The Corporate Tax is one of the most poorly understood economic indicators when it comes to fundamental analysis of currency pairs and the broader stock market. Most economists have concluded that the Corporate Tax is among the least efficient and least defensive Tax. Although, there is an ongoing debate among economists about the efficiency of Corporate Tax collection from various companies. Beurocrats have agreed that it causes significant distortions in economic behavior.
The common person on the street believes that the Tax is directly paid by Corporations, which is not true. Owners and Managers of corporations often assume that the Tax is simply passed along to consumers—the vagueness about who actually pays the Tax accounts for its continued popularity among officials.
What is Corporate Tax?
The Federal Corporate Tax differs from the individual income tax in two ways. First, the Tax is levied on the net income and not on gross income. This means the profit of the organization is also included in the net income with permissible deductions of business costs. Second, it applies only to businesses that as registered as Corporations and not as partnerships or sole proprietorships.
The Corporate Tax is levied at different rates for different brackets of income. For example, in the U.S., 15% on taxable income under $50,000, 25% on income between $50,000 – $75,000 and rates varying from 34% to 39% on income above that. The federal government has kept the rates low for small corporates with a lower turnover as it can benefit companies to a greater extent. However, lower rates have little economic significance. More than 90% of all the Corporate Tax revenue came from 1.5% of corporations with assets higher than $10 million.
States levy further income taxes on these corporations, the rates ranging from 3 to 12 percent. One of the main reasons behind low State Corporate Tax is that the states can easily relocate out of states that impose unusually high taxes.
Effect on Capital Flow due to Corporate Tax
Today, economists are of the opinion that the burden of Corporate Tax falls entirely on the owners of capital. The latest research says that, since capital is mobile, it will flow to investments that produce the highest after-tax returns. High Corporate Tax raises the cost of capital and reduces after-tax returns in the corporate sector, thus leads to relocation of capital into Tax-exempt sectors of the economy.
When governments reduce the rates under various tax brackets, it has two major effects. Firstly it increases the supply of capital available to corporations, and secondly, it increases the rate of return on investments in the non-corporate sectors as capital becomes more plentiful there.
The major drawback of the relocation of funds due to higher tax rates is that the burden of Tax ultimately shifts to workers and employees. The workers, over time, become less productive and earn lower real wages.
The Economic Reports
The Economic Reports of Corporate Tax are announced on a yearly basis for most of the countries. However, during economic emergencies, changes to the Tax rates will be made by the Finance Ministry to stabilize the money flow into the companies. In the U.S., the Corporate Tax data is published and maintained by the Internal Revenue Service (IRS), which is the government agency responsible for the collection of taxes and enforcement of tax laws. The IRS also handles corporate, excise and estate taxes, including mutual funds and dividends. People in the U.S. refer to the IRS as the “tax man.”
Analyzing the Data
Corporate Tax plays a vital role in the long term growth of a country. Most investors pay close attention to the Corporate Tax rate of a nation as it determines the development of the Manufacturing sector and GDP as a whole. Institutional traders compare the Corporate Tax rates of different economies and invest in those countries where the Taxes are low. They feel that lower tax rates lay down the path of growth for companies, and they will also be able to pay dividends to their shareholders.
Impact on the currency
When the government reduces tax rates, companies will be able to retain their profits, and hence this will lead to reinvestment in the company. This directly leads to the expansion of the business and will be able to increase production. When the Manufacturing sector starts to perform well, investors will be prompted to invest in the economy either by purchasing shares of a company or in the currency. When large investors invest, smaller fund houses also start buying the currency, which leads to an appreciation in the currency.
Sources of information on Corporate Tax
Corporate Tax data is available on the official website of every country’s Finance department, which also provides a comprehensive analysis of the same. Here are the Corporate Tax rates of some of the major countries of the world.
Sources to find more information on Corporate Tax
There are many arguments in favor of the removal of Corporate Tax, but this is from the perspective of industries. When we think from the government’s point of view, the Corporate Tax is said to increase the revenue of the government, which is very much needed for running the nation. Executives believe that ‘an old tax is a good tax’ holds validity even today. Any major change in the tax regime imposes new costs and complications during the transition period.
Impact of Corporate Tax rates news release on price charts
We understood in the previous section of the article, the meaning of Corporate Tax, and the role it plays in an economy. In the following section, we will see how the Corporate Tax announcement impacts the value of a currency and cause volatility in the pair. The data of this economic indicator is keenly watched by long term investors and representatives of the manufacturing sector. In the below image, we can see that the Corporate Tax rate announcement has a moderate to high impact on the currency, and in most cases, the announcement is made by the Deputy Governor.
Today we will be analyzing the Corporate Tax rate of Australia, which shall be imposed on the companies for the current financial year. It is published on the official website of the Australian Taxation Office, which gives statistics of previous data as well. The below image shows that the Base Rate was fixed at 27.5%, while for the general category, the Tax rate was fixed at 30%. There were no changes in the Tax rate as compared to the previous year. Let us see how the market reacts to this data.
EUR/AUD | Before The Announcement
We shall first look at the EUR/AUD currency pair, where the above image signifies the state of the chart before the announcement is made. What we see is that the overall trend is up, and recently, the price has been moving within a range. We should be cautious before taking any sell trades in such chart patterns, as the price is at the bottom of the range, and the major trend is up. Depending on the news data, we shall trade the currency pair.
EUR/AUD | After The Announcement
After the Corporate Tax announcement is made, market crashes below, and we witness selling a fair amount of pressure, which takes the price lower, thereby strengthening the Australian dollar. One of the reasons behind the sudden downfall is that the Corporate Tax rates were maintained at the same level as before, which is said to be good the economy (due to overhead costs of changing rates). At this point, we cannot immediately go ”short” in the market as the price is the key ”support” level. Therefore, we should wait for the price to break the ”support” and then take a ”breakdown trade.” In such trades, the ”take profit” should be small based on the overall trend.
AUD/CAD | Before The Announcement
AUD/CAD | After The Announcement
The above images represent the AUD/CAD currency pair, and in the first image, we see that the overall trend is down, suggesting weakness in the Australian dollar, and now the price seems to be retracing the down move. If the data were to be positive for the Australian economy, we need to be extra cautious before attempting a buy trade as the trend is down, and there is a high chance that it might get sold into. However, bad news can work in our favor and might result in a further down move. After the news announcement, we see an increase in volatility to the upside, and the price closes with a bullish ”news candle.” Traders buy Australian dollars after they realize that the Corporate Tax rate was unchanged, which is good news for the manufacturing sector, particularly. One should be trading the pair on the long side, only after suitable reversal patterns are seen in the market.
AUD/CHF | Before The Announcement
AUD/CHF | After The Announcement
This is the AUD/CHF currency pair, where the chart characteristics appear to be similar to the AUD/CAD currency pair. Also, here the market has recently formed a range and currently at the bottom of the range. In this pair, positive news data can prove to the ideal case for going ”long” in the market as the price is at a point from where some buyers can pop up anytime. In any case, it is advised to analyze the data and then trade. After the Corporate Tax rate announcement, the market again moves higher, and volatility increases on the upside, which strengthens the Australian dollar by little. The sudden surge in price is because of the positive Corporate Tax data, and thus traders turn bullish on the currency. One can go ”long” in the market with a ”take-profit” at the ”resistance” of the range and stop-loss below the ”support.”
That’s about Corporate Tax rates and the impact of its new release on the price charts. Let us know if you have any questions in the comments below. Cheers.