Category: taxes

Introduction

The year 2001, saw America rise up to the prospects of a grim economic outlook since there were signs of an impeding depression. As a result, former president Bush decided to introduce new tax measures that were going to simplify the tax system, as well as, act as an incentive for economic growth (Harvard Law School 3).

The new tax system was meant reduced tax rates on individual income, child taxes, married couple’s tax and other tax groups. Certain taxes such as the estate tax were completely eliminated and deductions such as the poor only benefitted in terms of percentage cuts only (Citizens for Tax Justice 1).

However, the tax cuts, which were enacted during Bush’s first term, are soon to expire and as a result, there is a lot of debate charitable deduction made available to non-itemizers; however, the biggest gainers were low income families because their percentage of tax cut was overwhelmingly huge.

However, this fact did not take long before it was highly politicized because of allegations that the wealthy benefitted most when it came to the dollar amount, while thegoing on between the republicans and democrats regarding if the tax cuts should be extended into the future or not.

Focus is also on the president’s plan to restructure the tax system, with certain allegations implying that, the president’s new tax plan is set to make small business owners pay up to half their earnings in federal tax (Los Angeles Times 2).

Calls to end the federal tax cuts are majorly spearheaded by the democrats because they are of the opinion that the tax cuts majorly favor the rich and consequently lead to the growth of the national tax deficit.

It is therefore their belief that eliminating the tax cuts should cover a major milestone towards closing the deficit gap created by impliemmntinf the tax cuts in the first place. This study seeks to explore arguments for, and against, the retention of the tax cuts.

Advantages of Extending the Tax Cuts

Letting the Bush tax cuts stay, is likely to save small business owners from having to pay hefty taxes to the federal government – a move which will ultimately influence the overall growth of the national economy (Los Angeles Times 1). This is true because small businesses submit individual tax returns the same way large businesses do and therefore, they would be harmed by a change in the tax system (Los Angeles Times 1).

It is also estimated that the rich who are allegedly being protected by conservatives of the Bush tax system, will pay less than they would, if the tax cuts were left to expire naturally (Los Angeles Times 3).

This means that though the tax cuts were largely seen to favor the rich, the rich would further benefit from the tax cuts if the Obama tax proposals are implemented. It is therefore better to let the tax cuts prevail because the rich would pay more taxes as a result.

Disadvantages of Extending the Tax cuts

Extending the Bush tax cuts would have significant impact on the American government national deficit because it is projected that if the tax cuts are extended over the next year, the government is expected to lose about 690 billion dollars.

It is also true that though the Bush tax cuts were meant to significantly cut taxes for everybody, it heavily favored the wealthy (Citizens for Tax Justice 1). It is therefore going to be highly inefficient for the government to extend the tax cuts because it benefits the rich the most.

Moreover, extending the tax cut means that the national debt is going to increase to about nine trillion dollars if it is extended for the next ten years (Center for American Progress 5). This means that, Americans will have to pay for the national debt at higher rates (in the future) because the government will have to borrow money to sustain itself, despite the deficit.

Furthermore, it is morally wrong to maintain the Bush tax cuts to benefit only 2% of America’s population, which is also the richest income group, while middleclass citizens do not reap as much benefit from the tax cuts (Citizens for Tax Justice 3).

In other words, there is no point of maintaining the tax cuts to people who do not need it, while letting other national issues like healthcare, infrastructure, education and the likes, suffer as a result.

Incentives

Despite the raging debate regarding if it is right to extend Bush’s tax cuts or eliminate them altogether, democrats and republicans have agreed that the tax cuts should be extended, at least for people who earn 250,000 dollars, or less (Center for American Progress 5).

This means that most of the incentives for individual income, child tax credits and marriage couple’s tax would be extended, but the tax system changes for people earning more than 250,000. The incentives for the existing tax brackets are explained by Department of the Treasury that:

“The top two brackets would be cut from 39.6 and 36 percent to 33 percent, and the next two from 31 and 28 percent to 25 percent. The lowest existing bracket would remain at 15 percent, but a new ten percent bracket would be added for the first $6,000 of income, $12,000 for married couples.

The proposal would also increase the child tax credit from $500 to $1,000 per child and make part of it applicable against the Alternative Minimum Tax (AMT)” (5).

The following diagram shows these tax cuts:

Also, as a point of argument to bring everyone on board regarding the idea of repealing the bush tax cuts; in the defense of the democrats, several small business owners who were argued to suffer from the expiry of the tax cuts will not be influenced by the expiry of the tax cuts because it is estimated that only about three percent of them have earnings that exceed 250,000 dollars (Center for American Progress 2).

Moreover, it is also affirmed that some of these small businesses are not necessarily small, in comparison to the established corporate giants.

Economic Implications

It is no doubt that the bush tax cuts have had a severe effect on the national debt burden. In the year 2000, it was estimated that the real cost of implementing the tax cuts was going to be about 1.9 trillion dollars and in reality, the US suffers significant budget deficits of close to five trillion dollars (Center for American Progress 2). The following diagram shows this situation:

Interestingly, it is on record that, Bush inherited a record surplus in federal budget from his predecessor and though he assured the nation that he was going to reduce the public debt by about two trillion dollars, he increased the public debt to five trillion dollars as soon as his tax cuts were made law.

This means that his tax cuts came at a very high cost and the current government is only seeking to decrease this debt burden. Definitely, a sure way of doing so is not maintaining the status quo, which started the problem in the first place.

Experts therefore note that if the bush tax cuts are extended, Americans may soon have to pay very high interest rates to pay back the money that will have to be borrowed by the government to finance its social programs (Center for American Progress 2). Moreover, there will be no end in sight for the ever-growing American budget deficit.

The Bush tax cuts have also significantly influenced the funding of several basic social programs such as Medicare, retirement pension schemes and the likes. In detail, it is estimated that the funding for these social programs have been scaled down by almost three trillion dollars (Center for American Progress 2).

Also, in as much as the tax cuts were meant to boost economic growth and ease the creation of jobs, it is documented that three years after the tax cuts were made law, the total jobs shrunk from 132 million jobs to 131.4 million jobs (Center for American Progress 2).

Focusing more on the creation of jobs, though the Bush tax cuts never created any new jobs in the first three years, the economy faired well in the following three years, but this cannot be specifically attributed to the tax cuts.

