Property taxes are a necessity for many cities and districts as they fill their budget and allow governments to redirect funds to other essential areas. However, for many owners, the assessment of the property’s value on which the tax is based is unfair. The government should consider not only the current value of the property in the area and state of the evaluated object but also the term of ownership to distribute taxes equitably.
The current property assessment system is based both on the value of the object and the area in which it is located, and the government also offers discounts for low-income owners (Martin and Beck, 2016). This decision, at a glance, is suitable; however, the gentrification of areas can significantly raise the value of a property. According to Martin and Beck (2016), the process of improving and modernizing neighborhoods substantially increases the cost of houses. This trend is unfair, since some families who have lived in the house for generations are forced to leave it because they cannot afford to pay new taxes.
Consequently, the government should also introduce a system of benefits for citizens, depending on the duration of the property-owning. Besides, according to Kim (2017), the introduction of a system in which taxes are levied only in certain areas with additional services may be more profitable than general taxation. If tax cuts are needed, this approach may be appropriate for maintaining the revenue streams. Another way is increasing or the introduction of taxes on environmental pollution; for example, houses using solar energy will have to pay less.
Thus, the state should use the current assessment system and also add to it the possibility of obtaining benefits for a long duration of ownership. This change contributes to fair taxation and long-term use of property, since people will be interested in an excellent state of their houses or territories and their long exploitation. At the same time, redirection of the tax payment sector contributes to the improvement of the environment and preserves government revenue.
References
Martin, I. W., & Beck, K. (2016). Gentrification, Property Tax Limitation, and Displacement. Urban Affairs Review, 54(1), 33–73.
Kim, Y. (2017). Limits of Property Taxes and Charges: City Revenue Structures After the Great Recession. Urban Affairs Review, 55(1), 185–209.
The modern economy is becoming increasingly globalized, in large part due to its growing digitalization. More and more companies are offering their services via online portals, with a considerable portion operating exclusively via the Internet without any physical location. As such, serving customers throughout the world becomes more of a matter of finding an appropriate delivery method instead of expanding the business and opening foreign branches.
The change is convenient for companies and customers alike, as they gain access to a broad base of products or potential buyers without expending the time and effort to go elsewhere and search. However, it presents issues for governments, which currently struggle to adapt to the new model, particularly with regards to taxation. This essay discusses the foremost issues related to the process when applied to digital platforms as well as potential solutions.
Double Taxation
Traditionally, a company that expanded into another country would open a separate branch office, which would process operations and pay taxes locally. However, doing so is no longer necessary in many cases, and so the situation where a company sells a product to someone in a different nation has become commonplace. However, both countries will require a portion of the profits as per their taxation law.
As such, the company has to pay fees twice, which results in a significant economic burden, increased prices to compensate for the loss and a general slowing of business growth. The phenomenon is known as double taxation and is generally considered an unintended consequence of outdated legislation. As such, nations throughout the world have begun taking measures to accommodate businesses by eliminating the tendency via a variety of options.
Generally, different nations will sign conventions that regulate double taxation rules between them by defining which one has exclusive taxation rights or priority. For example, according to Peng, China had signed 99 such agreements with other countries by 2015 (350). However, an issue arises when the interest of both countries are taken into account, as each party will generally want to collect taxes from international business exclusively.
On the one hand, the customer’s nation is opposed to the movement of money beyond its borders without any return investment, as a foreign entity with no local holdings appropriates the money. On the other, the company’s country hosts potentially massive global entities and expects to collect considerable tax revenue from them, which it cannot do if they pay their taxes elsewhere. Nevertheless, different nations eventually settle on agreements that create a compromise between the two sides, partially resolving the issue.
The approach has not been perfect, even before the introduction of digital companies and sales. Devereux and Vella describe issues such as the need to define and police the border between the two countries as well as the necessary awareness of different income types (4). When the varying laws between different countries and the nature of a company that may have assets in dozens of different nations at once are taken into account, the system becomes extremely complicated.
As such, it becomes challenging for the model to adapt to changes in the overall business landscape. Even if some entity develops a solution to an issue, it has to be applied across thousands of agreements worldwide, each with unique circumstances, consistently. Being profit-oriented above all, multinational corporations have found ways to exploit the fact for gain, creating another significant issue of the digital economy.
Tax Evasion
Large companies with international holdings are often accused of employing various methods to avoid having to pay income taxes. American tech giants such as Amazon can serve as an example, growing to gigantic size while effectively paying no tax. The movement of money and assets into locations where legal entities would struggle to discern their existence or size usually facilitates the behavior. Highfield describes the practice as the abuse of some countries’ non-transparent environments to conceal income and assets from taxation (2).
The method arose with the emergence of large international banks that facilitated the smooth movement of money, and with the emergence of new digital methods, such as cryptocurrency, the process is now even more straightforward. However, other, more modern methods have emerged as countries tried to address the problem of offshore assets.
While attempting to minimize tax is normal behavior that has existed for as long as the taxation system itself, the advent of the digital economy creates additional opportunities for companies that want to engage in the practice. As Sand-Zantman notes, the situation where most of the customers are not located where the company’s assets are enables tax evasion and optimization (5). Companies are naturally inclined to place their headquarters in countries with low taxes and to minimize their royalties in high-tax nations to minimize pre-taxation income.
Previously, such behavior was not frequent because it interfered with business, but nowadays, in many cases, there is virtually no difference in the operating capacity of a company. For example, software companies can provide their services worldwide without any difficulty, given the presence of sufficiently robust servers to facilitate operations such as downloads.
It is challenging to address the issue because if legislation aimed at reducing the abuse of taxation differences is adopted in a country, the company can move. Digital assets are not as difficult to transfer to other locations as physical resources are, and so a firm that finds itself in an unfavorable environment can move elsewhere on short notice. There is virtually no way for a country to prevent such an exodus, which would ensure that the company does not pay any income tax altogether, as it becomes a non-resident. As such, the issue has to be tackled comprehensively, with the assistance of all of the world’s countries. The concept presents considerable difficulty due to the complexity outlined above as well as an agency issue. Countries with relatively low tax rates may be interested in housing large companies and refuse to participate in the initiative.
It should be noted that higher tax rates may not necessarily be sustainable for the companies themselves. Bauer claims that many digital companies make less of a profit than what people may initially assume and that increasing their taxation would go against the principle of fairness (12). Many successful digital businesses work by achieving low profit margins or operating at a loss but expanding rapidly through increased popularity and overall market share.
They then invest most of the money back into operations, creating considerable expenses and reducing their profits as a result. The faithfulness of such a model, where the company dominates the market but technically does not make a profit, to the spirit of the law is debatable. Nevertheless, it is true that such firms would not be able to sustain increased taxation without introducing considerable changes in their business models and potentially ruining themselves.
Digital Currencies
Digital commerce would not be successful without an easy method for quickly transferring money internationally. Initially, companies relied on bank transactions, similarly to more traditional companies, but they have since evolved to use various other approaches. Some businesses employ internal currency that can be exchanged for real money and used for purchases while others support a variety of online payment processors.
Regardless of the specific approach, tracing the new methods can be challenging due to their separation from traditional cash flows. A payment processor account’s country can be challenging to determine, though many are trying to implement robust identification and verification procedures. Overall, the determination of taxes that are necessary to collect as well as the location where they are due can be considerably more complicated than in physical commerce, creating issues for authorities.
The situation becomes more convoluted when currencies that are designed for the explicit purpose of guaranteeing the user’s anonymity, such as Bitcoin, are taken into account. They purposely obfuscate the owner’s identity, and so it is necessary to undertake disproportionate effort to determine who made the transaction and where. Nellen also notes that with the constant fluctuation of the currency’s value, the value that should be used for the translation of its value into the national monetary unit is unclear (28).
It should be noted that if the company operates in cryptocurrency and does not translate its holdings into its monetary equivalent, it will potentially be able to conceal all of its income. Such a situation is not currently feasible, as too few entities throughout the world work with such payment methods, but the future may bring considerable change.
It is challenging to respond to the issue of the decentralization of online payments, as it has emerged in response to the inadequacies of traditional money transfer methods. Typically, it was problematic to send money to another nation on short notice, as the process was relatively slow due to incompatible systems and involved a variety of commissions that resulted in an additional financial burden. As such, online processors present everyone with a unified system that people can use regardless of their location and specific currency. While convenient for consumers, the system creates difficulties for governments in differentiating payment sources.
Furthermore, adjustments to the system that enable easier accountability may make them less accessible to consumers, creating a widespread backlash. As such, governments should exercise care and search for methods to deal with cryptocurrencies and their use in business.
Current Solutions
Countries around the world are aware of the rising phenomenon of digital commerce and its implications for taxation. As such, they are taking measures to develop a solution for the issue, both individually and in collaboration with other states. Greggi notes that the Organisation for Economic Co-operation and Development published its first report on the issue of international taxation in 2013 and has been recognized as an appropriate discussion arena (1).
Territorial concerns are the biggest issue with current digital economies, as they do not rely on it as much as traditional markets. As such, research is ongoing into a redefinition of taxation that will accommodate the new paradigm while retaining its ability to police traditional corporations. However, no determinations have been made yet, and the debate is expected to continue in the decades to come until a satisfactory framework can be reached.
The distinction between resident and source countries, which is fundamental to most international trade agreements, is currently being discussed. Greggi describes Action 6 that was undertaken by the European Union, under which some countries would be classified as more deserving of taxation than others, and the less prioritized countries would step back (11). The proposal reduces the ability of multinational corporations to exploit loopholes by moving to countries with low tax rates while operating elsewhere. However, the aforementioned agency dilemma arises, as no country would willingly cede its right to tax a large entity.
As such, the presence of an impartial overseeing agency that is acknowledged by both countries is necessary to make the priority determination. The European Union may partially qualify, but it is biased towards its members, and so it can only make decisions internally, complicating the implementation of the approach.
Another approach would be to disregard the international nature of the company and treat it and its associates as internal entities for purposes of tax collection. Heinemann and Shume note that Australia has decided to collect the Goods and Services Tax from Uber drivers instead of the corporation itself (2). In doing so, it avoids international considerations and removes the loophole that would enable specific taxi services, including Uber, to avoid registering as a provider. Similar considerations can be applied to most sharing services, as the country’s residents own and use the assets, with the company acting as an intermediary.
As such, the country would tax its internal business transactions, avoiding the issue of the corporation potentially avoiding taxes. However, foreign companies that provide clients with services directly are a different matter.
Streaming services, such as Netflix, are such cases and so require additional attention. Fundamentally, Netflix enables owners of content to display it worldwide and receive profits. However, it is not reasonable to expect content producers, especially smaller ones, to be aware of the legislations of all of the countries where their work may be watched and pay taxes accordingly. As such, Heinemann and Murray claim that the Australian Tax Office shifted the responsibility for the tax remits on the operator of the service (4).
