Category: taxes

Governments need money to run their daily activities and to offer various services to the public. Arguably, the main source of revenue for a government is a collection of taxes either directly by imposing them on salaries and wages or indirectly by imposing them on goods and services. It is important to note that taxes are compulsory and they are used by governments to provide services that are beneficial to the general public.

Moreover, taxes are not payments for any specific services rendered by the government (Kaplow, 2011). The benefits of various types of taxes to the economy have been a subject of debate for a long time now. Specifically, taxes levied on goods and services have been said to have mixed effects on the economy and some people are skeptical about their necessity.

Taxes are imposed to achieve desired consumption and price levels. Similarly, taxes are used by governments to achieve specific employment level as well as to enhance income distribution. However, the incidence of taxes sometimes distorts the aim of taxation. Incidence of tax determines who finally pays the monetary value of tax.

This usually occurs because people can shift the money burden of tax from one person to another especially for indirect taxes. However, the incident of tax is also influenced by various factors (Haufler, 2001). When a commodity’s elasticity of supply is more than the elasticity of demand, buyers will pay a higher amount of tax than sellers.

This means that the price of the commodity will increase above the normal market prices. On the other hand, if the elasticity of demand is higher than the elasticity of supply for a given commodity, suppliers will have to bear the burden of the tax alone or pay the higher percentage of it. This has the effects of increasing operational costs of producers ( Kaplow, 2011).

In this regard, producers will be discouraged from producing certain commodities if taxes are high. Taxes on commodities can also have different effects depending on whether production costs are increasing or decreasing. If taxes are imposed on a commodity whose production costs are increasing, the price will rise by less than the amount of tax.

In this case, the burden of the tax will be shared between the buyer and the seller depending on the elasticity of demand and supply. On the other hand, if tax is imposed on a commodity whose production costs are decreasing, the price of the commodity will increase by more than the amount of tax (Dwivedi, 2002).

As price increases disproportionately, quantity demanded of the commodity decreases by a higher percentage than the increase in prices. This, in turn, decreases supply. The tax also reduces the purchasing power of people which affects demand thus interfering with the market operations.

Taxation is a way through which the government influences the market and market forces of demand and supply are not left to operate freely. On the same note, if tax leads to an increase in prices, people will be compelled to reduce savings to maintain their living standards (Dwivedi, 2002).

It is important to note that commodity tax is not vital in the distribution of income. In essence, commodity tax only serves to interfere with the market forces and bring about inefficiency in free market operations. However, tax is crucial in supporting the government, and no government can do without a tax system. Therefore, it is important for policymakers to find ways of ensuring that there is a balance between tax effects and benefits.

References

Dwivedi, D. N. (2002). Microeconomics: Theory and Applications. New Delhi: Pearson Education India.

Haufler, A. (2001). Taxation in a Global Economy: Theory and Evidence. Cambridge: Cambridge University Press.

Kaplow, L. (2011). The Theory of Taxation and Public Economics. Princeton: Princeton University Press.

A decline in taxes is what is referred to as a tax cut. A tax cut automatically has an instantaneous effect on both the pertaining government and the taxpayers, which are usually a reduction in the government’s income and an increase in tax payer’s income.

However, in the long term, a tax cut is speculated to have macro-economic benefits if the taxpayers use the supplementary income they get wisely, and at the same time, the governments adjust well to its reduced income. For instance, if the tax cuts are beneficial enough, they are likely to give an incentive to both individuals and corporations to invest hence stimulating economic activity and eventually, this generates more income which is taxable and as a result more revenue for the government.

After the ‘Bush Tax Cuts’ of 2001 and 2003 signed by President George W. Bush, the US economy began ailing as it underwent the worst recession ever felt since the 1930s. The incoming President, Obama thus inherited a $1.3 trillion deficit, rising unemployment, and unparalleled crises in the US banking system (Larson 2003).

As a result, he had the colossal duty of putting the economy back on its feet again and at the same time, set a strong foundation for future economic growth. At his inaugural address, President Obama stated that “Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some but also our collective failure to make hard choices and prepare the nation for a new age” (Singletary 2009).

Before that, Obama had indicated that he had a robust plan oh how he would revive the economy in the shortest period possible rather than lay long term strategies that would take long to heal the economy. This short term plan consisted of a stimulus package which he guaranteed the American citizens that under the plan; he would inject billions of dollars into the economy through tax cuts and direct spending.

“Obama’s tax cut plan would give $500 to individuals and $1,000 to couples per year and in the form of credit. It would be a payroll tax credit that would see employers reducing the amount of tax that is withdrawn from the paychecks of employees. This cut he estimated would cost $150 billion” (Singletary 2009).

Budget deficit usually occurs when the income that is being spent by the government is more than the received tax income from taxpayers. Therefore due to demand in the economy, which increases during the recession, the government returns fall as expenses are raised. This is usually caused by unemployment benefits given out and a constant swell of people who have lost their jobs and need welfare. It also affects the economy in terms of investment spending, which decline steadily since people do not have the money to invest.

Tax cuts in such a situation add even further to the economy demand. However, with the introduction of the stimulus package, President Obama also signed legislation known as the American Recovery and Reinvestment Act that would help jumpstart the economy. As it gave working Americans a tax cut, this is a plan that also created new jobs and made significant investments in the infrastructure of the country.

Further, private investments normally collapse during the recession, and thus the money in the economy that would be borrowed for these private investments is left unborrowed and unused. When the government takes this opportunity to create a program and borrow this money for investing, it crowds out investment, causing what is known as the “crowding out” effect. This effect is characterized by lower employment, lower money multiplication, and lower overall GDP (Baumol & Blinder 2008).

When the government takes measures to influence and stabilize the economy, especially by adjusting the levels and allocations of taxes and government expenditure, this is known as fiscal policy. On the other hand, a contractionary fiscal policy arises when the government decreases its spending or increases the taxes causing the economy to contract.

According to the Keynesian theory, the expansionary fiscal policy works best during the recession. (Baumol & Blinder 2008) notes “this is because if a deficit is run through increasing government expenditures by a small amount, it causes the aggregate demand to shift upward to the necessary amount of restoring the economy to the natural GDP level.”

Conversely, the contractionary fiscal policy can be used during a booming economy. When the economy is already at the natural GDP level, but the collective demand is estimated to continue increasing, then the GDP level is also expected to rise. As a result, prices will also rise, as well as wages and the prices of other resources. Eventually, there will be inflation in the level of prices but no change in the GDP. This can, however, be combated by increasing taxes or decreasing expenditure by a small amount which will reduce the collective demand. (Hemming et al. 2002)

In conclusion, cutting taxes at this time of recession, which amounts to an expansionary fiscal policy, is bound to be beneficial to both the government and individual citizens of the United States. Additionally, there is the economic effect which acknowledges the positive impact that lower tax rates have on work, output, and employment as it gives the motivation to increase performance in these activities. In this way, the tax base, in general, is also positively affected.

Reference List

Baumol, W. J., & Blinder, A. S. (2008). Economics: Principles and Policy. Stamford, CT: Cengage Learning.

Hemming, R. et al (2002). The effectiveness of fiscal policy in stimulating economic activity: a review of the literature, Issues 2002-2208. Pennsylvania Ave NW, Washington: International Monetary Fund.

Larson, J. S. (2003). Tax cuts: issues and analyses. Main St, Huntington, NY: Nova Publishers.

Singletary, M. (2009). Obama’s proposed tax cut not what Americans need now. The Washington Post, pp. 23, 25.