Evidence is made of the Clinton tax raise in 2003, where the American total job estimate was 111 million and six years down the line, there was a 16.5% increase in job creation (Center for American Progress 2). This means that the rise in job creation during the last three years (of a six year time span after the tax cuts were made law) cannot be solely attributed to the tax cuts.

The Bush tax cuts also never did much justice to the economy either because the national economic growth rate was more stagnant when compared to the “Clinton economy”. There is a 10% difference in the economic growth rate between Clinton’s regime and after Bush’s tax cuts were made law.

This is true because in the first six years after Clinton clinched power, the national gross domestic product (GDP) grew by 26% but after the Bush administration administered the tax cuts, the GDP only grew by a paltry 16% (Center for American Progress 2).

The following diagram represents the fall in GDP during the tax cut period:

This means that the tax cuts never added any value to the economic growth, as much as it should have (or was projected to). In fact, in comparison to previous GDP estimates after the Second World War, the GDP growth never decreased to 16% because it never went below 22% (Center for American Progress 2).

These facts were recorded despite President Bush’s affirmation to the American population that “his tax cuts would deliver real and immediate benefits to middle-income Americans” (Center for American Progress 2).

To cement the failure of the Bush tax cuts, the national income for the population never increased in the same proportion it was predicted. The Center for American Progress affirms that:

“Real income for the median American household went from $51,356 in 2001 to $52,163 six years later—an increase of just 1.6 percent. Under President Clinton’s tax rates, real median household income went from $45,839 in 1993 to $52,587 in 1999—an increase of 14.7 percent” (2).

These indicators simply show that the Bush tax cuts were a complete failure and in instances where positive results were registered, little evidence can be traced to the role decreased tax cuts played in registering positive results.

There is therefore no point of continuing something that obviously does not deliver what it was supposed to deliver. There is therefore no reason why the American population should expect any more from the Bush tax cut system than what they have experienced in previous years.

Tax Cuts On Middle Income Population and Pending Obstacles

Extending the tax cuts for the middle income population is proving to be a fruitful venture because of the current economic situation in America. In other words, it is important for the government to maintain the tax cuts for the middle income population; at least temporarily, until the economy completely picks up, before the government considers withdrawing it.

This is important because the economy is still on a recovery phase and withdrawing the tax cut is not going to ease the recovery efforts in any way. However, for the top earners, the tax cuts should be immediately withdrawn because they do not need the tax cuts as much as the middle income and low income earners do.

However, the biggest obstacle to achieving this goal is founded on the fact that the rich have a very strong influence on policy formulation while the poor have a very small say in the same process. Moreover, the policy makers are largely comprised of the rich and elite in the society and therefore, advancing agendas that may not be beneficial to them may be a difficult task.

Conclusion

This study notes that the Bush tax cuts have not added much value to the economy as it should have. Letting the tax cuts prevail any longer would only be counter progressive to the goal of achieving long-term and cheap means to economic prosperity.

However, there is an exception to eliminating the tax cuts for the middle income population, at least temporarily, because the economy is still in a fragile state and needs the tax cuts for this income group. This compromise therefore needs to be observed for the interest of the majority.

Works Cited

Center for American Progress. Three Good Reasons to Let the High-End Bush Tax Cuts Disappear. 2010. Web.

Citizens for Tax Justice. Ctj Analysis Of Bush Plan Updated To 2001 Levels. 2001. Web.

Department of the Treasury. General Explanations of the Administration’s Fiscal Year 2002 Tax Relief Proposals. 2001. Web.

Harvard Law School. The Bush Tax Cuts of 2001 and 2003. 2008. Web.

Los Angeles Times. The Tax Cut Debate. 2010. Web.

The effects of the Tobin tax on the direct and indirect financial intermediation

Tobin tax is a type of taxation that is commonly used to restrain speculative trading in order to raise revenues. The European Union has suggested the inclusion of a financial transaction tax in their countries. However, this is faced with opposition from fifteen countries, including the United Kingdom. The tax has both negative and positive outcomes. If implemented, the tax will play a major role in ensuring there is fiscal consolidation without having any direct impact on the economy. In addition, the tax can enhance long-term investing, hence contributing to the market constancy (Reisen 1).

On the other hand, financial services would not be exempted from any value-added tax, thus making sure there is a reduction in a competitive business. However, the Tobin tax would have a huge negative impact on the UK financial services. The reason is that the commission has put it clear that the financial transaction tax will not only be implemented to financial institutions that are within the FTT region. It will also be applied outside the FTT region in case the transaction is carried out with a counterpart, which headquarter is in the region (Reisen 1). In addition, financial investors are more likely to be affected by the tax. For example, invested vehicles that require constant trading will suffer from the highest tax strain.

The ability to hedge risks

The implementation of an FTT would lead to increased hedging risks and costs. The reason is that whenever an investor involves in a project using foreign currency, he/she/company is faced with an exchange rate risk. With the Tobin style of taxation, investors would be unwilling to sell their risks. Therefore, hedging will create insufficient risk allocation. Moreover, tax on derivatives will make it very expensive to hedge against any risk.

Effects on global bond, equity, and derivatives markets

Global bonds, equity, and derivatives markets will be negatively affected. MMFs will be required to incur tax on secondary markets since there may be an increase in operational costs. There will be a huge effect of FTT on money market funds. Investors who contribute to funds will be forced to pay double taxes (Food 1). The first way they will be paying tax will be through selling and buying units of a fund. The second way will be when the fund sells or buys securities that it uses to invest.

What the tax might mean for you?

The Tobin tax will mean a lot to me. According to my understanding, the Tobin tax makes those who are targeted by it more likely to avoid the levy. Small businesses will be left behind struggling. The likelihood of people losing jobs will increase. The financial trading will go up since banks will be trying to recapture the cost of doing business. An increase in the cost of doing business leads to losses in a business. A business will be forced to cut the cost through job losses. The main impact would be on small businesses.

Will it affect the US?

Tobin tax will not be introduced in the United States. The reason for this is that the United States of America was against its implementation globally, especially after the 2008 economic recession. The government of the United States insisted that the Tobin tax was not well-suited to the free movement of capital. Several other bodies, such as The Financial Services and the US Chamber of Commerce, have already raised their voices against the tax. The two bodies have already written a letter to the commission indicating their reasons for opposing the Tobin tax. Economists in the United States argue that the Tobin tax has never been tested anywhere else in the world.