This centralization will enable more straightforward and more comprehensive taxation for many large companies, as most of the world’s largest digital firms serve as intermediaries between suppliers of good and services and potential consumers. With that said, there are still significant legal concerns that have to be addressed before the initiative can be implemented and work in the manner intended by its creators.
Theoretical Frameworks
The actions described above have been taken while their effects were not sufficiently theoretically explored. As such, it remains to be seen whether the effects will be positive and what lessons can be learned from these initiatives. For now, scholars and legislators are researching the matter and proposing a variety of potential solutions. As Olbert and Spengel note, many declarations of intent have been made, but common terms such as economic activity and value creation remain undefined (45).
As such, work should concentrate on the creation of a concrete framework that can be used to translate various ideas for improved international digital taxation into practice. It is essential to understand the differences between traditional physical business and its digital counterpart as well as the best way to address both using a single system without damaging the interest of any party.
It is essential to understand that the digital economy has brought about new and unique models that should be approached differently with regards to taxes. Bacache et al. investigate six different models of tax interaction: network rents, two-sided markets, privacy protection, fiscal instruments, platform competition, and fiscal competition (51). Privacy is a particularly interesting concern, as violating it allows companies to save costs, and the idea of consensual data submission can potentially create additional tax consideration. Overall, however, increased taxation will naturally lower the activity of the platform and slow its growth.
However, different tax options can have varying impacts on the performance of the business, and so the research can yield noteworthy results with regards to the methods that can be applied in the situation. As such, the research explores potential options and their effects on specific types of enterprises and aspects of their operation.
Many internet platforms, particularly social networks, have little to no intrinsic product value and generate profits due to the user network they have accumulated. For example, Amazon is famous due to its large consumer base and massive selection of sellers, and without either of the two it would suffer massive financial damage. As a result of this tendency, the quality of the service itself does not matter as much as its network effects.
Thus, according to Bacache et al., such platforms can be taxed directly without any significant distortions to their productivity (52). Naturally, the reduced money supply would make these companies less inclined or able to introduce new features in the future. However, this effect is unavoidable, and the businesses will find a way to remain profitable and sustainable in the long term.
However, many other companies offer multifaceted services that fall under different taxation categories and can switch focus between different revenue sources. Bacache et al. provide the example of a company that responds to increased advertisement taxation by starting to charge users a subscription cost, compensating the loss by switching to a different revenue source (52). As a result, users who are unwilling to pay the cost would no longer be able to use the resource. The reduction in its consumer base would then harm the overall revenues of the company, mainly due to the reduction in its ad income. Other forms of taxation, such as taxes per user, can also lead to the company disregarding its least profitable users. As such, a per-unit tax may be more appropriate than the ad valorem taxation prevalent in traditional fiscal activities.
Many platforms will collect data on their users to offer personalized services and advertisements. In doing so, they can increase their revenue by increasing the probability that the customer will purchase a product or be interested in an advertisement. The data may also be sold to aggregator firms, which then use it for big data analysis, though the practice is generally frowned upon as unethical.
As can be inferred from the profitable nature of data collection, increased taxation leads companies to respond by gathering more information to compensate (Bacache et al. 53). With that said, prolonged use of the practice can lead to adverse consequences due to public backlash or the crossing of the collection and sales into illegal territory. Taxing data collection revenue, specifically, could be a partial solution to the issue, especially alongside other approaches.
All of these considerations apply when the company’s business model is generally immutable, which is generally not the case with rapidly changing digital firms. Some taxation options can have unintended consequences that harm the end-users, such as subscription prices or discrimination based on potential profits. Such flows can also be taxed to discourage the behavior, but the company would suffer significantly as a result.
Bacache et al. propose the option of retaining the current arrangement but having companies pay users for willingly uploading their personal data (54). In such a scenario, everyone can ultimately benefit, and the government can collect taxes on the incomes of its residents without having to apply international considerations. However, it may be challenging to convince companies to follow this paradigm when they have access to large amounts of personal information for all users at no cost.
The effects of taxation on the Internet as a market also should not be disregarded, as it can affect competition. Many digital services are currently asymmetric, with large companies such as Google or Amazon and their divisions such as YouTube or Twitch dominating the field and a variety of smaller competitors. As such, according to Bacache et al., smaller services could be disproportionately affected by taxes and become less competitive while the large services, which are capable of paying the costs without endangering their operations, would become de-facto monopolists (54-55). The situation is not desirable, and so taxes should be applied with care.
Lastly, high tax can lead consumers to avoid paying it through a variety of legally feasible methods. For example, with regional pricing creating different prices for the same software product, consumers can try to pretend to be from the other country and purchase it at a lower price. The money would then go to that other nation, bypassing the fiscal system and resulting in a lowering in overall tax revenue. Bacache et al. suggest price non-discrimination policies and a domestic goods bias as a potential solution (56). However, the policy is dependent on the company, and the countries with lower prices would be disinclined to make their version of the product less attractive.
Conclusion
It is challenging to tax the digital economy, and a practical framework has not yet emerged. International taxation, the primary issue related to the topic, emerged to address double taxation and reduce the unfair burden on large firms. However, the convoluted shape that the system eventually adopted created considerable opportunities for companies, especially digital ones, to minimize the taxes that they pay.
Countries such as European Union member states and Australia have adopted measures to counter aspects of tax evasion, but it is unknown whether the initiatives will have a beneficial effect. These projects are not supported by sufficient research to enable a prediction of whether they will succeed. However, studies are ongoing, and there is a variety of ideas for effective taxation that benefits everyone that may warrant testing and evaluation.
Works Cited
Bacache, Maya, et al. Taxation and the Digital Economy: A Survey of Theoretical Models. 2015. Web.
Devereux, Michael, and John Vella. Implications of Digitalization for International Corporation Tax Reform. 2017. Web.
Greggi, Marco. In Search of a Compass. Base Erosion, Profit Shifting and New Dilemmas in International Taxation. 2017. Web.
Heinemann, Fletch, and Murray Shume. “Uber, Airbnb, Netflix… Australia’s Steps to Tax the Sharing and Digital Economies.” Tax Planning International Indirect Taxes, vol. 13, no. 7, 2015, pp. 13-15.
Nellen, Annette. “Taxation and Today’s Digital Economy.” Journal of Tax Practice & Procedure, vol. 17, no. 2, 2015, pp. 17-26.
Olbert, Marcel, and Christoph Spengel. “International Taxation in the Digital Economy: Challenge Accepted.” World Tax Journal, vol. 9, no. 1, 2017, pp. 3-46.
Peng, Wei. “Multinational Tax Base Erosion Problem of the Digital Economy.” Modern Economy, vol. 7, 2016, pp. 345-352.
Taxation is a fundamental element of the functioning of any state. It provides the government with money needed to support people, creates environments beneficial for their development, protects them, and satisfies their basic needs.
For this reason, any citizen should be ready to pay taxes to support the further development of the country. At the same time, the sophistication of the modern world results in the appearance of a complex taxation system that contains many regulations and requirements. The complexity of this framework might be confusing for people and presuppose some difficulties with the determination of various types of payments that are obliged to do. The primary goal of the given report is the provision of information on tax treatments to improve their understanding and outline general peculiarities of the existing system.
Rental Income
Questions about rental income are among the most popular ones. First, it can be determined as any payment a person receives for the occupation or use of a particular property (“Tips on rental real estate income”, n.d.). All citizens are obliged to report this sort of earnings following the current legislation. Moreover, it is critical to provide information about all properties an individual owns at the moment (“Tips on rental real estate income”, n.d.).
It means that a taxpayer should describe rental income and expenses using Form 1040, Schedule E, Part I (“Tips on rental real estate income”, n.d.). If there are more than three buildings or rooms, additional Schedules E should be completed (“Tips on rental real estate income”, n.d.). It guarantees that all existing payments will be considered and no problems with taxation will emerge. If a person receives some services instead of money as a payment, they should also be mentioned considering their real market value.
Long Term Capital Gains and Losses
Properties or capital that a person owns and uses for various purposes can be determined as a capital asset. In other words, homes, rooms, and cars can belong to this category. Deals presupposing sales of capital assets precondition the appearance of gains or losses that should be reported. If a person owns property or some other object for more than one year before any alterations, the capital loss is determined as long-term (“Topic No. 409”, n.d.). It means that one should be accurate in formulating for how long the asset is held as various types of taxations are applied. All sales and other transactions related to long-term capital gains and losses should be reported using appropriate forms to include all payments and avoid problems with the law (“Topic No. 409”, n.d.). If the income is higher than losses, additional tax rates are introduced.
Annuity Income
First of all, it is critical to remember that annuities are tax-deferred, which means that there are some advantages as investments might grow faster. However, it does not mean that there are no dues associated with this income at all. The annuity payments are taxable if a person has no investment in the contract because of the following list of factors:
There is no individual’s contribution to pension or annuity
There are no contributions from the salary by an employer
All contributions were received before (“Topic No. 410”, n.d.)
Annuity income can also be partially taxable if a person adds after-tax dollars to a pension (“Topic No. 410”, n.d.). In this case, taxes are not paid for part of this new amount of money. In such a way, there is a protection that ensures that retired people will be able to acquire the fund needed to support their living.
Settlement of Lawsuits or Court Judgments
If a person acquires money as a result of a lawsuit judgment or settlement, he/she has to pay taxes introduced by the IRS. In all cases, it depends on the main features of the trial and results. For instance, compensation for emotional or mental distress will be taxed as income, but any additional treatment will be tax-free (IRS, 2011). Lost wages and punitive damages are also taxable as they are considered additional payments and should be reported as any other financial operations (IRS, 2011). For this reason, any court judgment should be treated from the perspective of the IRS as the agency responsible for the observation of taxation and its effective functioning. Individuals can be recommended to consult with a specialist to avoid misunderstandings or problems related to this aspect.
Discharge of Indebtedness Income
Another problematic area associated with taxation is the discharge of indebtedness income as many individuals might have problems with its poor understanding. One should remember that if a person borrows any sum of money, he/she also acquires a debt (“Topic No. 431 canceled debt”, n.d.). There are special rules for incomes associated with this issue. If there is a cancellation of payments because the whole debt is forgiven or discharged, the amount of the canceled debt becomes taxable (“Topic No. 431 canceled debt”, n.d.). Every person should be ready to report it and pay the determined sum. At the same time, there are some exceptions such as gifts or inheritances, education loan repayments, or special forgiveness programs that are created for various groups of people (“Topic No. 431 canceled debt”, n.d.). In general, the given approach ensures that all possible transactions associated with this issue will be considered.
Scholarship
Another vital topic is the scholarship and the way it is taxed. First, it can be determined as an amount of money needed for a student to study in a particular educational institution (“Topic No. 421 scholarships”, n.d.). If a person receives this sort of payments, it can be tax-free; however, some important factors should be considered:
A person studies in an educational establishment that has a regular faculty and curriculum.