Introduction

Corporate taxes refer to tariffs imposed on the income of companies. They are used as a form of legal obligation that businesses owe to governments of countries where they operate. It is important to understand that rules associated with corporate tax rates range from one country to another. A comparison of tax rates in different countries contributes to the understanding of tax rates’ history that influence economic growth and taxpayer behaviour. For this assessment, it was chosen to compare the UK and US corporate tax rates, how they have changed throughout the twenty-year period, and how these changes contributed to advantages and disadvantages in taxpayer behaviour. The paper includes such information as current data on corporate tax rates in the UK and the US, a 20-year comparison of rates in two countries, advantages and disadvantages of corporate tax systems, commentary on current developments, and a conclusion.

Current Data

United Kingdom

When discussing corporate income taxes to which companies-residents of the United Kingdom are subjected, it is essential first to mention that taxes are being imposed on the total income. Such income includes money that a business earns from all sources within a specific accounting period; also, taxes take into consideration all chargeable capital gains (EY 2017). On the other hand, companies that are not residents of the United Kingdom are subjected to corporate income taxes only in the case if they operate in the country by using permanent establishments (EY 2017). These establishments can take several forms: a fixed place of business in the UK that serves as a vehicle for companies to carry out their business or an agent that has been given authority to conduct trade in the county on behalf of a foreign company.

The main corporation tax rate in the United Kingdom for both large and small companies in 2016 was 20%; the decision to establish this figure was made in April 2015 (OECD, 2017). It was expected that the rate would decrease 1% to become 19% starting from April 2017 (EY 2017). The rate will subsequently drop to 18% in April 2020 (Spring budget 2017 2017). Companies that earn profits from the extraction of oil on the UK continental shelf (ring-fence profits) are required to pay a rate of 30%. Such companies have an option to claim the smaller profits rate (19%) but only under the condition that its profits for an accounting period are less than £300,000 (EY 2017). It can be concluded that the United Kingdom has been relatively loyal to corporations and has tried to provide fair conditions for businesses to pay corporate income taxes. However, such developments as Brexit are expected to change the tax environment in the country and lead to fluctuations in taxpayer behaviour. Importantly, it is essential to make sure that tax reductions do not hamper the national budget or lead to deficits. Additionally, issues with large corporations not paying taxes require further management.

United States

US businesses are required to pay corporate income taxes on the income they get from their worldwide operations; these also include the income of foreign branches regardless of their repatriation status. As a rule, US companies are not subjected to taxes imposed on foreign subsidiary’s earnings until it is sold or liquidated (EY 2017). International corporations are subjected to taxation in the US only in the case when their income is directly related to trade within the country or a specific income with US sources (Tax Foundation 2012). It is noteworthy that companies-residents of countries that have established income tax treaties with the US are only subjected to taxation “only to the extent the income is attributable to a permanent establishments in the United States and rates of tax on certain US-source income may be reduced or eliminated” (EY 2017, p. 1679). Taxable income of US companies that do not exceed the earnings of $335,000 falls in the range between 15% and 39% (EY 2017). Companies with an income between $335,000 and $10,000,000 are taxed 34% on their income (EY 2017). Furthermore, US corporations that earn more than $10,000,000 pay 35% in taxes, with earnings that exceed $15,000,000 but not exceed $18,333,333 pay an additional tax of 3% (EY 2017, p. 1680). To conclude, companies that earn more taxable income $18,333,333 pay a rate of 35% (EY 2017). As the United States is among countries with the highest tax rates, the established guidelines affect consumers’ and taxpayers’ behaviours.

United Kingdom vs. United States: 20-Year Comparison

Based on the OECD (2017) and (1999) data on corporate income taxes in the United Kingdom and the United States for the last twenty years, the following table was created:

As seen from the comparison table above, the United Kingdom has witnessed more fluctuations in corporate tax rates over the past two decades than the United States. Both countries showed to reduce corporate tax rates: from 31% in 1997 to 19% in 2017 for the UK and from 39.5% in 1997 to 35% in 2017 in the US. Based on these changes, taxpayers’ behaviours: while in the US, large corporations have tried to avoid paying a 35% rate through transferring their key operations to lower-tax-rate countries, the UK have managed to attract foreign companies through becoming a tax haven (Hong & Smart 2010).

For the United Kingdom, it is expected that corporate taxes will decrease in the future, which should not be considered as an alarming sign. For many businesses (especially smaller ones), corporate income taxes can harm incentives and have an adverse effect on the economic growth of the country and taxpayers’ behaviour. It is important to note that in OECD countries, corporate income taxes are high on the list of the most harmful and damaging; therefore, the UK’s decision to gradually reduce them can boost economic development (Djankov et al. 2010, p. 32). If taxes continue to decrease, companies-taxpayers are likely to experience the reduced return of shareholders, which also affects individuals with direct holdings (Miller 2017, para. 49). With regards to taxpayers’ behaviours, some large corporations avoid paying taxes due to the lack of attention paid to their diligence; instead, the government scrutinizes smaller businesses that show better behaviour in terms of diligently paying corporate taxes.

If to explain why the United States has had a relatively fixed corporate tax rate since 1997, it is essential to mention that the country imposed taxes on its citizens from the most of its existence. Also, the US has the highest corporate tax rate among other advanced economies; if to take into account all OECD nations, the country has the highest tax rate in the world. It can be explained by the fact that the United States has the highest tax rate because it is among the largest countries with a highly developed economy, which means that it costs companies more to transfer its business to another county from the US as opposed to transferring it from the UK, for example. The lack of institutional competition allows the government to impose higher taxes on companies and hold the rate on the same level since the risks of those companies leaving the country are low. Because of institutional competition, other OECD countries have dropped their corporate tax rates by 50% to attract foreign investment.

When speaking about changes or the lack of changes in tax rates, it is crucial to mention how they affect taxpayer behaviour. According to Inman (2014) from The Guardian, US companies are attracted to lower corporate tax rates that the UK and other countries can offer. Moreover, decades of tax competition between countries have led many of the original US companies to the leave the States; eBay operates from Luxembourg, Coca-Cola and McDonald’s have congregated in Switzerland while Google and Facebook “moved” to Ireland (Inman 2014, para. 6). According to the findings of Devereux, Lockwood, and Redoano (2008), countries engage in two-dimensional competition: over statutory rates profit and effective marginal tax rates. Therefore, high taxes that the United States currently imposes on its taxpayers leave corporations no choice but to transfer their businesses to lower-tax-rate countries.

Advantages and Disadvantages of US and UK Corporate Tax Systems

When it comes to the disadvantages of the corporate tax system in the United Kingdom, is crucial to mention that companies have difficulties when it comes to paying corporate taxes. According to the article in The Daily Mail prepared by Hawkes and Watkins (2013), it was revealed that almost one in four largest companies in Great Britain paid no taxes within one year. Among a hundred companies included in the FTSE, 47 did not provide reliable information for their tax payments in the UK; however, when 53 companies provided information on their tax payments, 12 stated that they paid no tax (Hawkes & Watkins 2013). Of these twelve, six organisations received a tax credit (Hawkes & Watkins 2013). Interestingly, the twelve companies that stated paying no taxes included such UK giants as Rolls-Royce, Experian, Vodafone, British American Tobacco, IMI, and more. This is a significant problem for the United Kingdom because the government has been accused of shaming small companies for not paying corporate taxes despite doing nothing productive to deal with large businesses such as Amazon or Starbucks. Such inequalities with regards to tax payments in the UK prevent the development of a unified system that should work efficiently.