Works Cited

Food, Chris. “‘Tobin tax’ push causes dismay”. Financial Times. 2013. Web.

Reisen, Helmut , “Tobin Tax: Could it work?” OECD Observer. 231/232(2002): n.pag. Web.

Introduction

Sometimes temporary differences occur in accounting periods which usually affect taxable income and accounting income. Causes of temporary differences include expenses deducted from both taxable income and accounting income and expenses deducted from taxable income before being deducted for accounting purposes among other reasons. The differences lead to deferred tax that requires a special method of appropriation (Bragg, 2010). As a result, firms usually publish incomes and expenses in one period for the purposes of financial reporting and in a different period for tax reasons. In this regard, interpreted tax allocation is a method of accounting used in reporting deferred tax liability. Though this method has various advantages, there are people who have criticized it based on a variety of reasons (Bragg, 2010). The method applies different approaches namely, comprehensive allocation, partial allocation, and no allocation.

Comprehensive Allocation

It is a form of interpreted tax allocation where the net effect of taxation is based on all book income transactions within a given accounting period. The main idea under this method is that deferred tax reporting procedures are supposed to reflect tax effects of all temporary differences, regardless of the period. It should however be noted that the amount of tax that is supposed to be paid, is not necessarily income tax of a single financial period (Jarnagin, 2008). Consequently, due to the emergence of temporary differences, deferred tax should be recognized. It makes no difference whether the period being analyzed under comprehensive tax allocation falls in one financial period or not. Comprehensive tax allocation is very crucial in determining the tax effects of a period that cuts across different fiscal years.

Partial allocation

On the other hand, partial allocation does not include deferred tax in its reports unless the amount is expected to be paid in a short period of time (Jarnagin, 2008). Proponents of this method argue that deferred income taxes only serve to create indefinite postponement of tax. Therefore, this method recognizes part of the temporary differences that lead to deferred tax, but not all the differences hence the name partial allocation. Consequently, the amount of tax reported during a particular period under partial allocation is the same as the tax payable during the same period. It is important to note that partial tax allocation only takes into account deferred tax that results from material temporary differences that are non-recurring. However, critics have disregarded this method arguing that it goes against the accounting principles of accrual (Bragg, 2010).

No Allocation

Under this method, the current income tax of a specific period is considered as the income tax expense of that period. Deferred tax is considered inconsequential because at the time of reporting the expense is paid to nobody in particular (Jarnagin, 2008). Moreover, supporters of this method have argued that the deferred tax liability is not very clearly explained. Therefore, the amount of tax that is supposed to be reported should be the same as the actual tax payable in that given period. Proponents argue that the liability of deferred tax is dependent on the probability of earning a taxable income in the future. Consequently, the payment of the tax will only take place if a taxable income is earned. Furthermore, the method holds that tax is an involuntary distribution of income and its allocation between accounting periods is not fair (Bragg, 2010).

References

Bragg, S. M. (2010). Willey GAAP: Interpretation and Application of Generally Accepted Accounting Principles 2011. Hoboken: John Wiley & Sons.

Jarnagin, B.D. (2008). 2009 U.S. Masters GAAP Guide. Alphen aan den Rijn: CCH.

Issue

• Has Sue been paying her tax on rent? If yes, has she been receiving rent from the house?
• Does Sue make any taxable income as a result of selling the rental house and the land?
• Does the tax system of her country tax capital gains?
• Can Sue be treated as a resident or a non-resident and does the tax system involved treat them differently?
• Are buildings and land depreciated?
• Does the tax system in question allow for depreciation to be deducted before arriving at the taxable income?
• Does the tax system in question allow women to pay their taxes separately or do their husbands file collective tax returns for their families?

Rule

The information provided is not sufficient for one to tell if Sue has been receiving rent and if yes, she has been paying her tax. We cannot tell if Sue is a resident or non-resident since we are not told anything about her citizenship, permanent home or the number of days she has stayed in the country.

In most tax systems, capital gains are not taxed but this country’s tax system taxes capital gain. The capital gain is taxed after allowing for a discount depending on the entity being taxed. For partnerships, a discount of 50 percent is allowed before dividing the capital gains among the individuals for tax purposes (Lasser, 2012).

Companies are taxed on their capital gains but after receiving a discount of 50 percent on the gains. Individuals receive a slightly higher discount on the capital gains before subjecting them to capital gains tax. They are allowed to deduct a discount of 75 percent of the capital gains before taxing them. Usually both buildings and land are not depreciated instead they appreciate in value with time. Depreciation is not an allowable expense in most tax systems and in this case, it is not clear whether it is an allowable expense. However, capital allowance is a uniform allowable deduction that is used to replace depreciation and it is meant to encourage investments. It is issued to those who indulge in particular investments (Barkoczy 2013).

Women are not allowed to file separate tax returns unless they do not meet any of the specified conditions according to the laws of most countries. They are only allowed to file their returns separately when they are not married or have separated with their husbands in a manner that shows no signs of getting back together in the future. They are also given a chance to be taxed separately when their husbands are not residents of the country in question. Thus, they have an option of filing separate returns when they earn their income.

On the issue of the transaction; it is clear that Sue makes some profit upon selling the land and the house. The profit is obtained as shown in the calculation below:

Sue should pay a tax on the $300,000 capital gain which is taxable income obtained from the transaction. The tax amount she should pay depends on the taxation rates for an individual in her country. If her country allows personal relieve then she should set it off from the gross tax and pay the net tax obtained.

The capital gain obtained from Sue has to be allowed a discount of 75% before subjecting it to any taxes because Sue is an individual. The exact value as calculated above is $900, 000. In this case, Sue’s husband is not brought into the picture although it appears like the capital gain income is at arm’s length. Therefore, Sue should be allowed to file a separate tax return (Barkoczy 2013).

Application

The law requires any income obtained in a country to be taxed although this depends on whether one is a resident or a non-resident. For non-residents, the rule of taxing income at the source applies and their income is also subjected to final withholding tax at the source. The percentage depends on the rates of the country in which the non-resident person earned that income. No personal reliefs are allowed on the withholding tax. For residents, different rates apply. The rates for most countries are retrogressive and depend on the income bracket of an individual. Personal relief is allowed to the residents and it is deducted from the gross tax to arrive at the final tax (Nethercott and Devos 2012).