Money that is used to pay for an education that is provided for a person, and for things critical for it (books, equipment, supplies) (“Topic No. 421 scholarships”, n.d.).
However, money used for renting a room, optional devices, additional tutoring, traveling, and courses are taxable as they are not critical for activities associated with the central purpose of scholarship (“Topic No. 421 scholarships”, n.d.). In such a way as, reporting payments, a person should consider these factors.
Divorce Payments: Alimony vs. Child Support vs. Property Division
Divorce payments are another important aspect of the existing taxation system. By the current regulations, alimony is tax-free for a person who pays and taxable for those who receive them (“Topic No. 452 alimony”, n.d.). At the same time, all amounts of money paid as child support should be reported and taxed (“Topic No. 452 alimony”, n.d.). It guarantees the appropriate distribution of funds and the effective functioning of the financial system. In many cases, recipients of alimony want to be it in the form of child support to avoid additional taxes (“Topic No. 452 alimony”, n.d.). Ex-spouses should also pay for property that is now owned by them under the court’s decision. In such a way, it is critical to consider these factors to ensure that the existing regulations are observed.
Prizes Winnings
In terms of the existing legislation, prizes, both cash or property, are taxable. The federal government considers awards, lottery winnings, and other sorts of payments ordinary income regardless of their size (“Topic No. 419 gambling income”, n.d.). Even if a person does not make any effort or perform special activities, the same approach to taxation is utilized. That is why, the U.S. government determines the tax rate resting on the income and introduces a special legal framework for payments (“Topic No. 419 gambling income”, n.d.). It is critical for individuals who acquired money in this way to report in short terms; otherwise, their actions will be considered a crime and an attempt to avoid taxes.
Gambling Winnings
The existing rules state that all gambling winnings are fully taxable as they are a part of persons’ revenue. Any individual should report the income on the tax return to observe the existing law (“Topic No. 419 gambling income”, n.d.). The given broad category includes raffles, horse races, casinos, lottery winnings (“Topic No. 419 gambling income”, n.d.). The cars or offered trips should also be included in the report regarding their real market value to ensure correct taxation. If a person has any sort of gambling prize, he/she can be demanded to pay an estimated tax because of the appearance of additional income (“Topic No. 419 gambling income”, n.d.). These rules regulate the taxation policy regarding the given aspect and should be observed.
Consulting income
Consulting is a popular occupation that provides individuals with stable revenue. However, they should remember that any money acquired in this way is taken as a regular income and should be mentioned in the report to pay appropriate taxes. The current approach states that the marginal tax rate depends on the sum of money acquire, and it grows with it (“Self-employed individuals tax center”, n.d.). For this reason, the IRS recommends making quarterly payments that are calculated resting on the topical and estimated tax liability (“Self-employed individuals tax center”, n.d.). It will help to avoid misunderstandings with the demanded amount of money and guarantee that individuals who earn money in this way will have no problems with taxation policy.
Non-Cash Transactions
All non-cash transactions should also be reported as they are a part of the financial sphere. The relevant approach to taxation presupposes that a person who is involved in this procedure should be ready to provide all necessary information about it to avoid problems with the law (“Cash payment report”, n.d.) For instance, the cancellation of debt mentioned above is also considered a non-cash transaction that should be reported as is a part of individuals’ income, and the same rules are applicable here.
Conclusion
Altogether, the income items mentioned above have various aspects that should be considered when reporting. The improved knowledge of the most important features and the topical approach to taxation might help individuals to avoid problems or misconceptions and enjoy benefits that are associated with the existence of gaps in modern legislation.
It is stated that the current Government is going to reverse the family trust changes introduced by the previous Government. The definition of family in the family trust selection regulations will be changed to restrict lineal successors to children or grandchildren of the test persons or the test someone’s spouse. This modification of the taxation system was represented in July 2008. Consequently, as Karl (2003) emphasizes “if a family trust was regarded as the trust which is aimed at making distributions to family that will be excluded from the test personal family group make sure it is before 1 July 2008. Family trusts will be prevented from performing a once off variation to the test personal specified in a family trust election (other than in relation to a marriage breakdown). Nevertheless this change will be retrospective from the viewpoint of the taxation rules of the 2007/08 income period”.
The government offers a tax program for families with children up to 13, and this program offers compensation of 35% of child care costs and up to $3,000 per child or dependent. As this tax credit is non-refundable, the families receive only the sum, which they have paid in taxes.
Fuller and Sharon (2002) state that New York State offers a refundable tax credit of up to 110 percent of the amount for which the families were eligible from the federal tax credit (whether or not they received it from the federal government). In contrast to the federal tax credit, the New York State child care tax credit is refundable so a very low income individual who does not have an income tax liability can still receive money.
The fact is that the opportunity for making all these variations off may be restricted, if not lost. These changes decrease the scope for family trusts for utilizing the possible tax losses and franking credits in order to decrease the income tax rate. The other changes of the Family Trust regulations were represented by the previous Government will not be invalidated entailing; permitting different variations in the family group that may happen as a result of death, divorce or birth and permitting family trust elections to be annulled in circumstances where the initial elections were not actually needed. Nevertheless, it is claimed by Fuller and Sharon (2002) that as a result of the tax-free threshold and low income offset taxpayers (other than minors) with income below $11,000 do not pay tax, consider ways of assigning income to any low income personalities in the family group. It is also necessary to emphasize that the threshold will increase to $14,000 for the 2008/09 tax year.
It is necessary to mention that when the employee leaves the service of the employer, one has an absolutely crucial decision to take. It is claimed that “such worker is oblige to estimate and select whether he / she is better off leaving the retirement financial reserves in the current qualified 401k retirement pension plan (if it is allowed by the plan itself), changing the company’s qualified plan such as a 401k plan, or rolling over to an IRA, by way of an IRA rollover.” (Brown, Williams 2007). Originally, if this process is managed properly, the 401k rollover according to IRA, makes it possible to maintain tax-deferred status by qualified retirement funds. Consequently, the employee has an opportunity to avoid tax withholding (20%) and penalty for premature retirement.
The instances of IRA and 401k are given in Brown and Williams (2007). They emphasize the following fact: “with a rollover IRA the investment options are open to most all investments (tremendous rollover IRA advantage). Within a qualified retirement pension plan employee’s choices are usually restricted to the selections (maybe two or three dozen) made available within the company-sponsored 401k plan. IRA rollovers currently allow for the most flexibility regarding distribution options and beneficiary selection.” This, originally, can be highly valuable in regards to extending IRA multi-generational planning. The A 401(k) plan can provide numerous advantages for the low-income taxpayers. Originally, these advantages entail the possibility to decrease the tax rate, and also lowering if the taxable income, and making savings that accumulate without making deposits. Thus, in 1978 Congress decided to encourage the American population to save finances for their retirement. Originally, this was aimed to lower the federal taxes and enhance some additional income by decreasing taxes. The tax reform act, which originated from this decision, supported the elaboration of the tax-deferred savings program for workers. However, the first 401(k) program was launched in 1982. It was a “defined contribution” program that allowed any employer or employee to set up the sum of money, which should be directed to the fund.
As for the single mothers, it is necessary to emphasize that the Government has also elaborated the program, allowing them to reduce their taxes and gain untaxable allowances for raising children.
Chesser and Harrison (2003) in Journal of Accountancy claim the following: “For the single mother to be eligible, one has to have earned income during the year, but beneath a particular level. This credit can add thousands to your tax refund and is a form of government-sponsored support for working single mothers. You can choose to have it show up directly in your paycheck the following year, instead of waiting for the end of year to file and receive the benefit”.
Taking into account the possibility to apply ROTH strategy instead of IRA, it should be stated that the biggest disparity between these two approaches is the way, the taxes are treated. (Traditional vs. Roth IRA: An Introduction and Comparison, 2009) If the yearly profits are $70000 and higher and $4000 are put in traditional IRA, the taxes will be paid from the rest $66000. Nevertheless, if these $4000 are put in traditional ROTH, these in no way will be regarded as the income tax deduction. Fuller (2002) in his turn states the following: “The Roth IRA is going to make more sense in most situations. A person filing the taxes as single can not make over $95,000. Married couples are better off, with a maximum income of $150,000 yearly.”
Tax Planning
As for the matters of tax planning which are aimed to simplify the tax system in general and not to bother people with the complexities of the bureaucratic system, it should be stated that the effective system is based on salary sacrifice. For clear understanding of the mechanism, it is necessary to cite Edward (2003) in his “Tax-Planning Services…” : “An effective salary sacrifice system is based on the arrangement between the taxpayer and the employer detailing the exact salary rate or income which will be sacrificed. It is advised that the worker and the employer agree upon all the conditions of the wages forfeit arrangement. This arrangement should enter into force before the assignment is performed. Finally, the employer should not have any access to the salary being sacrificed for the period of the arrangement.”
Originally, the changes in the tax planning system touched deemed dividends allowing taxpayers not to apply to the Commissioner in case of their obtaining. It is said, that the permission for not applying to Commissioner was introduced to taxpayers to declare the dividends and get the tax credit for the future (Fuller and Kagan, 2002)
Tax Planning Issues for Small Business and Entrepreneurs with Low Income
The companies are obliged to take into tax accounting the profits and losses which originate from their financial contacts, that reflect the generally accepted accounting practice (GAAP). There are two accounting tools regarded as authorized: mark to market (it is generally resorted to by financial traders) and accruals.
Business turnover lower $2 million means special tax benefits such as a simplified trade regime and tax offset. In case of advance income it should be compulsorily credited; there should be certain contributions to the political parties’ development for about $1,500. Investments in education and social funding should be compulsory observed. As Crouter and Booth (2004) found in their research: “The earned income credit is a refundable credit for certain qualified workers. It is aimed at helping offset some of the increases in living expenses and social security taxes. This credit reduces the amount of tax owed, if any, and may result in a refund to the taxpayer.” From this point of view, the suitable workers may perceive some part of their income credit in their paychecks. For being suitable, the employee must have a child (under 18), and expect to fall into certain income restrictions, and meet other specific requirements. Which are generally stated in W-4 form, Earned Income Credit Advance Payment Certificate, and in more detail in Publication 596, Earned Income Credit, as stated by Crouter and Booth (2004)
From this point of view, the applying of examples will help in the issues of clarifying these strategies. Thus Perez (2009) states that by filling out any new form for the employer, any worker is free to make all the required adjustments for the withholding. As for the W-4 modifying, it is often emphasized that there is an opportunity to decrease the amount of the declared allowances according to line 5 of the W-4, or it may be done according to line 6: the wished amount for being withheld may be added. Garwood (2008) in his turn states the following: “The more you have withheld, the more likely your tax bill will be covered and you will not owe money at tax time. In fact, you may benefit from a refund check. For those who are not very good at setting money aside for taxes, having more taken out of your weekly or biweekly paycheck is a benefit.”