A similar situation can be observed in the US, where the largest and most profitable businesses try to shelter their profits from tax payments. As found by Rojo, Anderson, and Klinger (2013) from the Institute for Policy Studies, giants such as FedEx, General Electric, Microsoft, Bank of America, and many others used loopholes in the tax law and employed corporate subsidies for reducing their bills. Such loopholes included the widening of offshore payments that cost the country around $90 billion each year, leading to cuts in governmental benefits such as Medicare and Social Security (Rojo, Anderson & Klinger 2013). Bartelsman and Beetsma (2003) also explored profit shifting of many OECD countries to account for the differences in tax rates, concluding that businesses tend to look for ways of reducing their tax payments by offshoring their profits to low-tax nations.

When confronted with the question of why they search for loopholes to avoid paying taxes, executives usually give a response that the 35% corporate tax rate is the highest in the world and thus makes their businesses not competitive in the international arena (Rojo, Anderson & Klinger 2013). Nevertheless, the evidence suggests that this statement is not true. Over the last sixty years, the US companies experienced a high level of profits while corporate taxes were on a low level. Furthermore, American stock markets have remained at high levels while CEOs of US corporations have been paid much more than other executives holding the same positions in foreign countries. Also, Rojo, Anderson, and Klinger (2013) stated that US companies pay higher taxes in foreign countries than they do at home.

The advantages and disadvantages of corporate tax rates in the United Kingdom and United States directly relate to taxpayers behaviours. It has been found that both UK and US corporations seek loopholes in corporate tax laws of both countries to pay lower rates or avoid paying them whatsoever. This can be explained by the lack of cooperation between governments and businesses with regards to the appropriate negotiation of tax rate rules for facilitating economic growth while ensuring that corporations are not set back by the high corporate tax rates.

Effects of Tax Rate Changes

United Kingdom

For the UK, the most recent developments in corporate tax changes relate to Brexit. As mentioned by Theresa May, the government is planning to lower corporate income tax rates to facilitate the retention of talent within the country and attract foreign companies to the country despite it leaving the European Union. However, experts suggested that a further tax decrease would not be enough for offsetting the pressure associated with Brexit. Decreased tax rates turned the country into a tax haven, to which even US companies have started transferring their operations to avoid paying high taxes. Nevertheless, the effects on the society have not been as positive. The unbalanced control of tax payments led to less wealthy individuals and businesses paying higher taxes than those with a high income, which points to a dramatic inequality in this sector. The government also lost more than it gained since large corporations avoided paying taxes, inherently damaging the budget and leading to financial losses.

United States

While the US has shown a steady corporate tax rate of 35% since the year 2000, the current President Donald Trump has made a statement about his intentions to reduce the rate to 15% (Browning 2017). It is important to mention that the implications of the 15%-plan will be complex. Under the President’s plan, individuals who earn a lot will be incentivised to become companies for taking advantage of lower tax rates. Also, the government does not have a solution for preventing this from occurring; experts have stated that the pass-through provision without additional precautions is likely to increase the governmental budget’s deficit by hundreds of billions of dollars (Browning 2017, para. 5). Societal behaviours are expected to change with the drop in corporate tax rates; as businesses will have to pay less, they can lower prices on some products to facilitate purchasing.

Conclusion

Based on the comparison of the US and UK corporate tax systems, it can be concluded that the two countries had different approaches toward imposing taxes on their companies. On the one hand, the UK has continuously been reducing the tax rate within the last twenty years and is planning to cut the rate even further. This can lead to the attraction of talent to the country to address economic and societal instabilities associated with Brexit. The United States, on the other hand, has been maintaining a steady corporate tax rate that is among the highest rates in the world. Despite this, the country managed to attract investors in the business sector and maintain high spending of the population.

Both countries are currently on the edge of major changes in corporate tax rates, which will subsequently affect behaviours of companies and their consumers. While it is considered that the reduction of tax rates is expected to attract foreign capital, the UK and the US risk undermining the budget and thus affecting societal stability. Further considerations regarding such drastic changes are needed to ensure that taxpayers will still make enough financial contributions to the budget.

Reference List

Bartelsman, E & Beetsma, R 2003. ‘Why pay more? Corporate tax avoidance through transfer pricing in OECD countries’, Journal of Public Economics, vol. 87, no. 9, pp. 2225-2252.

Browning, L 2017, Trump’s 15% corporate tax plan may just be his opening gambit. Web.

Devereux, M, Lockwood, B & Redoano, M 2008. ‘Do countries compete over corporate tax rates?’, Journal of Public Economics, vol. 92, no. 5, pp. 1210-1235.

Djankov, S, Ganser, T, McLiesh, C, Ramalho, R & Schleifer, A 2010, ‘The effect of corporate taxes on investment and entrepreneurship’, American Economic Journal: Macroeconomics, vol. 2, no. 3, pp. 31-64.

EY 2017, Worldwide corporate tax guide 2017. Web.

Hawkes, A & Watkins, S 2013, Revealed: one in four of the UK’s top companies pay no tax while we give them millions in credits. Web.

Hong, Q & Smart, M 2010, ‘In praise of tax havens: international tax planning and foreign direct investment’, European Economic Review, vol. 54, no. 1, pp. 82-95.

Inman, P 2014, Britain is a corporate tax haven – that’s why US firms are keen to uproot. Web.

Miller, H 2017, What’s been happening to corporation tax. Web.

OECD 1999, Historical Table II.1 – statutory corporate income tax rate, Web.

OECD 2017, Table II.1 – statutory corporate income tax rate. Web.

Rojo, J, Anderson, S & Klinger, S 2010, Corporate tax dodgers: 10 companies and their tax loopholes. Web.

Spring budget 2017.2017. Web.

Tax Foundation 2012, A global perspective on territorial taxation. Web.

Introduction

General Overview of “Tobacco Companies Elude Tax Increase.”

One of the most successful steps taken by President Barack Obama was signing a law where the issue of children’s health insurance is concerned. This information is mentioned from the very beginning of the article by Matt Apuzzo for Associated Press in November 2009. This author touches upon the issue of tobacco usage as one of the most effective means which can be used to improve our health care system and prevent people from making the biggest mistake in their lives – star smoking. The main theme of the article und1er consideration is that Obama’s law has led to a considerable increasing in taxes on cigarettes but still promoted the development of another, less taxed industry – pipe tobacco.

Economic Concepts to Describe

Walter Wessels (2000) admits that almost all economists try to use economic models or concepts in order to comprehend this world better. In this work, some economic models will be considered in order to understand the intentions of the author of the article “Tobacco Companies Elude Tax Increase” and clear up whether the information presented is reliable and useful. First of all, the concept of demand and supply (Adil, 2006) should be considered and investigated in the sphere of tobacco. Secondly, it is necessary to evaluate the tobacco market in action during some period of time and find out what years and why to become beneficial for the tobacco industry.

The thesis of the work

Apuzzo (2009) states that many tobacco companies just try to find out a new and effective way out to cope with a tax increase, this is why it turns out to be important to evaluate the tobacco market in action and the concept of demand and supply to clear up what encourage people to use tobacco and what components have to be included.

Main Body

Taxation of alcohol and tobacco

Tierney Plumb (2009) admits that “raising alcohol taxes saves lives and saves society money.” His words about alcohol and its fast development may also cover the tobacco industry and explain how beneficial the tax increase may become for both spheres. When people start paying more for products, services, or information, they become thinking more about the outcomes and consequences of their actions and analyze whether these issues may cost so much. The changes in the sphere of alcohol and tobacco have much in common: both of them have many consumers, both of them have many competitors, and both of them face troubles from the governmental side.