Conclusion

It is not clear from the information provided whether Sue is a resident or a non-resident. However, one thing is clear that she earns some income in the country. The taxable income earned is $300,000 and it is to be taxed. The amount of tax she will pay depends on her status of residence. If she has also been receiving rent and has not been paying her taxes, she should pay the tax together with the penalties stipulated in the laws of the country but if the country allows personal reliefs to its residents, then she will be allowed to deduct a personal relief from the gross tax liability before arriving at the net tax liability.

Reference List

Barkoczy, S 2013, Foundations of Taxation Law (5^th Ed.), CCH Australia Limited, Sydney.

Barkoczy, S 2013, Tax Legislation and Study Guide (16^th Ed.), CCH Australia Limited, Sydney.

Lasser, K 2012, Your Income Tax 2013: For Preparing Your, 2012 Tax Return, Wiley & Sons, London.

Nethercott, R and Devos, T 2012, Taxation Study Manual, CCH Australia Limited, Sydney.

Introduction

According to Prosser & Murray (2010), “tax avoidance” is the legitimate use of the taxation system to decrease the amount of tax payable within a regulatory framework. Tax avoidance should be distinguished from tax mitigation, which is generally used by tax advisers as an unconventional derogatory to tax avoidance. This is a critical provision as it interferes with the economic growth of a country as well as international relations. Tax mitigation has also been used extensively in the tax regulations of certain dominions to differentiate tax avoidance (forecasted by the policymakers) from those that take advantage of the loopholes existing in the current regulatory framework (Bartelsman & Beetsma 2000). According to Mainland China’s Supreme Court, the legitimate right of a person to reduce the sum of what would otherwise be his/her taxes or completely avoids them cannot be questioned. Another term that is common in relation to taxes is tax evasion. Tax avoidance and evasion are means of tax noncompliance since they designate several activities that are not appropriate to a county’s taxation system (Bracewell-milnes, 1980). In this essay, some of the worldwide tax avoidance strategies are discussed in regard to the UK and Hong Kong. It is vital to establish whether this is a new phenomenon or a reaction to the policy document signed in June 2010 and a draft consultation framework of December 2010, which was suggested by a coalition government (Siriwardana & Schulze 2000).

The relationship between Hong Kong and Mainland China

For the past decades, Hong Kong has been a Special Administrative Region (SAR) of the people of the Republic of China. It is evident that the mini-constitution created by the Chinese government provides Hong Kong its sole legislation, economic independence, and credible/trusted judicial systems (Braithwaite, 2003).

. In this context, it is vital to note that Beijing has been bestowed with the responsibility to deal with the defense and foreign affairs of China. A critical relationship between Hong Kong and mainland China is the basic constitutional provisions regarding the establishment of the Hong Kong SAR vividly setting out the legal frameworks of the Chinese government on Hong Kong. This also regards how SAR should be administered in diverse contexts. The aspects of tax avoidance in Hong Kong and mainland China are evident in regard to double taxation laws signed by both jurisdictions. Majorly, Hong Kong is a trading center within the Chinese territory. It also serves as a service center within the region. The region has limited natural resources compared to mainland China. This demonstrates the relationship (both legal and economic) that exists between Hong Kong and Mainland China. Additionally, Hong Kong executes its independent international trade affairs; however, it has maintained its border controls, custom procedures, and international trade provisions with China.

Agreement to Avoid – “Double Tax”

Hong Kong had no double taxation provisions until 2001. This provision obviated the global double taxation treaties that existed before. Under the provisions of “territorial principle,” the country realized the significance of double taxation treaties and has since then signed various agreements in concurrence with this. The government has entered into various agreements to streamline its taxation provisions. Nonetheless, the Basic Law’s Article 151 has a provision that grants Hong Kong an opportunity to legalize double taxation treaties (Weber, 2005). However, the country is required to use “Hong Kong, China” for legal purposes and other international provisions. Additionally, Hong Kong is not allowed to utilize any double taxation treaties that the Chinese government might enter into since only the mainland taxes are stipulated in such treaties or trade agreements. According to the Basic Law, China is under no obligation to enforce any double taxation treaties on Hong Kong. This is clearly elucidated in articles 106-108 of the double taxation laws in order to avert any mishap that might arise on international relations and other legal provisions. The provisions of double taxation laws gave Hong Kong the audacity to manage an autonomous taxation system without any obstruction from mainland China (up to 2047). By 7/9/ 2012, all-inclusive double taxation avoidance (DTA) treaties had been signed amidst Hong Kong and the countries like Austria, Belgium, Brunei, Czech Republic, France, Hungary, Indonesia, Netherlands, New Zealand, Portugal, Spain, Thailand, and the UK among others. Hong Kong has equally finalized double taxation treaties on aviation as well as shipping incomes with numerous countries (Malpert & Petersen 2000).

Worldwide Tax Avoidance (Focused on HK and the UK)

In most cases, Hong Kong is quoted as a model of tax virtue since it has a low and comparatively simple tax system (Toh & Tan 1998). This system is very meek for people who pay taxes who, in contrary to Americans, do not need the help of auditors to complete their tax forms and guarantee their compliance. However, the more wealthy an individual is the more likely it is that he or she will pay reduced proportions of their income in tax since there is no dividend or capital increases tax in Hong Kong (Wintzer 2007). Extremely wealthy individuals, who actually need accountants to handle their tax dealings, are very much conversant with ways of managing the system. This principle is also applicable to other individuals who own corporations and organize their affairs so that much of their revenue is obtained from dividends (Erasmus universities Rotterdam1978). Even though most rich people in Hong Kong avoid income tax liability, they still generate 60% of their total income from direct taxation. Much of the remaining proportions are obtained from stamp duty on assets and shareholding businesses. Hong Kong is a major proponent of the anti-tax brigade, though the scheme can result in distortions that can impact negatively on businesses (MacPherson, 2008).