As for the rules of qualifying children for the aims of claiming the earned income credit, it should be stated that they are different from the rules for dependents. From this point of view it should be stated that it may be possible that a child may be qualified as the taxpayer’s dependent, but not for EIC; or would qualify for EIC. Here are the qualifying children rules for the earned income credit:
Relationship test
Age test
Residency test.
To claim a qualifying child or children it is necessary to attach Schedule EIC to Form 1040. (Perez, 2009)
Influence by Tax Planning Transformations 2008
It has been already emphasized that the threshold will increase to $14,000 for the 2008/09 tax year. Taking this into account it is necessary to state that such a threshold is aimed at increasing the possibility of giving tax credits, allowances and tax planning system capabilities. It is claimed that if such contributions are paid for the advantage of an associate, these contributions are regarded as fringe benefits. Consequently, where these contributions are paid to a non-accomplishing superannuation fund they will be regarded to be a fringe advantage.
Taking into account the tax-paying system for the low-income taxpayers, there are several filling status issues. Fuller and Kagan (2002) give 5 categories:
Single. This is applied to everyone who is unmarried, divorced or separated by the state law.
Married, applying jointly. A married couple may post a joint return. If a spouse died during the year, the other has an opportunity to file a joint return with that spouse for the year of death.
Married applying separately. A married couple may elect to file their returns separately.
Widow(er) with Dependent Child. A taxpayer is granted with an opportunity to choose this filing status if the spouse died during 2006 or 2007, a taxpayer has a dependent child and he o she meets certain other conditions.
This is regarded to be a strategy for married couples. If one of the spouses has a steady income and the other is a freelancer, the setting up of the withholding may be very helpful. Karl (2003) emphasizes that claiming for more withholding for any person with a steady salary will be really beneficial if the spouse who is an independent contractor has essentially higher earnings. This can be adjusted, should the independent working spouse have lower earnings, and can help ensure that they are covered at tax time.
Originally, if there is a strong necessity from the side of a taxpayer to make sure there is enough withheld to cover the tax obligations, any taxpayer does not want to have too much money withheld. This money may be invested and the attained profits may be derived from the interests.
Thus, based on these categories, the individuals having salary-packaged benefits and $180 000 or less taxable income are to review their sacrifice arrangements. Individuals with income lower than $11000 are not to pay tax – it is connected with low-income offset and tax-free threshold. The tax rate for minors (under 18 years children) make about 45%, the tax-free threshold is about $1,667, being increased to $2,667.
Another instance of married couple strategy tax-reducing may be applied in the case of one of the spouse’s death. Originally, it is stated that the NRB (nil-rate band) would result in a substantial IHT (inheritance tax) saving. However, this strategy has essentially changed since the transferable nil-rate band (TNRB) was represented on 9 October 2007 in the Pre-Budget Report. The instance of this strategy application is stated in Garwood (2008): “For example, say John died in 1995 having used only 75% of his NRB. If his wife Mary dies in 2009, her NRB will be [pounds 325,000 (2009/10 NRB). This will be increased by the 25% unused proportion of John’s NRB so she has an NRB of [pounds] 406,250, thereby reducing the IHT on her estate by a further [pounds] 32,500.”
Conclusion
In conclusion, it is necessary to mention that the opportunities provided by tax planning formation made some benefits to individuals with low income; though there are certain contradictions between state and federal policies striving to help such people.
Originally, the taxpaying structure for low-income taxpayers is essentially simplified, and, it is necessary to mention that they are granted lots of additional opportunities, which allow them to decrease the tax rate, decrease the threshold of the income tax and receive the tax credit, which is based on the social position, personal circumstances or working conditions which potentially may lead to the decreased income rates.
The strategies and systems which are widely represented in the paper offer different ways for declaring incomes, and depending on the way of this declaration, tax rates and allover sums vary. Originally, it is linked with the notion that citizens should have an opportunity to gain help from Government, on the other hand, this help is possible only if the taxes are thoroughly paid by all the citizens.
References
Brown, Carol Necole, and Serena M. Williams. “The Houses That Eminent Domain and Housing Tax Credits Built: Imagining a Better New Orleans.” Fordham Urban Law Journal 34.2 (2007): 689
Chesser, Delton L., Walter T. Harrison, and William R. Reichenstein. “Investment Tax Planning for Retirement: How to Make Taxes Work for the Client.” Journal of Accountancy 196.2 (2003): 63
Crouter, Ann C., and Alan Booth, eds. Work-Family Challenges for Low-Income Parents and Their Children. Mahwah, NJ: Lawrence Erlbaum Associates, 2004.
Fuller, Bruce, Sharon L. Kagan, Gretchen L. Caspary, and Christiane A. Gauthier. “Welfare Reform and Child Care Options for Low-Income Families.” The Future of Children 12.1 (2002): 97
Garwood, Paul. “Financial And Tax Planning, Summer 2008 – Maximising Your Returns.” Mondaq Business Briefing, 2008
Karl, Edward. “Tax-Planning Services for Clients or Employers: CPAs Should Understand Their Responsibilities.” Journal of Accountancy 196.6 (2003): 69
Perez, William. “2009 Tax Rate Schedules. Tax Brackets for the 2009 Tax Year” Tax Planning: U.S. 2009
“Traditional vs. Roth IRA: An Introduction and Comparison”. Flexo, 2009.
The local and federal governments across America have moved to privatize the provision of services. Privatization is preferred because it enables better service provision for people as well as enables governments to save on expenses. According to Minger (n.d), privatization has evolved over time from a radical concept into an approach that has been proven and is well established in management. Privatization across the U.S has led to better service delivery by providing greater variety, effectiveness, and efficiency.
Apart from privatization, governments also form partnerships with the private sector to facilitate service provision by forming public-private partnerships (PPPs). PPPs entail cooperation between the public and private sectors in different areas such as designing, developing, constructing, operating, owning, or sponsoring infrastructure assets or in the delivery of services. However, the private sector is expected to play a major role in the partnership while the public sector provides the needed support (Minger, n.d). The City of San Diego is dubbed as the best model for PPPs. It is the second most populated City in America, followed by Los Angeles. Therefore, the City has a huge population to serve.
San Diego was among the places chosen to conduct a pilot PPP project in the 1980s through the passage of Assembly Bill 680 (Minger (n.d). The first PPP involved the construction of the Route 125 toll road in the County Minger (n.d). However, the first PPP was not successful as expected. Minger (n.d) states that the project ended up costing close to $500 million more than the forecasted cost of $360 million. In addition, the project did not attract many users either, as expected. Therefore, the private consortium that had signed up for the project could not collect enough money from the project. It ended up filing for liquidation, becoming the first PPP to fail to pay the federal administration’s loan. In the end, the San Diego Administration Government (SANDAG) took control of the project and has been able to operate it successfully as a component of the open road system in the County.
Nonetheless, the City continued to embrace the concept of PPPs. The PPPs are coordinated through the Corporate Partnerships and Development Program (CPDP). The entity is tasked with the exploration and formulation of innovative channels that are expected to benefit the people of San Diego. The CPDP has enabled the City to generate additional revenue from its past and current PPPs. In 2001 the City’s administration formed a partnership with the Cardiac Science Organization, which is a leading developer of cardiology merchandise and amenities Minger (n.d).
The CPDP partnership has been able to generate a lot of revenue for the City that has helped in the operation and sustenance of the Public Access Defibrillation (PAD) Program (Jaccard, 2020). The program has been helpful in improving the survival rates of sudden cardiac arrest victims by making AEDs available such as fire extinguishers in City and county environments, schools, hospitals, and dispensaries, as well as businesses and tourist attractions. To further integrate the PPP framework as an administration tool, the City has continued to seek new partnerships. In 2018, San Diego commenced the process of evaluating the need to form PPPs to develop a multipurpose project (Minger, n.d). The project entailed providing commercial spaces, residential units, and a bus Stopover in the Columbia-Civic/Core district of Downtown San Diego.
Tax Policy
In general, the state of California charges very high taxes on businesses. The state also charges double taxation since it imposes a tax on small and medium enterprises (SMEs) and personal income. According to Jaccard (2020), individual business owners pay tax on business income and pay tax on personal income derived from the business. In the City of San Diego, the City Treasurer is mandated to conduct tax administration under the Law. There are different types of taxes charged within the City, as listed below:
Property Tax
Sales and Use Tax
Leases
Highway Users (Gas) Tax
Fines, Forfeitures, Penalties
TransNet
Rents and Concessions
Motor Vehicle License Fees
Transient Occupancy Tax (TOT)
Rental Unit Tax
Franchises
The latest change in tax policy involves the introduction of Propositions (Prop) 19 and 15. The propositions are expected to significantly affect the current laws on property taxes. They are mainly intended to adjust the restrictions on tax reviews on real estate as currently stated under Prop 13 and successive similar propositions. Prop 13 restricts any increase in property tax to 2 percent per year (Jaccard, 2020). Therefore, homeowners in California have usually been paying property taxes on a lesser tax base than the real value of their houses. Prop 15 and prop 19 are expected to introduce more punitive tax policies. According to (Minger, n.d), Prop 15 is aimed at taking away the safeguards on the commercial and industrial property as currently stipulated under Prop 13. Prop 19 is expected to have a bigger effect on family homes (Jaccard, 2020). Even though the proposed Law creates a fire safety fund, it establishes numerous alterations to traditional procedures on property tax calculations.
In general, San Diego has been at the forefront in the development and implementation of PPPs, which have proven effective in the provision of services for the people. The City has also developed a framework for the implementation of PPPs to ensure there is effective coordination between the public and private sectors. In addition, the City seeks to adjust the tax regime to improve the collection of taxes that are instrumental in financing various activities in the City.
References
Jaccard, C. (2020). How will Prop 19 affect my taxes if it passes? Web.
Minger, S. (n.d). Why do we need public-private partnerships? Web.
Income tax means imposing or levying the proportionate rate upon the income earned. Government is empowered to levy upon the income of the individuals. “The tax under consideration has a base which includes all net gains” (Rolph, 1954, p.260). This is so done for ensuring the economic development and betterment of a country and its citizenry as well. Because, Paler (2007) states that “a state’s ability to collect revenue has long been recognized as essential to its growth and development” (p. 2).
As it is mandatory upon every citizen to pay due regard to the law of the land, everyone is bound to abide by the provisions regarding tax legislation of the country while income earned from different sources by rendering services. Individuals of a particular country are levied as per the existing tax laws and regulations. Though Corporations are not levied, the proportionate shares of stockholders in corporate earnings are subject to tax. Stockholders are treated as if they were partners for tax purpose.
Proper monitoring and management of tax administration helps the country to conduct its functions effectively and smoothly. The tax functionaries of the United States of America are regulated through the Internal Revenue Service (IRS). Hollis (2004) shows that “[i]n 2002, the Internal Revenue Service (IRS) processed almost 227 million tax returns, collecting more than $2 trillion in revenue, and it helped almost 95 million taxpayers who called the toll-free automated line, wrote letters or visited one of its more than 400 offices around the nation”.