Challenges of the companies who suffer from taxation

The increase in taxes makes any company take considerable actions and offer interesting propositions to attract new customers or at least not to lose old ones. Matt Apuzzo (2009) informs that small companies within the tobacco industry face considerable challenges because of huge and famous companies, and if it is not difficult for big organizations to change tobacco for pipe tobacco, small organizations cannot adapt to new working conditions and purposes. The demand for tobacco do not decrease, and people still continue buying cigarettes; but supply of tobacco faces challenges, and many companies lose their constant clients in a short period of time.

Tobacco market in action changes considerably during the 20^th century

Tobacco market is in action for many centuries, and taxation of tobacco underwent considerable changes from the middle of the 1900s till the beginning of the 2000s. The diagram below shows that the beginning of the 1900s did not require taxes, and the year of 1990 made tobacco producers spend money in order to stay ion business, in order to meet the demands of customers, and in order to have some kind of material to fight against competitors. These various tobacco taxes hit tobacco industry considerably (Haustein & Groneberg, 2009), this is why the year of 2000 provided tobacco organizations with a chance to have a rest and develop their business. Unfortunately, the development of this industry was too quick, and the year of 2009 is marked by huge taxes, which exceed actual prices of tobacco:

As it has been mentioned above, small companies are now under a threat of being collapsed. In the article under consideration, the author says that huge companies, who are already known on the world market, just use their name and popularity in order to produce new products and another type of tobacco without changing prices.

These companies believe that their brands and their names will help to gain respect and recognition among their consumers, and they should not be obliged to decrease prices in order to attract attention or to be re-organized in order to achieve good results and not to spend much money and suffer because of huge costs. The inability to repeat the policy of huge companies, small organization have to analyze world market, change prices, add discounts and benefits in order to prove consumers that their production is worthy of usage:

Demand for and supply of tobacco production: why they are not equal

The demand for tobacco will hardly be decreased. Even if people know about harm of cigarettes, about the possible to get cancer, or about possible lethal end, they continue smoking and use the production in spite of higher costs. However, taxation creates numerous challenges for tobacco supply: not each company may allow to lose money and not to get benefits just in order to satisfy consumers’ demands. Apuzzo (2009) underlines that fact that “raising taxes on roll-your-own cigarettes from $1.10 to $24.78 a pound” makes companies evaluate their activities, shut down their brands of roll-your-own, and pay more attention to another category, known as pipe tobacco.

The challenges, which take place because of the changes within demand and supply of tobacco products, may be properly explained by means of the following DEMAND AND SUPPLY CURVE:

If the supply for tobacco products shifts to its right because of the improvements of technology, the prices and the quantity of the products undergo considerable changes as well: prices decrease, and quantity increases. Demand (of products from society) takes the same position, this is why the changes of prices (from P1 to P2) and its quantity (Q1 and Q2) lead to increase of supply for tobacco products only.

The changes in demand happen because of several factors. They involve changes of tastes, when people find out that cigarettes of one and the same producer may be characterized by different quality; changes of incomes, when people are deprived of the opportunity to buy good cigarettes and have to pick out another alternative; changes of population, when people leave small towns in order to check own powers in a bigger city, the demand of small town decreases and supply increases, and the demand of big cities increases, however, supply of tobacco cannot be increased within a short period of time. This is why in order to change the situation and find more opportunities to increase supply, tobacco companies try to raise prices and get benefits quickly.

The article by Matt Apuzzo explains that companies of any size may be challenged by increasing of taxation and changes of such concepts like demand and supply. However, the major point is that huge companies have more changes to cope with these challenges and control own incomes and expenses. And small companies cannot change the type of their production in a short period of time, this is why they suffer because of taxation increasing and inability to take into consideration all consumers’ demands.

Supply for tobacco is stopped, and companies lose money, customers, and popularity. On the one hand, such increases of taxes have positive outcomes for society and for markets: weak companies are eliminated, and less companies aim at producing harmful for health products. On the other hand, increase of taxation promotes the development of new companies, which try to enter tobacco market and offer products, which are still not checked by time, people, and fashion.

Conclusion

“Tobacco Companies Elude Tax Increase” is the article by Matt Apuzzo that introduces how significant and considerable the increase of taxes may be for many companies. Both huge and small companies are under a threat of being eliminated or at least checked in accordance with their abilities to cope with challenges and changes of demand and supply. Tobacco market is cruel indeed, because the failure of one company may lead to a victory of another one.

This is why it is better to follow conditions and interests of people, who may become a potential customer. First of all, it is necessary to evaluate possible changes of demand and make sure that supply will not suffer. When an organization is ready to cover the expenses, connected to taxation raising or other concepts, this company may be considered as a powerful enough. Its products will be in demand, the concept of supply will not suffer, and the desirable benefits will be observed.

Reference List

Adil, Janeen, R. 2006. Supply and Demand, Mankato, Minnesota: Capstone Press.

Apuzzo, Matt. 2009. Tobacco Companies Elude Tax Increase. Associated Press. Web.

Haustein, Knut-Olaf & Groneberg, David. 2009. Tobacco or Health?: Physiological and Social Damages Caused by Tobacco Smoking. New York: Springer.

Plumb, Tierney. 2009. Report: Raising Md. Alcohol Taxes Would Be Beneficial. Washington Business Journal. Web.

Wessels, Walter, J. 2000. Economics. Hauppauge, NY: Barron’s Educational Series.

Introduction

The access to affordable and quality food has overtime proved to be a complex issue hence making the agribusiness industry vital as it facilitates the production, processing, and distribution of food in world economies. The operations of the agribusiness sector are affected by a number of factors in regard to the business environment. An organization has to consider the issues that will determine its success or contribute to its failure while conducting trade and transactions.

The agribusiness industry has been operating internationally, especially due to globalization, and thus, both the domestic and the foreign investment factors have to be taken into consideration before resources are allocated to the sector. Certain factors like the economic conditions of given countries contribute to the success or failure of this industry because of the opportunities or limitations that they present, which in turn determines the competitiveness of the agribusiness industry.

The international financial market is a major determinant of the way agribusiness is conducted, and it is currently at risk due to the vast use of foreign tax havens. The heavy flow of money into tax havens contributes to inflation, tax competition, and unemployment, and labor productivity in different states of the world.

Statement of the Problem

The study will be focusing on examining the impact of international tax havens on Arizona and the world, specifically the international financial market, which in turn has the capacity to affect the agribusiness environment, its level, and the quality of service. The study will be addressing the following factors:

1. How the use of international tax havens affects the economy.
2. Tax has ns’ impact on the policies and structure of the international business environment.
3. How the state of the economy of a country affects agribusiness.

The aim of this study is to explore the relationship between international tax havens, the state of the economy, and its influence on the conduct of business. By the end of the research, I expect that ideas will be generated on whether the use of tax havens has a negative impact on international agribusiness and hopefully lead us towards possible solutions to the problems.

Purpose of the Study

The purpose of this study is to institute the impact of international tax havens on Arizona and the world by establishing its effect on the economic performance of countries and determine whether the elimination of tax havens can be beneficial to agribusiness.

Literature review

This research approach will involve the current, past, and future reviews of business practices involving tax havens because the study of what has been done allows one to make possible conclusions about the impact of international tax havens as they form the basis of the research. Studies on these impacts suggest that tax havens negatively affect the economic position of countries through the alteration of financial markets, which consequently leads to the failure of the business.