Another strategy used to avoid tax is double taxation. Most nations enforce taxes on revenue earned or gains realized within their jurisdiction irrespective of the home country of the individual or company. Most nations have signed bilateral double taxation agreements with several other states to avoid taxing individuals twice, essentially where the revenue is earned and for a second time in the country of residence and possibly, for the citizens of Hong Kong, taxed once again in the nationality state (Prosser & Murray 2010). Nevertheless, there are comparatively limited double-taxation agreements with countries branded as tax havens. In these countries, taxes are enforced at a lower rate or never levied at all (Pagone 2010). People or companies can find it smart to create covering businesses or transfer to areas with lower or no taxation rates. This creates a state of tax opposition in different governments. Different countries inclined to be havens to diverse kinds of taxations, and for dissimilar groups of people or corporations (Tooma, 2008). Countries that are independent or are autonomous under international laws have hypothetically infinite powers to endorse tax laws influencing their regions, if not restricted by preceding international agreements. However, to avoid tax, it is generally not enough to merely relocate one’s assets or properties to a tax haven. An individual or a company also needs to relocate to the haven country to avoid tax (OECD, 1987).

Without moving from a country of residence, individual taxation can be legitimately avoided by the formation of a discrete legal entity to which an individual’s property is bestowed. In most cases, the detached legal entity is a corporation, trust, or establishment. These could as well be located overseas, like in the case of most reserved foundations (Palan, Murphy & Chavagneux, 2010). Properties/assets are eventually taken back to the person with consequent capital gains and taxation evasion valid to all returns. In addition, income tax would still apply on any income or dividend drained from the legitimate entity (Practicing law institute, 1993). For an individual who formed the trust to avoid taxation, there may be limitations on the kind, objective and recipients of the trust (Lapidoth, 1966). Tax shelters are also other methods of tax avoidance strategy. They are described as reserves that let or allow a decrease in an individual’s income tax liability. Possessions like home proprietorship, annuity plans, and individual retirement accounts (IRAs) can be generally be regarded as tax shelters since assets in them are never taxed so long as they are held within the specified duration of time (Reed, 1989). Initially, the term tax shelters were used to designate mainly some investments created in the form of limited partnerships, which were considered offensive by the Hong Kong internal Revenue Service (OECD 1987).

The Need for Further Reform

Actually, there is a critical need to avert the provisions of ‘taxation avoidance’ since it is a fundamental method through which governments lose revenues. An investor who has securities in form of real estate or any other kind of assets may opt to avoid taxation. This indicates why there is a need for further reforms in the taxation avoidance laws both in Hong Kong and China. However, for individuals holding cash, the units of decline in the worth of money suppose to be paid as tax (Woudernberg, 1991). This penalizes people holding money in form of cash (mostly small or medium scale earners according to the economists). Quite often, low-income earners have fixed pays, incomes or allowances. Consequently, they always look for ways through which they can avoid paying taxes. This is evident in Hong Kong and the UK where such initiatives are rampant. The loss of monetary value resulting from taxation avoidance is often indicated by the decline in the country’s revenues (CITAE 1980).

According to economists, in this case, the concerned country would let pass a lot of cash unnecessarily. This is quite devastating to the developmental provisions embraced within a country. This money might be put into unnecessary projects rather than helping the government to fund its projects. It’s a devious manner of evading taxation since it occurs gradually while nobody notices. Also, it is concealed because there are no taxation forms to be filled or levies added to bills or procurements. In contrary to other taxes, where an individual is obliged to pay at a certain rate, nobody is asked to remit any cash. Practically, people feel wealthier since there is an increment in their wages or house costs and they have even more cash but with very low value. Upon avoiding taxation, inflation might occur so covertly since there are no laws to be either passed or voted down (International Bar Association 1982). However, taxation normally advances the financial position of persons who have unresolved fixed interest obligations such as credits and loans. This also demonstrates why there is a need for further reforms in the taxation avoidance laws both in Hong Kong and the UK (Mo, 2003).

Just like any other kind of revenue, the Hong Kong government levies taxation to cater to its expenditures. Rather than increasing tax rates or borrowing money from other federal financial agencies to raise enough cash, the government might opt to print more money in order to fund its projects. In this context, as the amount of money in circulation increases compared to the creation of goods and services, costs also rise. Families and corporations are left poorer since they now have less power to purchase with their available cash and governments can hardly meet their expenditures due to taxation avoidance (Smith 2008). An individual can easily evade taxation just avoiding holding cash. According to economic theories, there is a peak taxation rate. At this rate, the amount of taxable income gets to the maximum point. Any rate above this maximum rate causes the amount of cash held to decline to the extent that tax income obtained from the inflation tax starts to reduce its buying power (Kostova & Roth, 2002).

Government’s Attempt to Prevent Acceptable Tax Planning

The government’s attempt to prevent acceptable tax planning is evident. Currently, there are several options of raising cash by the government than there were during the revolutionary period. Banks, financial institutions and financial markets let the government borrow cash without evading taxation. Since the ownership of resources is transferred to the public sector, this liability is paid by somebody. If more cash is borrowed by the government, higher rates of taxation will soften. Borrowing by the government is one of the numerous issues affecting interest rates. Since interest rates influence other variables like savings and also considering that the cost of bonds varies inversely with rates of interest, it is quite difficult to ascertain accurately the persons affected by the government shortfall through tax avoidance (Peebles & Wilson 2002). As indicated earlier, it is vital to understand the meaning and context of tax avoidance in regard to Hong Kong and the UK among other governments (Khan, Phang & Toh, 1995). This demonstrates the government’s attempt to prevent acceptable tax planning within the concerned territories. When governments combine different regulations for expenditures and taxes, they can easily induce inflation. Nonetheless, when this takes place, political business persons tend to avoid taxation despite the implementation of policies to stop this crisis (Koh & Mariano, 2006).

Suggestion and Recommendation

Hong Kong and the UK’s government can establish and embrace viable double taxation laws so as to enhance their taxation provisions. It is evident that the double taxation agreements established between Hong Kong and other countries are viable for the global trade provisions (Kaynak, Bloom & Leibold, 1994). This is a critical legal aspect that might influence international trade and foreign exchange provisions between the concerned countries if not managed properly in the provision. There are extra ways in which taxation can help the government to make money despite the previously mentioned avoidance. One of the means of gaining surplus tax incomes is by making taxpayers pay more taxes (Woudernberg1991). Taxation evasion also shrinks the attuned sum of debt owed by the government. Generally, there are no systems or even extra tax collectors required to gather tax. For instance, without taxation avoidance, an individual having $1000 in a reserve account and netting an interest of $30 per year gets $30 since no tax is paid to the government (Brown, 2012).