Purpose and Scope of the Study
The Internal Revenue Services (IRS) is the central body entrusted with the responsibilities of executing, monitoring and supervising the revenue administration in the USA. This statutory body was established through the Internal Revenue Code (IRC). The central theme of the present study is concentrated on explaining the philosophical outlook and practice of public administration corresponding to the Internal Revenue Service (IRS).
In this view, the study demonstrates to discover the role of the Internal Revenue Service (IRS) in regard to its functions in contributing to preserve the notion of public administration. Henceforth, the present study intends to highlight on the following topics: philosophy of public administration, environment of public administration, administrative ethics, nature and process of policy making, decision making, organizational structure of the IRS, leadership and management of the IRS and other relevant matters to develop a structure over IRS.
In addition, the study would also attempt to explore the defects and loopholes in the operation and management of Internal Revenue Service (IRS) and recommend practical suggestions and way out for its more effective operation and help preserving the notion of public administration and serve the peoples’ maximum interests as well. The findings of the study would widely facilitate the policy makers in arriving at the right decision and accordingly shape a fit revenue administration for the country.
Methodology
This is an analytical as well as empirical study with a view to exploring the deficiencies and impediments in the way of effective operation and management of the Internal Revenue Service (IRS). So, the Researcher in order to properly evaluate the merit of the study has taken an extensive approach. Accordingly, Researcher has taken help from various sources. Particularly, emphasis has been put on the thorough study of texts and journals. In addition, to upgrade the quality of the paper, it has been made informed with the information taken from the internet.
Internal Revenue Service (IRS)
The Interval Revenue Service (IRS) was established with the auspices of the Internal Revenue Code. It monitors, oversees and manages the entire revenue affairs of the country. A study (Snyder, 1952) shows that “[p]rior to the reorganization of 1952, the Internal Revenue Service (IRS) collected the revenue through ‘64 Collectors’, who were Presidential appointees. Congressional investigators found that the Collectors had been susceptible to political influence and to other forms of improper pressure. Commissioners had found they were unable to control the independently-appointed Collectors” (p. 221).
The centralization of the taxation system was mostly liable for this problem. The Select Committee report (Final Report, 1976) states that “[t]he problem was perceived in part as one of excessive centralization, which made the Internal Revenue Service (IRS) a powerful tool of political forces and threatened public confidence in the tax system.” So, decentralization of The Internal Revenue Service was necessitated for certain needs of tax collection and tax law enforcement.
The Select Committee report (Final Report, 1976) shows that “The high degree of local autonomy and agent discretion which accompanied decentralization has made the Internal Revenue Service (IRS) an effective tax enforcement agency. It has, however, proved to make difficult the effective control of non tax law enforcement activities”. Recently, several defects and loopholes have been found in the operation and management of the Internal Revenue Service (IRS).
So, over the days, there has been a growing debate as to the merit and efficacy of the Internal Revenue Service (IRS). Policy makers and citizens are worried regarding the effective operation of the Internal Revenue Service (IRS). The agency is riddled with various problems. Delmar (1998) shows that “[e]very year over 100 million taxpayers have an (e.g., Treasury General Counsel Order No. 4) obligation to compute and report their income and tax liability to the Internal Revenue Service (IRS). But millions either fail to file returns or file inaccurately” (p.13).
Use of Force
It is alleged that Internal Revenue Service (IRS) officials pressurize their sub-ordinates to extract more revenues from the taxpayers by means of force and coercion. “In fact, congress encourages Internal Revenue Service (IRS) officials to do so” (Rainey, and Thompson, 2006, p.1).
Tax Gap
Tax gap in America is a common scenario. “National Research program undertaken by Internal Revenue Service (IRS) suggest that in 2001 around 16.3% taxpayers did not pay their taxes worth $345 billion” (Rainey, and Thompson, 2006, p. 575).
Organizational Structure
There were various organizational problems at the Internal Revenue Service (IRS). Amongst other, the major difficulties were the inadequacies of telephone services, politically motivated and inexperienced personnel in and complicated tax legislations.
Form 990
One of the defects in the existing tax mechanism is that the Form 990 information return filed by tax-exempt organizations has not changed since 1979. Of Course, In 14 July, 2007 the Internal Revenue Service (IRS) recommended a discussion draft for redesigning the form emphasizing the necessity of ensuring transparency and smooth organizational operation of the Internal Revenue Service (IRS).
Taxation in the USA
Personal Income Taxation
Law does not allow avoiding taxable income. Section 6151 of Internal Revenue Code states, every taxpayer should submit their payment with tax returns. Otherwise, anyone on the charge of avoiding tax would be convicted with criminal penalties. As it is the ethical responsibility of citizenry to regularly pay tax to the exchequer, avoiding tax thus meant overruling the esteem of law of the land. In United States v. Drefke, (1983) case, Eighth Circuit Court of Appeals held, “when a tax return is required to be filed, the person so required ‘shall’ pay such taxes to the internal revenue officer with whom the return is filed at the fixed time and place.
The sections of the Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the… tax, a duty which he chose to ignore”. Levying tax depends upon the gross income of a citizen. Gross income includes all sorts of earning obtained from different sources through rendering services. As per section 61 of Internal Revenue Code, any income, from whatever source, is presumed to be income, unless the taxpayer can establish that it is specifically exempted or excluded.
Section 61 of the IRC states that gross income means all income from whatever source derived. Personal income taxation has strong connections with the formation of human capital, the choice between labor and leisure, the investment decision, the compliance and evasion of legal rules, and the geographical location of resources. The Internal Revenue Code imposes a federal income tax upon all United States citizens and residents. Again, in Brushaber v. Union Pac. (1916) case, court held, the United States Supreme Court has recognized that “sixteenth amendment approves a direct non -apportioned tax upon United States citizens throughout the nation, not just in federal enclaves.”
System of Taxation
US follow the status of residency or citizenship in order to levy taxes on its people. “One’s residency status determines which U.S. tax return has to be filed. In USA, in regard to determining the tax rate, following two matters are given considerations (i) green card test; (ii) Substantial presence test, i.e. status of the citizens. Hence, the authority in levying tax, duly evaluate following things: whether the taxed individual is a non-us citizen or Resident alien i.e. a person regulated under either tax law residency test or Non-resident Alien, i.e. a person who is not under the ambit of either tax law residency test.
In case of levying tax upon citizens and residents, The Internal Revenue Service (IRS) determines the rate on the basis of their worldwide income. Furthermore, U.S. citizens and resident aliens are generally taxed in the same manner although there are a few exceptions” (Faussett). However, non-residents are levied only on U.S.-source income and are allowed only limited deductions and credits. A non-resident alien is generally levied at a flat 30% rate on U.S.-source investment income, For example, a U.S. citizen, but a resident alien does not include in income compensation earned as an employee of a foreign government or international organization and that is received for official services rendered. Whereas income, that is effectively connected to a U.S. trade or business is taxable at graduated rates.
Again, a foreign-born spouse of either a U.S. citizen or resident alien holds no special status except for being able to elect to be treated on the tax return as a resident alien. This enables the couple to file a joint tax return. It is important to point out that an illegal alien is subject to the same income tax rules as a legal alien. The substantial presence test must is applied to determine whether the individual should be levied as a resident or non-resident alien (Faussett).
Reform: Rossotti Period
For decades long, the Internal Revenue Service (IRS) had not changed its enforcement and revenue functions of the country. So, the agency could not properly administer its activities. Thus, inefficiency and mismanagement in the Internal Revenue Service (IRS), led the congress to adopt a reform commission in 1996 and legislate an enactment entitled “Internal Revenue Service Reform and Restructuring Act of 1998 (RRA 98)” for the efficient tax administration in the country.
This act introduced major reforms. The Internal Revenue Service Restructuring and Reform Act of 1998 mandated that the agency would provide top-quality services to the taxpayers or citizens of the USA by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. The new organizational framework introduced by Rossotti and Department of Treasury, reflects a balancing approach between taxpayer service and tax enforcement activities.
The reform emphasized on improving taxpayer support, outreach and education. Rossotti (Rainey, and Thompson, 2006, p. 602) deserves a handful credit for his efforts in centralizing Internal Revenue Service (IRS) phone operations. His administrative reorganization has obsolete the old decentralized regional and district office structure. The new Internal Revenue Service (IRS) structure was equipped with four new operating divisions, emphasizing on service and support for taxpayers. In addition, the newly developed Internal Revenue Service (IRS) manual defined 10 offenses providing that Internal Revenue Service (IRS) officials would be punished in committing any of those 10 offenses regarding the enforcement actions.
Of course, the reform proposal also provided provisions against those resisting the enforcement actions. The reform introduced by Rossotti is important for following two considerations: a. A reorganization that supported a more strategic approach to tax which promoted prospects making progress in eliminating the tax gap, b. a reorientation of agency managers to broader measures of the agency’s performance (Rainey, and Thompson, 2006, p. 602).
The significance of Rossotti’s reform is laid in making change in the organizational structure of the Internal Revenue Service (IRS). This helps the organization to work more strategically and more effectively so that the Internal Revenue Service (IRS) can attain a long lasting achievement in eradicating the tax gap. The reform has also ensured a higher level of compliance among the low-income taxpayers and thereby helps to reduce the tax gap through VITA (Volunteer Income Tax Assistance) program. In fact, it has erected a mechanism for an effective and successful tax administration throughout the country which has yielded efficiency and expertise among the Internal Revenue Service officials in executing their responsibilities.
Another contribution in Rossotti’s reform was to carry a change in the agency’s mission. Earlier, Internal Revenue Service (IRS) was criticized for confining its activities solely within tax collection and abusing the tax payers. So, concern for improving the citizen’s comfort was urged by the situation and reform initiative stressed on taxpayers’ satisfaction, i.e. delivering quality service.
Undeniably, the reform by Rossoti and his administration has made significant contribution in the Internal Revenue Service (IRS) for simplifying the revenue administration and providing better services to the citizens as well (Rainey, and Thompson, 2007, p. 583).
Impediments
The reform of Rossotti was sharply criticized for weak enforcement of the scheme. But, because of some difficulties, the program could not be succeeded. The major concerns that impeded the reform initiative were budget constraints, the Internal Revenue Service (IRS) Restructuring and Reform Act, and a sharply increasing workload. These were beyond the control of Rossotti’s team.
Budget
Budget or resource constraint severely impeded enforcement actions during the 1997-2002 period. Congress and the president imposed budget constraints that caused the total number of revenue agents and tax auditors from 16,380 in 1997 to 13,046 in 2002.
