Chapter 3 Blog- “Illinois Tax Hikes will Hurt Companies"

Link: http://money.cnn.com/2011/01/13/news/economy/illinois_corporate_tax_hike/

Summary:

This article is about how Illinois’s budget crisis is reaching high levels of deficit and how Illinois has raised its corporate income taxes in businesses and raised income taxes from the citizens in order to pay off this deficit..  Corporate income taxes were previously 4.8% and have now increased to 7%.  Corporate taxes are taxes calculated on the company’s final net income.  The original income tax rate of Illinois was 3% and it has now risen to 5.25%.  Right now, Illinois is facing a deficit of approximately $13 million and $6 million of that are unpaid bills to social service agency, schools, and funeral homes.  Companies have angry responded to this crisis because many companies in Illinois are still recovering from the effects of the recent depression.  Now with these high corporate taxes this will cause a lot of negative effects to the companies.  Now companies will have a lower net income after the calculation of corporate taxes which mean they will have a lower margin than it used to be.  As a result less people will be hired in the future creating a higher unemployment rate.  Before the increase in income tax, Illinois was ranked 21^st for highest tax rates and now Illinois is one of the top states with one of the highest tax rates in the United States being ranked 3^rd right now.  There are many reasons why Illinois is in this deficit which forced them to increase corporate taxes.  The government isn’t paying its vendors and it isn’t corporate tax refund checks back to the government.  As a result, the Illinois government owes companies around $1 million in refunds.  Therefore this increase in income tax and corporate tax rates is not getting a good response from the citizens and companies and it seems like these increases in taxes are doing more harm than good to the economy.

Connection:

This article is related to chapter 3 because it mostly talks about how corporate income taxes can affect the net income of a company.   With increasing corporate income taxes, companies will have to pay more taxes off their sales and revenue, depending on the amount they earn in one accounting period.  Since companies lose money from corporate taxes, companies will treat it as an expense.  So, this article is also related to corporate income tax expense of chapter 3.  Corporate income tax expense is calculated on the net of all the sources of income including income from operations, non-operating sources and income from unusual or infrequent events.  If you take the company, JK Creative Printers & Mailing for example, they earned close to around $4 million in revenue and let’s say for example they had around $2 million worth of expenses.  Their net income is $2 million.  If we were to calculate the corporate income tax in Illinois, we would take the net income and multiply it by the corporate income tax rate.  The corporate tax rate in Illinois is 7%.  The tax that the company would have to pay is $140,000.  If you take a look at the previous tax rate, it was 4.8%.  If there was no increase in corporate taxes, the income would only have to pay $96,000.  It may seem that an increase of 2.2% of corporate tax rates may not be that high, but when dealing with really high numbers, it can make a big difference.  You can see why companies are really upset about this increase in corporate tax rate.  When the government increases corporate tax rates, the businesses will have to increase their sales tax rates as well.  With higher sales taxes less people would want to buy the goods and therefore result in a loss of sales.  This article also relates to deficit in chapter 3.  A deficit is when a corporation has more expenses than revenue.  In other words, in this case, the government is spending more money than money being earned and right now the government has a net loss.  Therefore by increasing the corporate tax rate, the government is earning more revenue but companies are receiving more expenses as a result from this cause.    

Reflection:

If I was put into this situation I would disagree with the idea of raising corporate tax rates because although the government is earning more revenue, it is harming the businesses too.  So, the increase in corporate tax rates has positive and negative effects.  The positive effect is that the government can collect enough revenue and pay off its bills and to its accounts payables to get out of the deficit.  However, on the negative side, businesses will lose more income, resulting in a lower margin.  Businesses will have to charge higher sales taxes which will cause a lower demand in their good with an increase in price.  More workers will get laid off since some businesses cannot afford to pay their salary with this increase in corporate taxes.  Therefore this will cause a higher unemployment rate which will worsen the economy.  Long-term effects may include lower sales because since more and more people become jobless, they will be less likely to buy goods which will lower business sales causing negative effects to the economy.  As you can see that the increase in corporate tax rates is doing more harm than good.  There are other solutions that the government can use instead of raising tax rates.  I thin the best solution is for the government to lower its spending.  Since United States is a capitalist country, there is little government involvement and really low tax rates.  Therefore the government isn’t receiving a lot of income from the citizens.  In other words, the government has a very low budget and it must be very careful of trying not to overspend its budget or it may result in a deficit like this one.  With lowering the spending, the government can avoid having more expenses than revenue and businesses won’t be hurt from the increase in corporate tax rates.