Conclusion

In Hong Kong and the UK’s context, “tax avoidance” can be described as the legitimate use of the taxation system to decrease the amount of tax payable within the regulatory framework in a country. On the other hand, taxation avoidance should be distinguished from tax mitigation used by tax advisers as an unconventional derogatory to tax avoidance. It’s tricky to evade taxation; however, it occurs gradually and nobody notices. Also, it is concealed because there are no taxation forms to be filled or levies added to bills or procurements. In contrary to other taxes, where an individual is obliged to pay at a certain rate, nobody is asked to remit any cash. In most cases, Hong Kong is quoted as a “model of tax virtue” since it has a low and comparatively simple tax system. This system is very meek for people who pay tax and, contrary to Americans, do not need the help of auditors to complete their tax forms and guarantee their compliance.

References

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Bracewell-Milnes, B 1980, The economics of international tax avoidance, DEVENTER KLUWER Press, Frankfurt.

Braithwaite, A 2003, Taxing democracy: understanding tax avoidance and evasion. ASHGATE, Burlington, VT.

Brown, B 2012, A comparative look at regulation of corporate tax avoidance, springer, Dordrecht.

CITAE (Colloquy on International Tax Avoidance and Evasion) 1980, colloquy on international tax avoidance and evasion: (Strasbourg, 5-7 March 1980): a compendium of documents, Council of Europe Press, Strasbourg.

Erasmus universities Rotterdam 1978, international tax avoidance: a study, KLUWER, Deventer.

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Khan, Y, Phang, S & Toh, R 1995, The Multiplier Effect: Singapore’s Hospitality Industry. Cornell Hotel & Restaurant Administration Quarterly, vol.36, no.1, pp. 64-69.

Koh, W & Mariano, R 2006, The Economic Prospects of Singapore, Pearson Addison-Wesley, Singapore.

Kostova, T & Roth, K 2002, Adoption of an organizational practice by subsidiaries of multinational corporations: Institutional and relational effects. Academy of Management Journal, vol. 45, no.1, pp.215-233.

Lapidoth, 1966, Evasion and avoidance of income tax: a comparative study of English and Israeli law, museum of taxes Press, Jerusalem.

MacPherson, A 2008, Hong Kong taxation: law and practice, Chinese university press, Hong Kong.

Malpert, A & Petersen, A 2000, Business immigration law: strategies for employing foreign nationals, Law Journal Press, New York.

Mo, I 2003, Tax avoidance and anti-avoidance measures in major developing, Law Journal Press, New York.

OECD 1987, International tax avoidance and evasion: four related studies, OECD, Paris.

Pagone, T 2010, Tax avoidance in Australia, Federation Press, Annandale.

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The 2017 tax reform ended up in the first significant changes in the field since the Tax Reform Act of 1986. In general, the Tax Cuts and Jobs Act (TCJA) of 2017 decreased the corporate income tax rate by 15% (from 35 to 21%). Analysts expected that this headline change would drive the conversion of flow-through entities and partnerships into C corporations (Klinzing, 2019). Nevertheless, the trend of three consecutive years shows that it has not occurred.

Although TCJA lowered the federal corporate tax rate for enterprises with a C Corporation structure, the distributions’ taxation (dividends) remain at the same level. For instance, noncorporate shareholders should pay 23.8% federal income tax on dividends. After adding the state’s income tax, the number grows to 39.8%, making C Corporations unattractive. The initial goal of reform was to increase profits of multinational corporations spurring capital investments. In practice, such businesses opted to buy back shares of their own stock seeking short-term profits.

On the contrary, a flow-through entity avoids double taxation as it itself is not subject to taxation. Nevertheless, its owners and investors should pay income tax that dropped by 2%. Noncorporate taxpayers that own proprietorships, partnerships, or S Corporations enjoy a 20% deduction resulting in 29.6% of the effective federal tax rate (Klinzing, 2019). The sufficient income tax of pass-through entities depends on employment taxes, self-employment, and the net investment income tax.

In general, there is no ideal entity consideration for businesses, as everything depends on their intention to make distributions or its absence. If the company wants to reinvest the lion’s heart of its income (after-tax proceeds), a C Corporation becomes a superior growth option. It is better because of usually higher income compared to pass-through structures. Contrary, if an enterprise wants to pay dividends, the flow-through entity would be a more efficient choice. For instance, manufacturing companies should convert into C Corporation entity as it needs continuous reinvestment in R&D, equipment, and structures to grow. Due to reform’s complexity, CPA firms witnessed the surge in clients and expanded their personnel to meet the demand.

Reference

Klinzing, M. (2019). Choice of entity considerations post-tax reform: Corporation or flow-through entity?. JD Supra. Web.

Taxes are mandatory levies or financial charges imposed by a government on taxpayers to raise revenue for funding its expenditures. These payments are collected from specified sources of income and activities, such as employment earnings or the sale of particular goods and services. Former American President Benjamin Franklin asserted the permanency and inevitability of taxes by equating them to death. Notably, most people focus only on the federal personal income tax since it constitutes the largest deduction on the earnings of an individual. However, despite the direct impact of the levies on the household budgets, taxes are critical in supporting governmental expenditure, including offsetting costs of delivery of public utilities and services, such as road construction and healthcare. Although federal income tax is levied on my employment earnings, the sales taxes I contribute whenever I purchase items have both positive and negative effects on my life and family members.

Governments levy different taxes through which they raise revenue to finance public expenditure. For instance, the generated funds from sales tax are channeled towards delivering services and supporting projects such as constructing health facilities, road infrastructure, and running food assistance programs (Alawneh, 2017). These expenditures enhance the quality of life since they expand access to utilities such as healthcare services, improve mobility, and generally reduce the cost of public goods (Arora & Chong, 2018). From this perspective, the imposed levies positively impact our lives by easing movements and subsidizing various healthcare expenditures. However, the federal income and sales deductions have an adverse effect on households since they reduce the disposable earnings and reduce the dollar’s purchasing power.