Flexible Legislation
The Internal Revenue Service (IRS) Restructuring and Reform Act impeded in audit and collection. The law included 71 new rights for taxpayers (Rainey, and Thompson, 2007, p. 580). For instance, earlier, the revenue officers had to provide a 30 days notice to the delinquent taxpayers giving them the opportunity to file a tax lien. But, the new legislation provided more time for each actions (Rainey, and Thompson, 2007, p. 580). Such provision lengthened and complicated the procedure.
Improper Decision
In executing reform initiatives by Rossotti with the Internal Revenue Service (IRS), Congress and the Treasury Department erred wrong, particularly in deciding the case of agency’s already underway reorganization efforts. A completed implementation of a new Master File computer system was called a billion-dollar mistake by the Government Accountability Office (Cyr, and Swanson, 2007, p. 578).
Inclusion of Ten Offences
Another defect was with the Internal Revenue Service (IRS) Restructuring and Reform Act was the inclusion of a peculiar type provision which enunciates that if any Internal Revenue Service (IRS) personnel do any of the ten offences, would be penalized. For instance, the offence of harassing a tax payer was subject to mandatory termination from the service. So, the personnel were worried about their service tenure and enforcement initiative.
Thus, the enforcement initiative was weakened. In this concern, Internal Revenue Service (IRS) officials were required to be reassured regarding their tenure and permanence in the service. As per the relevant Statistics, the number of liens filed by collection personnel reduced from 544,000 in 1997 to 168,000 in 1999. Again, because of the reassurance to the collection employees, the figure was increased to 492,000 by 2002.
Increasing Workload
Increasing workload was another problem. The tax code brought about 293 amendments in the regulation of tax provisions during this period. For those changes, the number of filing tax return rose to 12 million. Again, the tax collection was increased by 527 billion dollars and the figure of tax return was increased to 121 billion dollars. Consequently, the Internal Revenue Service (IRS) had to face a great difficulty in tackling such an increase workload with already lost workforce.
Criticism
Though the reform program deserves success, it lacks serious defects in some cases. Consequently, the program has been severely criticized from several quarters. Critics argue that tax reform program undertaken by Rossotti is defective on the following grounds:
Non-Compliance Data
The purpose of a tax return examination is to rectify the tax return as well as teach the taxpayer regarding the proper application of the law. Consequently, in the subsequent years, tax payers will be able in determining self-assessing tax return. An ideal and well regulated tax mechanism can help Internal Revenue Service (IRS) in reducing the tax gap in the country. Though the program succeeded, due to non-inclusion of tax noncompliance data, the reform was not properly addressed.
Inadequate Computer System
Though, computer system has been introduced, it is still inadequate as the system cannot provide timely and accurate information.
Weak Enforcement
As the reform program was more stressed on customers’ satisfaction, rather than enforcement initiatives, it was very much frustrating in the operational scheme of the organization. So, there was a wide gap between tax owed and collected tax. Consequently, non-compliance rate of the tax payment was increased and stood at 17%.Due to lack of proper enforcement initiatives, the rate of non-compliance was on the rise.
From 1997 to 2002, the adjusted gross income gap rose from 10.9 percent in 1997 to 13.5 percent in 2002. This measure of failure to report income is not consistent with a good outcome record for the Internal Revenue Service (IRS) over those years. Considering this, Mikesell and Birskyte conclude, “Though … the failure to reduce it [noncompliance] cannot be entirely attributed to Internal Revenue Service (IRS) policies during Mr. Rossotti’s tenure … it clearly indicates that the Internal Revenue Service (IRS) did not have much success in improving the level of taxpayer compliance” (Rainey, and Thompson, 2007, p. 579).
In 1997, the Internal Revenue Service (IRS) examined 12.8 returns out of each 1,000 returns filed by individuals, but in 2002 it examined only 5.7 returns per 1,000 filed (Mikesell, and Birskyte, 2007, p. 574). Transactional Records Access Clearinghouse (TRAC). (2005) shows that “[t]he face-to-face audit rate of individual income tax returns fell from 0.6 percent in 1997 to 0.16 percent in 2002”. Transactional Records Access Clearinghouse (TRAC) (2006) states that [t]he percentage of face-to-face audits of returns filed by all corporations decreased from 2.62 percent in 1997 to 0.88 percent in 2002. Employees satisfaction and customer relation with the tax payer did not make any meaningful change for the development of enforcement activities.
Politicization
Initiative has been made in case of pay banding and special salary rates in Rossotti’s unique management approach. Special salary rates have overly politicized the Internal Revenue Service (IRS). The centralization of power and the addition of more political appointees were conflicting with the Hoover Commission recommendations that decentralized the agency in 1954 after many scandals. Again, Rossotti allowed some retiring the IRS executives to retire one day and return to work on the next day in the same job. It is our understanding that Commissioner Everson ended this practice soon after taking office.
Inefficient Contractors
Rossotti spent millions on outside contractors to implement his plan. Due to lack of experiences of those contractors, no commendable improvement has not been ensured.
Organizational Structure
Though, Rossotti deserves credit in reforming Internal Revenue Service (IRS), his organizational structure bears some major defects, one of the major of which was the absence of accountability. Later on, Commissioner Everson has changed the Internal Revenue Service (IRS) structure and has made the system more functional and effective. Under the newly introduced system, experienced and expert officials are invested with the responsibility of tax collection and auditing process. This process is working well because both the processes are complicated and require to be handled with efficient personnel.
Recent Reform
As the Internal Revenue Service (IRS) has been continuously striving to better its service quality for why the agency has recently introduced further reform initiatives in its operation and management services in addition to the earlier reform program designed for making the body as a public demand oriented agency
Electronic Case Processing
Internal Revenue Service (IRS) preserves the notion of facilitating the customer in obtaining information through the use of computer conveniently and easily. Hence, the agency has developed and implemented an electronic case processing system that help in quickly processing an exemption application and has introduced a convenient and cost-free e-Postcard program for organizations in transmitting their annual notice.
E-Post card
Internal Revenue Service (IRS) has introduced e-postcard. The small organizations opening their activities after 31 December, 2006 are entitled to get tax exemption in case of their annual income $25,000 or less. In order to avail this opportunity, the organizations are required to file an electronic notice on Form 990-N so as to afford the Internal Revenue Service (IRS) to access the information available regarding these organizations. To effectuate the program, Internal Revenue Service (IRS) has launched a program to make people conscious about their tax exemption status.
Non-Compliance Data
The Internal Revenue Service (IRS) has exerted to measure compliance of different types of taxes and taxpayers through National Research Program. By this means, Internal Revenue Service (IRS) will provide a statistically valid representation of the compliance characteristics of taxpayers.
Life Cycle Program
Internal Revenue Service (IRS) has launched Life Cycles in its public website in FY 2007. Life Cycles are web-based learning tools that help exempt organizations to apply the tax law at every stage of their existence. In order to meet the requirements of new organization Internal Revenue Service (IRS) has recruited cyber assistant. The function of Cyber Assistant is to help Internal Revenue Service (IRS) in accomplishing its tax exempt status. In so doing, Cyber Assistant will make an interaction between tax exempt applicants and the organization itself (FY 2008). The agency has taken the approach to disseminate information to the tax exempt organization through: educational outreach, websites and life cycle program.
Recommendations
The inherent philosophy of public administration in every country is to provide the common masses invoking the maximum benefits and privileges of public services. As Citizens comfort is the prime consideration, public administration should make continuous effort in delivering better public services to the people. The traditional taxation system of the country could not meet the situation. So, the Internal Revenue Service (IRS) has exerted to ensure better services for citizens satisfaction through its intensive action programs. Now, it is urgently required to develop enforcement activities in the tax administration.
More training programs should be introduced to educate the personnel as regards their responsibilities, developing leadership and management skill and effective means for enforcing tax legislation for the purpose of improving a better tax administration in the country.
Provisions should be made so that the Internal Revenue Service (IRS) officials can be free from being pressurized in extracting revenues from the people.
Data collection regarding tax gap should be developed. At the same time, steps should be taken to reduce the gap and penalize the delinquent avoiding taxes.
Organizational structure should be remodelled. More improved telephone and internet services should be developed to help the citizens getting available assistance and cooperation. Persons of experiences and expertise should be appointed so as to make the organization effective and ensure efficient service delivery.
Form 990 should be more developed to facilitate the tax exempt organizations in case of information return filed by the tax exempt organizations and confirming transparency and efficiency.
Recently, The Internal Revenue Service (IRS) has taken a plan to design, develop and deploy a learning content management system (LCMS) that would allow the employees of the Internal Revenue Service to “view training progress, request training electronically, and launch web-based training. There are also long term plans for Internal Revenue Service (IRS) to explore strategic integration with other internal legacy systems and implement a Learning Content Management System to better manage learning content” (U.S. Office of Personnel Management, 2005). It has made an epoch making change for aspiring better change in regard to taxation in the coming days
Conclusion
Revenue collection or tax administration of a country is important for its sound economic development. The success of an ideal tax administration depends upon the fiscal policy of a country. The current revenue administration of America does not meet the demand of the situation. Though some recent changes have been carried into the tax legislation, still there are some inadequacies and shortcomings.
The reform initiatives suffer from inherent lacks as they can not properly address the tax issues of the country. Congress, Citizen Group, media and all concerned should be active for ensuring a better tax mechanism for the betterment of the country. Rossoti’s reforms and subsequent changes can be taken as a guideline in this regards as they (guidelines) manifest leadership, management, organizational structure, and customer’s satisfaction in improving overall aspects of IRS.
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Income tax deductions are important for taxpayers to understand and claim those they qualify for. This study covers: income tax and the most tax systems used i.e. progressive, proportional and regressive; it also discusses what income tax deductions are; the common income tax deductions such as health insurance, license fees, professional association duties, retirement plan contributions student loan interest among others; the most overlooked income tax deductions such as the energy-efficient upgrades, travel to drills and meetings expenses for military reserve and the national guard, etc; conclusions; and recommendations of the study.
Introduction
According to Fishman (2008), income tax is the tax levied on the incomes of businesses both corporations and other legal entities and on the income of individual citizens of a country. Various methods of income taxation are applied i.e. progressive, regressive and proportional. Progressive income taxation in which the rate of tax increases as the amount to be taxed increases; this means the higher the income the higher the tax to be levied. In regressive tax, the tax rate decreases as the income to be taxed increases and proportional taxation is where there is a constant rate of taxation (Steingold & Schroeder, 2007). An individual income tax is levied to the total income of a person on a pay-as-you-earn method with corrections made at end of the year for those who have not made enough payments in the year to the government and refunds to those who have overpaid. Corporate tax is levied directly from the various jurisdictions on the profits of businesses and associations including capital gains. Many countries of the world use a form of income taxation though laws guiding them vary from country to country with most being extremely complex. The critic on taxation is that failure to formulate and implement a balanced income tax can be a discouragement to savings and investment, penalize work and a barrier to business competitiveness.
