B)only economic profits are taxed.
C)only normal profit is taxed.
D)the opportunity cost of equity cannot be deducted from the tax base.

Question 34

Assuming that corporations maximize profits, that investors maximize the return to their investments, and that the supply of savings is not perfectly inelastic, in the long run a corporate income tax will:

A)not prevent investment markets from achieving efficiency.
B)reduce investment.
C)reduce wages.
D)both (b) and (c) are correct.

Question 35

If corporations maximize profit, a corporate income tax:

A)has no affect on the profit-maximizing output in the short run.
B)reduces the profit, maximizing output in the short run.
C)increase the profit, maximizing output in the short run.
D)increases the supply of corporate output in the short run.

Question 36

If an all-equity firm has after-tax income of $100,000 based on a 34% income tax, what is the after-tax income of an equivalent firm that pays $15,000 in interest that is tax deductible?

A)$85,000.00
B)$105,100.00
C)$90,100.00
D)$100,000.00

Question 37

Assuming that corporations maximize profits and investors seek to maximize the return to their investments, the long-run impact of a corporate income tax is to:

A)reduce the incomes of corporate shareholders only.
B)reduce the incomes of workers only.
C)reduce the incomes of all investors.
D)increase the price of both corporate and noncorporate goods.

Question 38

In the long run a corporate income tax that initially reduces the return to investment in the corporate sector will also:

A)reduce the return to capital in noncorporate sectors.
B)increase the output of corporate goods.
C)decrease the output of noncorporate goods.
D)both (b) and (c) are correct.

Question 39

The effective tax rate is:

A)the same as the statutory tax rate.
B)based on real economic profits.
C)based on the nominal profits.
D)not inflation adjusted.