Research also shows that investors are attracted to countries with quality public service in addition to a comprehensive and transparent tax regime. This research shows that tax authorities encounter difficulties in carrying out their jobs because of the information limitation in tax havens brought about by its secrecy legislations. Studies report that the lack of information has led to the rise of tax-related crimes, including tax evasion and avoidance.

International tax havens

Taxation forms the basis of an efficient government in addition to its being an important aspect of the prosperity of a nation. Tax compliance reflects a country’s willingness to adhere to corporate social responsibility. A tax haven is an impediment to the economic success of a country because it offers an “escape route” to individuals or corporate entities intending to evade taxes. Tax havens, which are also referred to as secrecy jurisdictions, are found in the countries where taxes are paid either at very low rates or are not paid at all. They are characterized by a great deal of secrecy and complexity.

Tax havens provide ways for individuals or companies to break the law by using high levels of secrecy. The United States began experiencing economic difficulties after the Cold War, and it started to draw illegal foreign money in order to handle the debts as it needed a place to “launder” the money, thereby leading to the beginning of secrecy jurisdictions. Tax havens are designed on structures that allow foreign companies to avoid tax payment in their domiciliary or source countries by taxing them at reduced rates. Statistics show that by 2009, corporations in the United States had acquired approximately US$ 1trillion from untaxed profits.

Economists report that the US loses about US$ 65billion in tax revenue when corporate bodies use tax havens because their secrecy allows one to hide the true value of their assets from tax authorities. It is legal for one to have a business in a tax haven provided that all the information regarding the company, its owners, assets, and activities are presented to the authorities of the owner’s country of residence for the purpose of taxation.

Those in support of tax havens say that the structures aim at providing individuals and corporations with means of diversifying their investments and are therefore legal. It is true that certain states or countries depend on finances from these tax havens, but the damage these practices cause to other countries is more compared to the benefits that they offer. Tax havens earn money from payments accrued from providing tax, regulations, and accountability “escape routes” to foreign companies.

The global economy continues to deteriorate while these tax havens flourish. Contrary to popular beliefs that the jurisdictions’ popular clients are only criminals like drug barons and terrorists, the tax has ns’ biggest clients are banks that help their customers to evade taxes. Research shows that assets in tax havens total to about a third of universal assets and are so concealed that they are almost not easily detected by tax authorities. Experts estimate that more than half of the international trade passes through secrecy jurisdictions and that the amount of lost tax revenue from the trade continues to rise every year.

Tax evasion and avoidance are destroying the international market, yet tax havens spend millions on professionals who design schemes that assist the rich to escape tax obligations.Tax havens’ structures which are complicated to deter the efforts of economists, tax authorities, and other experts to pursue justice. Tax authorities are often faced with a shortage of staff that makes it difficult for them to prosecute the wealthy and professionally staffed tax heavens.

Experts on the tax avoidance industry name London and New York as the main secrecy jurisdictions in the world. This observation discredits “the myth” that tax havens are only found in small states and islands. New York and London are among the largest financial centers in the world and major players in the tax fraud sector. Fraudulent investment scams often use tax havens to launder money, which analysts say comes mostly from poor countries and not rich ones.

Other known tax havens include Luxembourg, Switzerland, Netherlands, Singapore, and Ireland among others. The Organization for Economic Co-operation and Development (OECD) which makes international tax laws and regulations makes people to believe that tax havens are only based in small states and islands, an issue which analysts deny. The analysts say that this fact is because they try to draw attention from themselves because certain OECD member countries are among the key participants in the industry.

The table above shows the names and activities of some of the popular tax havens. (Adapted from the Tax Justice Network website www.taxjusticenetwork.com) Secrecy jurisdictions’ supporters claim that tax havens protect companies from double- taxation but economists say that this move ends up creating an even bigger problem of double non-taxation whereby one avoids getting taxed both in their home country and in the tax haven.

Researchers claim that tax havens handle about half of international trade profits. Multi-billion dollar fraudsters like those of Liechtenstein put their profits into tax havens in order to avoid being taxed in their domiciliary. International tax law states that both the country from which an individual operates and his country of residence can tax the profits and this is referred to as the domiciliary principle. This principle states that the owner’s home country retains the right to tax so as to avoid double taxation which might be brought about as a result of the two countries charging the same tax base. The owner’s domiciliary has the taxing mandate regardless of the country from which the proceeds are made.

The disadvantage of this rule is that one’s country of residence relies on data from the country that the income came from. Secrecy regulations in tax havens make accessing the information difficult hence the owners end up avoiding paying taxes. Initially, setting up a company in a tax haven does not facilitate taxes’ evasion if one follows the global income rule which requires an owner to report all his offshore proceeds to his domiciliary for taxation purposes. It is the manipulation of the tax havens that enable owners to evade tax. The tax haven secrecy is the main impediment to the fight against tax evasion.

A few decades ago, tax havens were used by a small percentage of wealthy individuals. However, in the present day, they have gained popularity with many wealthy people and corporations. The elimination of trade barriers has further facilitated tax evasion by encouraging the shifting of mobile taxable bases. Tax haven lobbyists and technological developments have also contributed to the menace. The characteristics of tax havens which include high levels of secrecy, very low or no taxes for foreign companies and individuals and absence of asset ownership transparency place about 30 to 70 states in the tax haven category.

This fact is a dilemma for countries worldwide especially developing ones because they need the money to achieve their developmental goals.

The structure of tax havens

Tax havens are based on the principal of discretion with the aim of concealing the identity of the company’s owners and their transactions and use confidentiality to justify the secrecy. This factor makes it hard for tax authorities to unearth illegal activities related to tax fraud because of the limited access to information which makes tracking money flow almost impossible. The tax havens employ different strategies to keep their client’s identity a secret. The most common one is having their clients register their companies and assets under the name of a third party which is legal according to tax havens.

These third parties or local agents, commonly referred to as “straw men” lease their names to the corporations and act as the companies’ directors. Tax havens do not have comprehensive company public registers and to prove that the companies exist, the registers only show the company name, that of its director and its establishment date. To ensure that the clients’ finances are handled according to their wishes, the director and the client draft a deed of trust. This deed binds the director to the clients’ wishes. In the event that a company has a register, the owner’s identity and details are normally classified.

The structure is further complicated by the fact that even the agent might not know the real owner of the company. Ideally, the agents should have the name of the owner but then this company ownership might have a long chain of command meaning that there can be other owners in the chain. The secrecy rules may prevent the agent from knowing the identity of the owner at the top of this chain. In other situations, a corporation in one tax haven may be in the ownership of another entity in a different tax haven with different jurisdictions. To make the situation worse, in certain tax havens, owners may be allowed to use attorneys to act like “straw men” and when a third party enquires about the identity of the owner, the lawyer may use the attorney-client professional confidentiality rule so as not to disclose the information.

Tax havens are normally established with the help of professional accountants and other legal and financial experts. The main aim of a tax haven is to ensure that the connection between its client and their company’s activities cannot be revealed to the authorities. This attribute makes tax havens attractive to several kinds of criminals including tax evaders, terrorists and drug lords who use it to launder their money undetected and in exchange for the privacy, tax havens collect rent from the companies. The use of tax havens by companies results in the loss of taxable bases by the home country of the owners.