Income tax deductions issues
An income tax deduction, on the other hand, is the value of an expense that is incurred by the taxpayer and which is allowed to be subtracted from the gross income before figuring the taxes resulting in a lowered total taxable income. A lot of work on taxes goes to determining what deductions to take, how much to take and when to take these deductions. In preparing tax returns it is imperative to understand the basic tax deductions in order to make a good record of them (Steingold & Schroeder, 2007). An expense qualifies to be deductible if it is: ordinary and necessary which means it is common, helpful, accepted and appropriate to the business or the profession; the amount is reasonable, and the expense must be related to the business/profession. Another issue is when to deduct expenses. Some expenses are investments in your life or business and are called capital expenses which are deducted over a number of years other than the year you incur them. Current expenses on the other hand refer to operating costs of the business. These have a useful life of less than one year and are deducted in full the year they are incurred.
Common income tax deductions
Some of the most common items included in income tax deductions include; health insurance, license fees, professional association duties, retirement plan contributions student loan interest, capital losses, business expenses, home mortgage interests, state and local taxes, charitable contributions both cash and non-cash, medical expenses, personal and casualty and theft losses and wages and benefits for employees (Finn, 2008).
Overlooked tax deductions
According to Fishman (2008), there are many income tax deductions overlooked by taxpayers. These include: tax deduction on reinvested dividends is one of the most overlooked subtraction by taxpayers. Mutual funds dividends automatically invested in extra shares increases the tax basis which in turn minimizes the taxable capital gains when you redeem your shares, this means overpaying tax; another item overlooked is the out-of-pocket money used in doing charitable works for instance stamps bought for your school’s fundraiser is charitable work;
A student loan interest paid by the parents is another deductible expense many people are not aware of. When the parents pay the loan and the child is not indicated as a dependant, the money is considered as given to the child to pay the debt. Also if one moves in order to take his/her first job, the expenses incurred in moving oneself and household goods are deductible even without itemizing it yet most people do not know it; travel to drills and meetings expenses for military reserve and the national guard deductions where to qualify you to travel more than 100 miles from home and if staying overnight, lodging and half the meals expenses; Another income tax deduction that people do not know about is the energy-efficient upgrades in the home or the offices for instance windows, doors, insulation and hybrid cars; among others.
Conclusion
Filing tax returns need not be such a hard time even for ordinary people. A person needs to understand the income tax system used in the country and how it affects his/her income. They also need to understand the common income tax deductions and write-offs they have a right to claim. With the help of an expert, a person can also be able to find tax deductions they qualify for and which are mostly ignored or overlooked when filing tax returns.
Recommendations
The first recommendation is to seek information and understand the rules on tax income deductions as contained in the IRS publications on what qualifies to be deducted, Form 1040 schedule A gives a list of items that are tax-deductible. It is also imperative to keep proper documentation of all these expenses and proof in case you are audited. There is a tax filling software for businesses such as Tax Act which benefits the business by advising on the method that will give the most rewards between itemizing and standard deductions. Moreover, it prints out relevant IRS forms for you. It is also important to know when to deduct what expenses from your taxable income this will require you to be able to classify expenses into current expense, capital expense or inventory (Fishman, 2008),
References
Fishman, S. (2008) Working for Yourself: Law & Taxes for Independent Contractors,
The present case study explains carbon policies introduced by Norway and Denmark – two European countries that have always been on the forefront of environmental change. Carbon taxes concern legislation whose main purpose is the reduction and eventual elimination of carbon emissions. Since the 1990s, both Norway and Denmark have been introducing carbon taxes that serve as incentives for fuel users to make a switch to alternative energy sources and, therefore, tackle pollution and delay climate changes. The dynamics of carbon policies development and their impact in the chosen countries fit the Environmental Kuznets Curve model. According to the said model, economic growth is needed for scientific, technical, and social advancements that will help to solve environmental issues. As the data analysis has shown, Norway enjoyed steady GDP growth in the 1990s, which coincided with fewer emissions. In the 2000s and 2010s, the country stagnated economically and was unable to decrease the carbon footprint. Denmark, on the other hand, has made more progress, and economic growth has brought about a decrease in CO2 emissions.
Introduction
A carbon tax is defined as the type of environmental legislation that seeks to impose limitations on the burning of carbon-based fuels such as coal, oil, and gas. The rationale behind introducing carbon taxes is extremely clear: uncontrolled and excessive combustion has been found to be destabilizing and destroying the climate. Comprehensive legislation might be the only feasible solution that would make users of carbon fuels pay for the climate damage. If a country decides to set the tax high enough, it turns into a powerful monetary disincentive that has the potential of leading the much needed change. Faced with increased expenses, companies might as well contemplate the switch to clean energy as it would be more economically rewarding. In the long term, carbon tax can make the use of alternative energy sources the new norm and set the standard in stone. The present study uses the Environmental Kuznets Curve (EKC) model for analyzing what Norway and Denmark have done so far and the impact that their policies have had.
Economic Model Analysis
Choice of Countries
The Northern European countries as a whole have always shown great concern for environmental issues and tried to amend the legislation accordingly. As stated in a recent report issued by the European Commission (2017), Denmark, Finland, Iceland, Norway, and Sweden are working on ambitious energy and climate legislative projects. Provided successful realization of the said initiative, these countries might as well go practically “fossil free” by 2050. Denmark and Norway have both expressed commitment to 100% renewable energy use, which surpasses the bars set by their neighbors – 80% for Finland and 50-75% for Iceland. It is projected that these policies will rely on renewable energy and energy-efficient technology.
So far, Denmark has already become a leader in the use of wind energy. Norway has a different approach but the same ambition: the country is a champion for hydroelectricity. As a result, carbon dioxide (CO2) emissions from energy supply have been on a steady decline in the region in the last few decades. It is compelling to study the cases of two neighboring countries with the same vision but different strategies. Moreover, the chosen countries – Norway and Denmark – show the most potential and may as well set a positive example for the rest of the Nordic region and even the world.
Defining the EKC model
The original application of the Kuznets Curve model concerns economic growth and inequality. The author of the theory put forward an idea that while at first economic growth drives economic disparity, once it peaks, the equality index is likely to be on the rise. Same goes for environment: admittedly, as the EKC suggests, the solution to pollution is economic growth. At first, rapid industrial advancements account for a high degree of environmental degradation (Waslekar, 2014). A prime example would be a major shift in the car industry that rendered personal vehicles more available for a common man. In the first half of the 20th century, a car was no longer a luxury but a part of everyday life. It is readily imaginable that the car market boomed, and the wide use of vehicles accounted for air, water, and soil pollution. However, in the developed countries, rapid economic growth made it possible to set out on a search for alternative energy sources and harness the degradation rate (see Graph 1).
The present case study attempts to explain the impact of current low-carbon policies introduced by Norway and Denmark in relation to the environmental Kuznets curve model. The EKC model is often criticized for its limitations; however, its use for this study is justifiable given that it applies to air pollution.
The Case of Norway
Country Introduction
The Norwegian government became environmentally aware early on: it first introduced carbon emission policies in the early 1990s. By 2005, Norway’s CO2 tax had become the most important climate policy instrument and covered almost two-thirds of Norwegian CO2 emissions and half of total GHG (greenhouse gas) emissions. The government, however, granted some industry sectors exemptions from the tax so that they could retain their competitive potential. In 2005, Norway implemented the first phase of an Emission Trading Scheme and joined the EU Emissions Trading Scheme three years later. Fast forward to the 2010s, around 55% of CO2 emissions in Norway had been taxed. The tax is charged per liter of oil and natural gas liquid as well as per standard cubic meter of gas combusted or directly emitted into the air through any other method.
Today, Norway is drawing on its previous experiences and attempting to introduce new, more innovative legislation. The country admits that global warming is one of the most serious challenges that the world is facing. In 2018, a Commission appointed by a Royal Decree presented a report to the Ministry of Finance, in which the experts described three possible scenarios (Graph 2).
Graph 2. Illustration of future climate changes in correlation to technology development and the efficiency of environmental policies
Successful climate policy. This is the most optimistic scenario that implies that the Norwegian government is capable of implementing low-carbon policies. It accounts for a fast and smooth transition to a low-emission society. Since the government takes care of the environment, the situation is devoid of significant self-enforcing mechanisms that could aggravate air pollution.
Late transition. Scenario B depicts a situation in which the government fails to make a swift transition and is back on the policies implementation. This leads to more pronounced climate changes and adverse economic effects.
Dramatic climate change. This scenario involves political failure that triggers self-enforcing mechanisms in the climate system. The end result is catastrophic climate changes that cannot be evaluated at the moment (“Climate risk,” 2018).
Case Analysis
For this case analysis, the working hypothesis is as follows: “If Norway enjoys steady economic growth, environmental degradation must be on the decline.” In this case, environmental degradation (damage) is operationalized as the amount of carbon emissions in the atmosphere. First, it is important to outline how much progress Norway has made since the early 1990s. This study concerns the time period from 1991 through 2018 due to the fact that in 1991, the country has introduced its first ever carbon emission reduction and elimination policy.
The second part of this case analysis deals with the actual impact that the policies have had on the environment. Various studies conducted in the 1990s and an economic analysis by Statistics Norway have shown that the effect of the CO2 tax was a reduction of 2.5-11% of Norwegian emissions. The estimation was made under a business-as-usual approach (the prediction concerning emissions that would have occurred had the tax not been introduced). As seen from the Graph 3, Norway enjoyed better GDP growth dynamics in the 1990s as opposed to the 2000s and the 2010s. Thus, it is safe to say that up until 2000, the environmental impact and economic growth fit the Environmental Kuznets Curve model.
Graph 3. GDP dynamics 1991-2019 (“Norway GDP,” 2019).
As Graph 3 demonstrates, starting in 2000, the economic growth in Norway has been stagnating or accelerating insignificantly. When contrasted with the data presented in Graph 4, it becomes clear that since 2000, there had been no positive dynamic in carbon dioxide gas emissions in the region. As Berglund (2019) states in her report, in 2018, it was revealed that between 2017 and 2018, the amount of CO2 emissions had risen by 0.4%. Norwegian climate activists called the news embarassing and pleaded Environment Minister Ola Elvestuen to take action. So far, there seems to be clear patterns in how the amount of gas emissions correlate with economic growth, which validates the chosen model (EKC).
Graph 4. Carbon Dioxide emissions in Norway from 2000 to 2018 (in million metric tons of CO2) (“Carbon Dioxide emissions,” 2018).
The Case of Denmark
Country Introduction
Just like Norway, Denmark first became concerned with its carbon footprint in the early 1990s. The first comprehensive policy aiming at reducing carbon emissions was introduced in 1992. As of now, as stated in a report by OECD (2018), Danish energy taxes are levied in compliance with the framework of the 2003 EU Energy Tax Directive. The Directive is responsible for setting minimum rates for the taxation of energy products in member countries. Within the framework, Denmark has introduced the following energy use taxes:
An energy tax applies to oil products, natural gas, coke, coal, and fossil waste. The rate is defined in proportion to the fuels’ energy content;
A CO2 tax is applicable to oil products, natural gas, coke, coal, and fossil waste. The rate is defined in proportion to the fuels’ energy content;
A tax on fossil waste is a combination of the input and output taxes. The output tax is levied on heat from energy production (OECD, 2018).
