Company Tax - Effective Tax Rates on Profits J . C . Stewart

Considerable controversy surrounds the measurement of profit in company accounts. Continuous inflation has underlined some of the problems involved. Current accounting practice in the United Kingdom and Ireland also obscures the amount of direct tax that companies pay. Kay and King (1980, p. 193) comment that the "effect of this accounting practice is that many companies, especially in manufacturing industry, show substantial tax charges in their accounts when in fact they are paying little or no tax at all". A similar comment applies to Irish companies as accounting standards in Ireland follow closely those in the United Kingdom. In addition, many features of United Kingdom Finance Acts are incorporated into subsequent Irish Finance Acts. A combination of differing or controversial measures of profit and obscure reporting of tax paid makes the calculation of tax rates on profits for the corporate sector a difficult if not arbitrary process. This paper attempts to estimate effective direct tax rates, calculated from published accounts of Irish companies, during the period 1964-79. An estimate of direct tax payments by companies may not be the same as an estimate of the incidence of direct tax on companies. This is because companies may be able to shift the burden of tax through higher prices on their products, so that the consumers of these products ultimately end up paying the tax. In other words, the formal incidence of a tax may not be the same as the effective incidence. Indeed many economists would agree with Kay and King (1980, p. 10) that in the long run the formal incidence of a tax is irrelevant to its effective incidence. The same may not be true in the short run. The traditional argument as stated, for example, by Kaldor (1956, p. 14), was that to the extent that firms maximise profits the formal incidence is equal to the effective incidence. Others have argued that oligopolistic behaviour rather than competitive behaviour is more normal in a modern economy. Hence, the introduction of a profits tax may result in a general rise in prices. King (1977, p. 248) argues that the incidence of corporate tax in an economy dominated by oligopolies depends on a number of complex factors, such as the determinants of corporate investment, and is difficult to estimate. There have been a number of empirical investigations of the extent of short-run shifting of corporation tax, not all of which are in agreement as to the extent to which short-run shifting takes place. For example, Dusansky (1972) con-