The secrecy legislations not only allow the manipulation of data but also ensure that the foreign companies are not mandated to publicize their information or preserve it. Information can be provided by the owners voluntarily but it should also be defined and follow all the owners’ home country’s legal requirements. The alternations made on data to cover up irregularities are not easy to prove because of the limited access to information with the help of secrecy regulations of the tax havens. In this kind of a situation, a legal request is the only tool that the public can use to access the information.

However, legal requests are lengthy and expensive and demand that the reason for the request should be stated and include basics like the company’s owners or individuals’ names, account details and the activities which are difficult because the third party files the legal request to gain access to this same information. These obstacles are more damaging to developing countries which are mostly the victims because they can neither afford to finance the costly and intense legal battles nor can they have the necessary competence to challenge that of the wealthy nations.

The challenges of the legal requests are further aggravated by the fact that the companies’ owners can hinder the process by the use of legal means in the “guise” of defending their right to privacy. The secrecy rules also provide clauses that enable fast and untraceable relocation of the company to a new tax haven. This fact is made possible because certain tax havens state that the owner should be the person physically handling the shares. This aspect is known as bearer shares’ ownership. It means that all one needs to do to change the ownership is to move the shares physically to another individual and he instantly becomes the new owner and this process does not need official procedures.

The relocation of the company further complicates the legal proceedings because in order to gain access to the new information in the new tax haven, the legal request has to start afresh. Limited liability companies are mandated by the law to uphold their company’s accounts. These accounts summarize the company’s activities and economic position especially for the sake of those who do not have the company’s records like the employees and creditors.

The reason for this development is that the company is entitled to confidentiality and hence there is information that the third party does not need to know. An external auditor counterchecks the accounts to ensure they are not altered. Tax havens do not necessitate the keeping of accounts by their clients meaning that the companies can manipulate their accounts and face no penalties. This fact is because the foreign companies do not pay taxes to the tax havens and hence no liabilities are attached. Accounting records are very important especially in facilitating transactions as creditors or investors may need to know the economic position of a company before committing their capital to the business.

Companies sometimes use a virtual address which means that they use financial centers’ official addresses to conceal the fact that they are registered in tax havens. They ensure that they choose a financial center that is not regarded as a tax haven. The address of the financial centre is fully staffed and equipped to make it seem genuine but it is only “a front” meaning that it only acts as an intermediary that passes information to the owners in the tax havens.

The economic impact of international tax havens

Tax havens’ operations cause harm to both national and international economies thus putting the welfare of the financial system at risk. Economists estimate that illegal money flowing into jurisdictions sums up to approximately $2 trillion annually. Tax havens facilitate financial crimes committed by tax evaders, drug dealers and other criminals laundering their “illegal” money in the jurisdictions. This aspect is necessitated by the fact that the secrecy jurisdictions reduce the price of committing crime by obstructing criminal investigations by tax authorities.

They alter financial markets because the limited access to information makes it difficult for trading partners to assess the economic position of companies and their performance hence raising transaction risks. These potential risks and lack of transparency and accountability “scare away” the potential business partners. The jurisdictions permit public and private corporations and individuals to avoid their responsibility of paying taxes but still enjoy the revenue benefits from their domiciliary which amounts to “corrosion” of democracy. Tax is a vital element for the development of a country as it offers a continuous supply of revenue.

Developing countries depend on it to “free” themselves from foreign aid debts but tax related crimes continue to undermine this effort because the more tax revenues are avoided; the more affected countries become dependent on foreign aid. Tax havens create tax competition between countries as they struggle to lower their tax rates to avoid losing taxable bases to the jurisdictions. The loss of these taxable bases forces the authorities to reduce capital tax rates and simultaneously increase labor tax rates to compensate for the loss of the taxable bases due to the fact that capital is mobile while people are not. This fact means that wage earners who are mostly middle income families are left to pay the wealthy people’s taxes.

The increase of employment taxes has now resulted to an increase in the inequality between the rich and the poor.The tax base composition change and the subsequent increase in employment taxes have a social cost as the employees experience motivation loss leading to a decline in their work efficiency. Certain economists like Charles Tiebout previously argued that tax competition is healthy since companies and individuals are attracted to countries with low tax rates for the reason that the competition forces companies to learn how to administer public service provision in a better way with as little tax as they can manage.

It is for this reason that companies lower their taxes as each tries to outdo its rival but what tax competition really does is undermine development as it deprives the nation of tax revenue that is meant to improve the citizens’ welfare. Developing countries are affected more because taxes make up a huge source of their total revenue. Tax competition forces these countries to cut back on investments in their public sector. A given country can be forced to do this because it needs to replace the resources as this would help in improving infrastructure as well as fund other social service sectors. Tax competition also raises a country’s debt as the government results to borrowing to compensate for lost taxes.

Austria and Finland have different tax rates yet their growth for real GDP is almost at the same level. Tax competition also creates an unequal tax standard by favoring established international companies and undermining local companies that are starting. These foreign companies prosper as a result of the low or no tax rates enabling them to gain a competitive advantage over the national companies with secrecy legislations and little or no liabilities favoring their growth. Analysts say that this unfair advantage has nothing to do with the quality of goods and service provision or their pricing. This fact is an injustice to the small companies as they are most likely to be the main beneficiaries apart from being major job creators.

Tax havens facilitate the theft of income from poor countries because they do not have the necessary resources to meet the cost of protracted legal processes in the event that they discover irregular financial activity being conducted by the wealthy multinational companies. Secrecy jurisdictions undermine the government and the legal system as the secrecy favors criminal activities allowing fraud and corrupt individuals to ruin public resources. It also leads to companies wasting huge sums of money in hiring legal and tax experts to help in setting up of companies and trusts in the tax havens. Experts suggest that these skilled individuals should instead be put to good use like giving advice on how to improve the performance of financial markets.

International tax havens’ impact on Arizona The personal and corporate, private and public total income tax that the state of Arizona loses to international tax havens annually amounts to approximately US$ 500 million. Researchers argue that the income per person in Arizona has gone from being 5% less than the national average thirty years ago to approximately 20% less presently. These lost resources could have been used to fund important public service sectors including healthcare and education. As a result of the massive loss, the government has been forced to reduce these sectors’ funding thereby compromising the welfare of the citizens and its economy.

Tax authorities have also been forced to increase the labor tax rate to compensate for the lost capital tax by having the middle income families pay higher employment taxes. The average tax payer and businesses have been forced to pay an additional $800 and $2000 in taxes respectively to cover for the lost tax revenue. The federal spending cuts known as sequester cuts have direct negative impacts on working families in several ways. First, the federal funding for education programs can be reduced compelling education institutions to pay their teachers’ salaries. Vital public services like the fire and police department can suffer greatly as a cut in the public safety grants can leave them understaffed and ill-equipped.

These cuts lower the capacity of the state of Arizona to compete with others in the current economy. The quality of the public service of a place attracts business which is good for development but sequester cuts in Arizona’s federal funding have lowered its quality of public service “driving away” investors. Expenditures in terms of insurance have risen with the compromised quality of fire protection, property and loss of life which has also increased because of the low quality police services provided. Health costs have risen as result of the inferior healthcare for children brought about by the cut in healthcare federal funding.

The education sector has not been spared either as the cuts in the sector have compromised the quality of education. This fact in turn has increased the rate of crime and decreased future productivity due to the lack of a well educated workforce which is the basis of development.

Table 2.

The table above shows Arizona’s federal funding reductions in various sectors and their subsequent effects.