Taxes are mandatory fees charged imposed on taxpayers and constitute the largest source of government revenue. The generated income is used to finance public expenditures, such as providing services, funding infrastructure projects, and running food assistance programs. These deductions are critical and positively impact the lives of the people since they are used to fund easier mobility, expanding healthcare accessibility, and minimizing the cost of public goods. However, the taxes are also detrimental since they exert additional pressure on household budgets by reducing disposable incomes.

References

Alawneh, A. (2017). The impact of public expenditure and public debt on taxes: A case study of Jordan.Accounting and Finance Research, 6(3), 10─23. Web.

Arora, P., & Chong, A. (2018). Government effectiveness in the provision of public goods: The role of institutional quality.Journal of Applied Economics, 21(1), 175-196. Web.

This article discusses how the ongoing Covid-19 pandemic affected global tax collections when technology firms make significant gains due to the work-from-home environment. The emergence of the digital economy has caused confusion concerning how tech companies should pay their corporate taxes. This issue has been compounded by the current pandemic with countries becoming reluctant to trade away tax revenue generated from tech companies. According to the article, profits earned by “U.S. tech giants such as Alphabet Inc.’s Google and Facebook Inc. are becoming even more tempting to European nations that are looking for money and ways to respond to their citizens’ criticism that multinationals aren’t paying their fair share.” As such, different countries are seeking to pursue unilateral taxes on digital companies.

The thriving digital economy presents a major problem in terms of structuring corporate tax. Under the conventional business environment as highlighted in the chapter studied in class, corporate taxes are structured based on the existing laws in different countries. For instance, in the US, corporate taxes are not strictly increasing as instituted by the Tax Reform Act of 1986 and expanded in the 1993 Omnibus Budget Reconciliation Act. As such, the US has six corporate tax rates – 15%, 25%, 34 %, 35%, 38%, and 39%, even though the last two arise from surcharges applied on top of 34% and 35% rates. These laws make it easy to structure corporate tax laws.

However, with the digital economy, there lack clear laws on how and where tech companies should book taxable income. In most cases, these companies profit from citizens in one country and book taxable income elsewhere. According to the article, this scenario happens “because profits are taxed where value is created, not where customers are located.” With the digital economy, location does not matter, and thus tech corporations could easily manipulate rules to pay minimal taxes. The Global Tax Project of 2013 seeks to address these issues to avoid a patchwork of national taxes by creating stability in the location and type of taxes that tech companies should pay.

Reference

Rubin, R., & Hannon, P. (2020). Global tax talks waver as pandemic hits government coffers. The Wall Street Journal. Web.

Introduction

Taxation has been a subject of heated debate since the foundation of the United States. The current state of affairs has not yet resolved the tensions: the left-wing representors support the ideas of high taxes spent on the common needs. Meanwhile, some libertarians see taxation as a form of organized theft: “the mass of ordinary working-class people have everything to gain by the abolition of taxation” (Tame 2). These debates are reflected in the tax policies of different countries of the world, and even within countries, those models can vary – the United States is no exclusion in this context. Texas is one of the nine states that does not have an individual income tax (Batheja 7). The state is also estimated to be in the bottom 20 on the property, sales, and corporate taxes (Batheja 7). However, despite the numerous supporters of this model and its undoubted advantages, the discussion continues due to the number of disadvantages this system demonstrates in the social support system. Hence, the Texas case becomes exceptionally peculiar in the context of taxation, as it appears to be a part of a broader discussion.

Advantages of Regressive Tax Policy In Texas

Firstly, some associate the Texas tax policy with high employment opportunities in the state. As Bobby Jindal claims, some neighborhoods in Dallas and Houston are filled with Louisianans (Batheja 4). As Aman Betheja understands it, “too many Louisiana residents are moving to Texas because that is where the jobs are, he said. The jobs are there, he argued, because Texas does taxes right” (2). That is why some states such as Georgia, North Carolina, and Ohio express their will to adapt to Texas’s taxation system (Batheja 7). Interestingly, it is calculated that “the luxury tax cost the federal government more in unemployment benefits than it ever brought up in as revenues” (Schlomach 4). Thus, there is a relation between regressive taxation and economic performance and employment in Texas.

Secondly, another argument for introducing the system is that it does not enlarge the social inequality, for which the regressive tax policy is sometimes blamed. The wealthiest people do not directly benefit from this system: they do not become more prosperous because of it. According to Brunori, the reason for that inequality and their incomparable wealth has little to do with the way taxation is organized (6). As he understands it, “George Soros, Sheldon Adelson, or the Koch brothers owe even a tiny part of their success to the tax system. The partners in Big Law or the Big Four accounting firms – all firmly entrenched in the top 1% – aren’t wealthy because the states have high sales or cigarette taxes. Rich folks getting richer has little to do with state taxes” (6). In other words, regressive taxation tends to be unfairly judged for social inequality, according to some opinions.

Disadvantages of Regressive Tax Policy In Texas

Nevertheless, there are some disadvantages to the current tax policy, which could affect Texas society. For instance, according to Spillman, the 2018 – 2019 budget was lower than in 2016 – 2017 by 6 percent (2). The drop in the state budget causes a lack of public spending. Therefore, public schooling, higher education, retired teachers receive less financing (Spillman 2). As a result, educational reformation lacks financial sustainability in the state (My San Antonio, 2019). In fact, in the upcoming years, public education’s state funding is estimated to lose about 3.5 billion dollars (De Matthews and Knight 2). These data demonstrate the effect the regressive taxation system has on public services like education in the example of Texas.

Moreover, one of the basic ideas behind taxation is the relocation of incomes so that the underprivileged groups The low social layers appear to be the most vulnerable to the regressive taxation: they pay between 11 and 13 percent and, thus, “spend a larger share of their income on sales taxes, raising the sales tax rate causes their total tax bills to grow relatively larger” (Spillman 4). In comparison, the highest earners in Texas pay about 2 – 5 percent (Sahadi 4). In a word, the argument of specific groups being underprivileged in a regressive taxation model seems convincing.