If more than one tax rate applies to one energy user or fuel, the energy tax profile shows the sum of all applicable taxes.
Case Analysis
Graph 5. Denmark: growth in GDP and CO2 emissions since 1990 (“Denmark: Growth,” 2017).
As seen from Graph 5, the dynamics of economic growth and environmental recovery in Denmark fit the Environmental Kuznets Curve model. Since 1992, the Danish GDP has grown by more than 40%. This coincided with a rapid decrease in the amount of carbon dioxide emissions (by more than 35%). As projected, economic prosperity has allowed this Nordic country to take appropriate measures and address its carbon footprint. However, as recent news have revealed, Denmark might have to tame its optimism regarding environmental improvements. As Jex (2017) reports, the average Danish household carbon footprint ranked fifth in the EU. Denmark was placed behind such countries as Luxembourg, the UK, Ireland, Finland but ahead of Germany, Italy, and France. Jex (2017) states that the EU average is 11.5 tons CO2 whereas the Danish average of 14.5 tons surpasses it by almost 20%. Previously, Denmark had been called one of the countries that were the best prepared to tackle climate change.
Conclusion
Carbon taxes constitute the core policy aimed at the reduction and eventual elimination of the use of fossil fuel. Norway and Denmark were chosen due to the fact that these countries demonstrate the potential to introduce successful low-carbon policies like the rest of the Nordic countries. The present case study relies on the Environmental Kuznets curve model that describes the relationship between economic growth and environmental degradation. Both Norway and Denmark started working on carbon tax policies back in the early 1990s. As of now, the two countries impose taxes on oil products, natural gas, and fossil waste. The case study has shown that the Nordic countries in question fit the Environmental Kuznets Curve model. The periods of economic stagnation correlate with higher emissions, and vice versa. Carbon tax policies seem to be working better for Denmark than for Norway as the former has allegedly made more progress. Yet, it is difficult to say whether carbon taxes are inherently effective: the Danish average carbon footprint still raises concerns and needs to be addressed.
López-Menéndez, A. J., Pérez, R., & Moreno, B. (2014). Environmental costs and renewable energy: Re-visiting the Environmental Kuznets Curve. Journal of Environmental Management, 145, 368-373.
From the statement that “A National Audit Office analysis of the 700 companies whose affairs are handled by HM Revenue & Customs’ large business service recently revealed that 50 businesses paid 67% of the total tax collected by the service last year, while 220 paid none and 210 paid less than 10 million pounds. Discuss the extent to which this demonstrates a failure of the tax system,” questions the principles and aims of taxations. To address this problem we can start at examining the principles of and aims of taxation.
To begin with, I will define a good tax system. A good tax system should be applied in a fair, reliable and transparent manner. It should provide ways in which proper communication to taxpayers about their rights and obligations as well as the available complaint procedures and redress mechanisms.
It should also consistently deliver quality information and treat inquiries, requests and appeals from taxpayers in an accurate and timely fashion; provide an accessible and dependable information service on taxpayers rights and obligations with respect to the law; ensure that compliance costs are kept at the minimum level necessary to achieve compliance with the tax laws; where appropriate, give taxpayers opportunities to comment on changes to administrative policies and procedures; use taxpayer information only to the extent permitted by law; develop and maintain good working relationships with client groups and the wider community.
Apply the provisions of tax treaties in a fair and consistent manner; promote the fair sharing of taxing rights in tax treaties and the development of domestic laws; not promote or facilitate tax evasion or avoidance by residents of other countries; improve access to bank and financial information for tax exchange purposes; provide the same treatment and redress mechanisms to all otherwise similarly situated taxpayers regardless of their nationality; treat the information obtained from tax treaty partners with the same or greater confidentiality protection as that required under domestic laws; make recommendations and provide assistance to policy makers for the renegotiations of areas of mutual concern in existing tax treaties. (www.oecd.org/dataoecd)
Objectives of a tax system
Taxation systems can be thought of as facilitating four main objectives. Most obviously, taxes raise the revenue with which governments can drive human development by providing systems of health, education and social security as well as the basis for a successful economy through regulation, administration and investments in infrastructure.
A second goal is redistribution, to reduce poverty and inequality and ensure that all feel the benefits of development. Gemmell & Morrissey (2005) summarize two decades of tax studies as follows: income taxes are progressive (although evasion is generally ignored); corporate taxes are regressive at low incomes and then become progressive; property taxes (more or less absent from the consensus and o en generating only small revenues, but important in a number of low-income countries, e.g. Namibia) are progressive; indirect taxes are generally regressive; and the overall picture is mixed, although structures are o en regressive at low incomes.
A third key goal is that of ‘re-pricing’ – that is, of using taxes and subsidies as appropriate to ensure that all social costs and benefits of production or consumption of a particular good are reflected in the market price. Most obviously, this may include taxing tobacco to limit damage to health, or petrol to limit environmental costs. Finally, and perhaps most importantly – although o en underappreciated – is the goal of strengthening and protecting channels of political representation.
Ross (2004) uses a panel of data on countries at all levels of income to show that these channels are systematically strengthened when the share of tax revenue in government expenditure is higher – that is, when governments rely most on tax Mahon (2005) shows that the strongest relationship exists for direct tax revenues: where citizens contribute most to expenditures through taxation of personal income and corporate profit
Tax Evasion and Avoidance
Before any concluding about the case of people who are not paying taxes in this case, one needs to understand the issues underlying the tax evasion and avoidance. One is legal and another is illegal. The risk in tax evasion is not beyond the taxpayer’s control. In fact, sophisticated kinds of tax planning blur the line between legality and crime and therefore reduce the likelihood that the transaction will be questioned. The distinction stressed here is in terms of the cost to the taxpayer: informally speaking, activities where the ultimate tax treatment is uncertain, with the risk imperfectly controlled by tax collection agency, could be classified as evasion.
Activities where costs have a different nature are avoidance. When a tax -saving scheme is illegal, it is uncertain whether a preferential tax treatment will be ultimately available, and therefore such a scheme is naturally considered evasion according to this classification. Taking advantage of tax incentives does not involve uncertainty about the ultimate tax treatment and is considered avoidance.
Many kinds of real-life tax planning are likely to have elements of both. The concept of avoidance has a number of implications within the framework that we have just discussed. First, taxpayers have a range of options: there is no single kind of tax avoidance. Second, probabilities of detection are lower than for outright tax evasion, and they may be reduced further if the taxpayer chooses to invest in protecting herself by hiring an adviser, paying for a legal opinion, or structuring the transaction appropriately.
Third, each of these extra options has various kinds of costs associated with it that are not present under the simplest kind of tax evasion. One of these costs has already been mentioned: taxpayers can invest in reducing the probability of detection. In addition, there may be a fixed cost necessary in order to even attempt tax avoidance: hiring a professional may not be optional but rather a necessary condition for pursuing a particular kind of tax avoidance, and so can be the cost of having an offshore account, a foreign subsidiary, or a charitable foundation of a future estate taxpayer. Furthermore, pursuing an avoidance strategy may require modifying real economic decisions or subjecting oneself to extra constraints.
On the other hand, combating tax avoidance is harder for tax authorities. Because taxpayers are blurring the line between legal and illegal, establishing that the behavior in question is in fact illegal requires expending resources. Auditing a single taxpayer may no longer be enough: transactions may have many participants. A court battle may ensue as a result. Tax auditors need considerable knowledge to cope with tax planning.
Accordingly, their qualifications and compensation have to increase with the sophistication of those who practice avoidance strategies. Understanding that tax avoidance adds extra costs are the key point, because the costs affect how harmful the activity is from a social point of view, and therefore how much it should be discouraged.
Availability of simple tax evasion is a fact of nature—one can always cheat—but tax avoidance is not. Tax avoidance is a function of ambiguity in the tax system. This is not to say that ambiguity can always be avoided in real life. Still, what and how many avoidance opportunities are available depend on the structure of the tax system ( Kopczuk W, 2006). From
Conclusions
The main aim of this of the paper is examine the principles and effectives of a tax authority and system. The issues mentioned in this write up touches matters of policy implications on tax complexity, tax evasion and tax avoidance. From the case represented tax evasion and tax avoidance similarly costly from the social point of view, despite differences in their legal status. A comprehensive compliance policy should target both. While penalties and increased probability of detection is the main tools of targeting tax evasion, a reduction in complexity of the tax code would reduce opportunities for both tax evasion and tax avoidance, and it would additionally make penalties a more viable policy choice.
Complexity in the tax code should be thought of as the extent of variation in possible tax treatments of economically related activities. This kind of complexity naturally creates opportunities for tax avoidance, and it also causes difficulties for otherwise honest taxpayers. As a result, it leads to confusion and mistakes that are often hard to distinguish from dishonesty. Consequently, penalties become a less appealing approach to enforcement while, simultaneously, detection becomes more costly. ( Kopczuk W, 2006).
In this case the principles and involved can be tax avoidance, tax evasion or failure to collect taxes by the authority. Therefore, it should be invested to know why taxes are not well collected. What reason that will be found will fall in those categories discussed.
References
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For Lohika to fulfill Kosdaq listing requirements, AVC, being the largest shareholder, must wait for one full year after the Initial Public Offering before it can sell its shares. However, if it is after six months, it can sell up to five percent of its initial shares every month.
According to Venture Company development law, Lohika is classified as a foreign company 1 whereas Altos Venture is classified as a foreign investor 2. Therefore, this means that the Safeguard period is not applicable for any professional investor or a venture capital firm that intends to invest in a venture company.
It is important to note that according to the Special Law for the Promotion of Venture Business (SPLPVB), the new technology investment company is not considered registered. However, if the Kosdaq listing regulation applies to Altos, then it should be considered.
The Foreign Investment Promotion Law (FIPL) obliges any foreign investor from disposing of shares, which it acquired through capital increase using third party allocation. This is applicable for one year after the acquisition day.
For Altos to be considered viable for safeguarding its deposit, it must be ascertained if it is a foreign investor in terms of FIPL regulations, Lohika’s share acquisition date, and its level of acquisition of new share or old share. If Altos is the current largest shareholder, it can only safeguard its deposits for one year.
According to the current U.S.-Korea tax treaty, it is not lawful to import tax on American investors’ Transfer Gain. This means that Altos don’t need to pay capital gain tax. A company is supposed to transfer income tax after selling its old shares. This does not apply to Altos. This is because it is only applicable to a listed company in a stock market. The Act on capital market and investment banking details this.