Conclusions

The research concludes that international tax havens have a negative impact on not only Arizona but also on the entire world as it drains the economies of countries belonging to the corporations or individuals who use them. Developing countries are particularly affected because they need the funds more than multinational corporations but due to the lack of comprehensive tax and legal regimes, multinational companies take advantage of them. The secrecy legislations “erode” trust between trading partners which prevents investments. In relation to international agribusiness, the tax havens hinder the growth of this industry by distorting the financial market creating an unfavorable operational environment.

Low productivity caused by increased employment wages affects not only the amount of food produced, processed and distributed but also its quality which subsequently compromises its safety. Tax competition on the other hand influences the stability of the product’s pricing. The banks’ participation in tax havens compromises crediting services as they transfer funds to jurisdictions instead of financing the agribusiness industry and other industries.

The inadequacy of funds also affects the distribution process because cost-effective transportation cannot be achieved by a fluctuating market. Small and medium sized enterprises (SME’s) suffer when tax competition limits fair competition as this leads to reduction of their chances of controlling the food market by deterring their growth. They may have new products or ideas to bring to the market but the multinationals’ unfair advantage may prevent them from accessing the markets. Resources that are exploited tax havens can negatively affect the rural economy by reducing its development which in turn deters agribusiness’ efforts in rural development.

The embezzlement of funds especially in developing countries which is encouraged by tax havens can bring disharmony among neighboring nations. This instability discourages investments because of the insecurity because the investors would want stability as it would assure them that their assets would be safe.

Recommendations

Policy changes in the tax industry have the ability to reduce the negative impacts of international tax havens by eliminating the channels that deny economies of their revenue and distort global financial markets. These policy changes should be able to increase the states’ chances of detecting tax and financial related crime especially tax evasion and avoidance. Apart from increasing the accountability of international companies and individuals who use tax havens, states can adjust the taxpaying rates by ensuring that tax regulations do not undermine small or national businesses. This fact would ensure that competition is based on a company’s ability to be innovative and the quality of its goods and services and the commodities’ prices.

Many countries should apply a mechanism that involves the use of progressive taxation whereby the tax payment is founded on ones capacity to pay meaning that the richer ones would pay more taxes. The mechanism would not only serve to increase justice and democracy but also ensure that the wealthy do not enjoy the benefits of taxes in terms of good infrastructure and an educated workforce at the expense of low wage earners. The move would increase the equality and reduce the poverty gap between the rich and the poor. The unitary tax system which is already being implemented in a majority of states in the US is an important aspect in the effort to eliminate international tax havens.

The system operates in a way that nations work out an international tax mechanism that allows them to determine the global income of every company and all its source countries after which all of them can subsequently tax their portion as per their domestic tax rate. The international mechanism serves to avoid double taxation whereby the same company is taxed by both the home country and its country of operation. The core principle of a unitary tax system is combined reporting. Worldwide combined reporting by international companies would close the channels that companies use to avoid paying taxes as they would bring together all the income of their mother companies and “shell companies “and then tax the total income.

This fact would require that the countries treat the corporations and their subsidiaries in foreign countries as a single entity. Taxing the companies would then be based on their activities in every one of their source countries. This strategy would only be effective if the companies practiced transparency in their reporting. To ensure that transparency is maintained, the companies can present their subsidiaries’ information country by country stating what activities every subsidiary is undertaking in each country together with the ones in jurisdictions. This fact would serve to prevent the companies from merging information from all the countries as this would increase the chances of concealing alterations made to the data.

TABLE 3.

The table above demonstrates the difference between a merged report and a country by country report. Tax authorities ought to demand the disclosure of information, particularly financial information because with the auditing of each accounting record, the chances of the tax authorities being able to detect any irregularities taking place would increase and as a result, they would be able to detect tax related offences. The accounting records and auditing would enforce the international companies’ accountability and both the tax authorities and trading partners would know what activities take place in different localities and how much profit each subsidiary makes.

The countries would then be able to tax the corporations and use the revenue for the improvement of their citizens’ welfare and their development. Worldwide combined reports would disband tax havens as profit shifting would no longer be of any benefit as the profits in these jurisdictions would be calculated and taxed by the home country as per its domestic tax rates. Countries should reinforce automatic exchange of information that can reduce secrecy and instill confidence in trading partners and investors thus encouraging them to carry out transactions. Tax authorities can then be able to detect and penalize tax evaders. Jurisdictions should also provide all the necessary information to the owners’ domiciliary for taxation purposes.

All the nations that prove to be uncooperative should be sanctioned. States should also enforce the registrations of all companies after which these records should be made available to the public for the benefit of third parties. The companies’ registers should include the name of the owner and the company’s activities, its assets as well as location. It has been a relief to many countries especially developing ones as the European Union has began putting into practice the automatic information exchange.

Tax authorities should officially make tax avoidance a crime. As at the moment, it is considered lawful because one utilizes weaknesses in the tax system to avoid paying taxes which they should otherwise pay and not directly break the law. Tax competition can also be eliminated through the application of the domiciliary principle which states that the home country retains the right to tax company capital no matter where the income is derived from.

This would also eliminate the need of tax havens because all the profits here would be taxed by the owner’s domiciliary. Nations can apply the Foreign Accounts Tax Compliance Act (FATCA) which permits states to a 30% withholding tax income made in the US by companies then shift to international financial institutions that are noncompliant to the United States rule of disclosing information on the identity of their investors or clients who are residents of the US.

This clause also applies to the residents of the US who directly or indirectly own assets that do not belong to the United States in these institutions. This fact may force the foreign financial institutions to either comply with the disclosure regulation or discontinue their dealings with United States’ residents and their assets unless they are ready and willing to face the 30% withholding rule. This rule is important in promoting the sharing of information between corporations and tax authorities. Experts suggest that tax authorities should get rid of the territorial tax system whereby only domestic profits are taxed. This aspect can be necessitated by the fact that multinational companies enjoy an unfair advantage of having their income made and taxed in low tax rated countries and then transfer their money back to their domiciliary.

Abstract

There are three most common forms of taxation. These include the VAT, Flat Tax, and the Progressive Tax. These forms of taxations are different in terms of how they are imposed. They are also differentiated in terms of their impact on the taxpayers. This study gives the difference between these three forms of taxation under these aspects. The study also seeks to address how these forms of taxation relate and the advantages and disadvantages of each form of taxation.

Introduction

In an attempt to gather its revenue, government can use various types of tax. These may include Value Added Tax (VAT), Progressive Tax, and Flat Tax. Value Added Tax is the form of tax that is charged on goods and services. This is one of the most common sources of the government revenue. Different commodities may be charged differently through the VAT. The more an individual buys, the more VAT he or she pays to the government. However, the Vat is only applicable for the taxable goods.

On the other hand, Flat Tax is a form of tax where everyone pays same rate despite of their levels of income. In flat tax, people from all levels of income are charged equally. On the other hand, progressive tax is the form of tax where tax rate varies with income. In progressive tax, those who earn high level of income are charged higher than those earning low income. In other words, tax varies with income. Each of these methods has its advantages and disadvantages.

Discussion

As already noted, VAT tax is a form of tax that is charged on goods and survives. When one buys goods and services, they pay a certain fraction of the value of the commodity as a tax. Some people have argued that the VAT tax is not fair and that it will bear more burdens to one fraction of the society. Christian and Robbins (2009) argued that the majority in the United States of America has feared that the VAT in the country will bear greater burden on the middle.

Since VAT is charged on goods and services, it tends to raise the prices of goods and services. This may have negative impacts on the market. For instance, according to the law of demand, the demand is low when the prices are higher. In this case, the VAT tax may reduce the level of aggregate demand in the country. This may have an adverse impact on the economy.

