Some corporate after-tax profits get distributed as dividends to
shareholders. These dividends represent the shareholder’s share of after-
tax profits and would ordinarily be taxed along with his or her other
income. To avoid double taxation on this income, however, individual
shareholders get a personal income-tax credit for their share of the
corporate tax already paid by the firm. In this way, the corporate and
personal income-tax systems are said to be integrated.
When governments in Canada consider changes to income-tax rates, a
debate usually occurs regarding which taxes should be changed: personal
income taxes or corporate income taxes. Some people argue that
corporate income-tax rates are already too low and that firms are not
paying their “fair share” of the tax burden. Others argue that corporate
taxes end up being paid partly by firms’ customers and employees, and
partly by the individuals who own shares in firms, which now include
most individuals through some form of employer-sponsored or self-
administered pension plan. In addition, they argue that corporate taxes,
by reducing the rate of return on investment, impede the economy’s long-
run growth. Extensions in Theory 18-1 discusses taxes on corporate
income and highlights the important difference between taxing accounting
profits and economic profits—a distinction we first saw in Chapter 7
Extensions in Theory 18-1
Who Really Pays the Corporate Income Tax?