The Corporate Income Tax : Its Distributive Implications on Individual Shareholders

Under the present system of income taxation in the Philippines, there is a differential burden created by the corporate income tax on shareholders' incomes vis-a-vis other types of personal income. Corollarily, within the corporate sector, a built-in incentive exists in favor of debt finance, but the role of this factor in the corporate choice between equity and debt finance has not been empirically established. Another major equity issue is the regressivity of the differential burden of the corporate tax among shareholders. This extra burden may eventually turn into a tax shelter for high-income taxpayers, creating a strong inducement for tax avoidance by capitalizing on the corporate device through retention of corporate profits. The proposed 20 percent final tax on dividends, which is part of the gross income package proposed under Cabinet Bill No. 34, is a tax in rem and will intensify the existing regressivity.