Conclusion

To conclude, the question of taxation has always been a subject of debate among various political ideologies and movements as it has a lot to do with the concept of human freedom. As a result, this problem’s reflection – the contradictory regressive taxation in Texas – becomes specifically peculiar. On the one hand, there are many vital considerations on how this model harms the community, favoriting the poor, and taking away the finances that could be invested in public services. Public schooling in Texas is shown to be an excellent example of this fact. On the other hand, there are also a lot of arguments in favor of regressive taxation. It is claimed to stimulate economic activity that guarantees Texas significantly more employment opportunities than its neighboring states. Moreover, some fairly point out that it is not the tax system that makes the wealthy people rich, so it is in vain to blame the regressive model for inequality.

Works Cited

Batheja, Aman. “The Joys of No Income Tax, the Agonies of Other Kinds”. The New York Times: 2020. Web.

De Matthews, David, and David S. Knight. “Texas Needs to Fund Its Public Schools Differently”. UT News. 2020. Web.

My San Antonio. “Public education reforms lack financial sustainability”. MYSA: 2020. Web.

Sahadi, Jeanne. “States Where Taxes Hit The Poor Hardest”. CNN Money: 2020. Web.

Spillman, Stephen. “Brown: Texas Has a Revenue Problem, and It’s Growing”. Houston Chronicle: 2020. Web.

Schlomach, Byron. “Progressive or Regressive, Is That Really the Question?”. Policy Perspective, 2006.

Tame, Chris. “Taxation Is Theft”. Libertarian Alliance: 2020. Web.

Bob wants to withdraw money from his 401(k) and use it to finance his new business. According to the Pension and Annuity Income in Publication 575, his 401(k) payments may have been pre-taxed (IRS, 2020). Being elderly, he will not be penalized for withdrawing from his account early on, which should cost him 10% of his savings. Therefore, the whole $690,000 is considered ordinary income and is maximally tax-bracketed at 37% as of 2019 rates. As a result, this transaction takes $221,000, which means Bob remains with $480,000 to invest in his venture.

Bob also considers selling his asset and using the proceeds to finance his new venture. Thus, he is concerned about its effect on capital-output and gross income tax. According to Publication 544, he has several options to help minimize his property’s sale tax, maximizing his payout, especially since he has held the property for years. According to Rupert and Kenneth (2019), when one holds property for more than a year, a tax rate of long-term capital gains (LTCG) is applied. Rupert and Kenneth (2019) further reveal that this rate is 0% on income less than $39,375, 15% for earnings ranging from $39,376 to $434,550, and is 20% for revenues exceeding $434,551. Since he has terminated his 401(k), his year’s revenue is $506,000, which is the sum of interest and dividends, he should tax the 20% LTCG rate. It is also important to note that any costs associated with selling the asset reduced his gain, affecting the tax he owes. By assuming a real estate commission of 6%, Bob’s payout after all the deductions becomes $6,408,000, as shown in the table below.

Table 1: Bob’s Payout Calculation

Such factors as appraisals, surveys, and closing costs are likely to reduce payout after taxation due to the minimization of tax costs. The capital transactions report is provided in Schedule D, one of the several schedules attached to the Individual Income Tax Return Form 1040 for all U.S. citizens (IRS, 2020). The document mentioned above lists capital assets, such as bonds, stocks, and buildings. Form 8949 reports profit and loss from capita and investments, respectively. Schedule D may ask the client to produce other forms, which have information regarding property sales, theft, or any other casualty resulting in losses (IRS, 2020). More specifically, part I and II of Schedule D are used to disclose financial information such as short-term and long-term profits and losses, respectively, while part III summarizes the two accounts.

Bob can appreciate how to handle sales revenue, exchange, or asset disposal provided in IRS Publication 544, which delineates how to calculate profits and losses. According to IRS (2021), the publication can help him apply the values and how to divulge them to the Internal Revenue Service (IRS). As indicated above, Bob is to be charged 20% for selling his property, which is the maximum rate per the LTCG. Consequently, this raises his cash flow by $6,408,000 when he finalizes selling his property. Moreover, Bob’s cash flow will increase since he does not pay any more mortgage interest or taxes levied on his real estate property.

If Bob chooses to structure his venture as a corporation, it is recommended for him to receive salaries up to the IRS’s highest level. According to Rupert and Kenneth (2019), such a business structure allows for salary deductions and tax bill reductions when it is newly structured. Ownership of the company depends on the shares held by a partner of the business. Moreover, this is a distinct entity subjected to double taxation, one on its profits and the other on the shareholders’ dividends. Contrary to tax-payers in the non-corporate sector, who can deduct close to $3,000 when they incurred losses resulting from ordinary income, a corporation offsets its losses from gains (Rupert & Kenneth, 2019). The latter can carry back such losses to three tax years and forward its profits for five years, all of which are considered short-term losses.

If Bob gives preference to partnership business structure, he will avoid double taxation seen in corporations. According to Rupert and Kenneth (2019), all the revenues earned and the losses incurred are shared among the organization’s partners. Since he is willing to give his daughter a 40% share of the business, he will get $180,000 one year later. Doing this would put him in a tax bracket at 32%. Thus, if deductions from exclusions, credits, or AGI are not factored in, then Bob’s tax bill becomes 38,916.50 dollars for the specific financial year.

Structuring the business as an S-Corporation means Bob needs to pass the various business finances such as deductions, losses, revenues, and credits through its stockholders for the federal taxation process. The organization must operate in the U.S., be eligible, and have a maximum of 100 shareholders (Rupert & Kenneth, 2019). His old car can be used to check all these marks. All the income items such as profits and losses for ST or LT, gains and losses for section 1231, charities, credits, and others are considered separately on the return since each item affects various stakeholders’ tax returns (Rupert & Kenneth, 2019). Therefore, the organization is similar to the C-corporation, where shareholders’ incomes are used to offset the losses incurred by the business. However, it is an unfavorable situation for S-corporation since it does not qualify for other corporate deductions such as dividends given to the stockholders. The reason is that any property it distributes is considered a return on capital if the business does not have accumulated revenues and profits. Therefore, an S-corporation is Bob’s best choice because it is not subjected to double taxation.

References

IRS (2020). About Publication 575, pension and annuity income. IRS.

IRS (2020). About Schedule D (Form 1040), Capital gains and losses. IRS.

IRS (2021). Topic Number 701- Sale of Your Home. IRS.

Rupert, T. J. & Kenneth E. A. Federal Taxation 2019. Pearson Publishers