Despite of these shortcomings, the VAT remains a very useful source of the government revenue. In America, for instance, VAT plays a pivotal role in funding the free government run medical care as well as hospitals both of which provides services to everyone (Anonymous, 2010).

The VAT in the US has also played an important role in funding free education for college students as well as free home mortgages. Without the VAT, such basic services could not be available to the people. In other words, the VAT has contributed to improving the living standards in America.

Flat tax has received an enormous opposition on the ground that it’s oppressive to the poor. This form of taxation is characterized with same tax rate to the people from different income bands. This form of taxation increases the gap between the poor and the rich (Rothbard, 2010). In other words, it does not encourage equality in income distribution.

One of the main advantages of this form of taxation is that it encourages people to work hard since the tax rate is constant. This leads to an increase in the level of production. It also reduces the cases of tax evasion. This helps in maintaining regular tax revenue for the government. This is unlike in the case of the progressive tax which tends to encourage tax evasion.

As already noted, progressive tax, is a form of taxation where people earning more income are taxed heavily than those who earn little. In this case, the progressive tax tends to reduce the gap between the rich and the poor. There have been some disagreements on whether individuals earning higher income should be taxed a higher rate or not. In this form of tax, every income band receives a different tax rate. In some cases, the lowest band of the income may be tax free.

One of the main advantages of this form of taxation is that it is fair. It helps in uplifting the poor in the economy. When the poor are charged little, they can be able to save a greater fraction of their income. Another advantage of this method is that although those in the higher bracket of the income are taxed higher rates, they still ends up taking more home than those in the lower bands.

Therefore, it still encourages those earning higher incomes to improve in their areas. Through this form of taxation, those in the lower band can be tax free (Mitchell, 2009). This is unlike the case of the flat tax where nobody can escape tax. In this case, this form of taxation has a significant role in reducing the level of poverty in a country.

According to Mitchell (2009), progressive tax promotes social cohesion. It can be viewed as a form of tax that is used for the collective good. It has a significant role in reducing the level of disparity. This is unlike the other types of taxation which are associated with high level of disparity. For instance, the flat rate tax has led to a significant level of suffering to the low income earners.

This method has been criticized on the ground that it is inefficient and that it tends to promote evasion, resentment, and reduced incentives to work (Mitchell, 2009). This method tends to lay greater burden on those who work more. This may discourage them.

Conclusion

From the above discussion, it can clearly be seen that each form of taxation has its own advantages and disadvantages. For instance, progressive tax is good in promoting equality among the people while VAT is ideal as it significantly helps in funding important services like health care. However, each of these methods suffers some limitations.

It is therefore advisable for the government to use these forms of taxation accordingly in order to reduce their negative effects to the taxpayers. For instance, the government may refrain from the taxation of basic goods. This will prevent rising in prices for important commodities like food.

Reference List

Anonymous. (2010). Wall Street Journal. Europe’s VAT Lessons (Eastern edition). New York, N.Y.: pg. A.22

Christian, E. and Robbins, G. (2009). The Dangers of a Value-Added Tax. Wall Street Journal (Eastern edition). New York, N.Y.: Oct 15, 2009. pg. A.17

Mitchell, D. (2009). VATs Mean Big Government. Wall Street Journal (Eastern edition). New York, N.Y.: pg. A.15

Rothbard, M. (2010). The case against the Flat tax. The free Market Reader; 1988, PP. 342-362

Introduction

Should The United States Federal Government increase “sin taxes” on alcohol and tobacco to help pay for the increasing costs of medical care? With the economy in a slump, the federal government is losing money on sales, property tax, and income taxes as sources of revenue. Lawmakers are trying to find new, less painful sources of revenue. In addition, the cost is going up on public services, entitlement programs and other various functions of government.

This upward swing requires that they look for a better, cheaper, and more effective way of spending. It is no wonder that policy makers are starting to feel the pinch. To make things even more precarious, they are facing a federal debt that seems to swell on a daily basis. Overall, this situation demands a completely new degree of creativity from all levels of government. The United States Federal Government makes some valid points on why tax increases, particularly sin tax, can reduce medical care expenses.

Taxes

What is “sin tax” in general? Creighton said that “Sin taxes are another name for excise taxes or sumptuary taxes that are placed on items that either society or the sovereign find objectionable.” (Creighton 126) Often these taxes would show up during a recession, so as to “generate revenue for the government and curb the consumption of unhealthy or undesirable products.” (Creighton 126)

There are two different types of sin tax where revenue can be generated. The first sin tax is government sponsored lotteries and legalized gambling. In search of sources of revenue, lotteries and gambling are not new concepts. The second is excise taxes and it is often used on products considered socially unhealthy, such as, alcohol, tobacco, and junk food

The first Continental Congress made use of lotteries to help finance the Revolutionary War. A decade ago, the general public rejected the custom of gambling. In the last decade, the viewpoints have changed dramatically.

Public perception has turned almost one hundred and eighty degrees on gambling. An outlook in finding and keeping a stable job, growing uncertainty in maintaining financial security, and aggressive marketing and public opinion campaigns launched by casinos, state governments, and Indian reservations has almost certainly had a hand in corroding anti-gambling sentiments.

During the Revolutionary War, congress passed a bill on alcohol tax to help generate revenue so as to cope with the national debt (Creighton 125). Creighton said “Secretary Hamilton, however, divulged a truly paternalistic aspect of tax when he described it “as a measure of social discipline than as a source of revenue” (Creighton 125). Another instance came up in1862 when the government passed a permanent tax increase on alcohol to generate revenue, which helped to pay the Civil War.

During the Revolutionary War and Civil War the government had difficulty collecting sin tax from the public. Many years later, the government has been continued to use this approach to minimize tobacco and alcohol use. It has been relatively successful in discouraging consumers from buying tobacco in recent times. Recently, the government has started taxing high calorie foods in an effort to stamp out obesity and raise additional revenue.

The United States Federal Government wants to increase “sin taxes” to help pay for the increasing costs of medical care. This has a lot of economic implications. Historically it has been shown that those sin taxes are rarely used by federal and state governments to support the purported programs. The programs are too amorphous. In this case, it has been identified that sin tax would be used to curb medical care costs but currently, those expenses come from too many quarters; it would be difficult to wave them off with a sin tax magic wand.

Unless all those flaws are fully identified and neutralized then the tax additions would not be very useful. Another problem is the contradictive nature of these taxes. To adequately solve the medical care problem through sin tax, the US government would need to make sin tax products prohibitively high (Creighton 134). Buyers would dramatically reduce their consumption of those ‘sin’ products and there would be no more taxes to be collected.

It would no longer be feasible to rely on that avenue for revenue because consumption would be minimal. This casts serious doubts on whether the method is economically feasible. Nonetheless, supporters of this move argue that addictive products by their very nature cause consumers to keep buying them regardless of their prices.

In other words, it is assumed that the commodities are price inelastic. This has been proven through the high amounts of revenue collected by states such as New York from alcohol-based taxes. No clear side is convincing enough, so one must look at other factors to determine whether the strategy will work.

Products of Sin Taxes

The major products considered as sin tax include high calorie foods such as confectionaries; snacks such as candy and chocolate and drinks that are high in sugar content such as soda. Alcohol and tobacco have also been traditionally considered as ‘sin’ products for quite a long time. Usually, the government is selective about the nature of foods that fall under this category, and has chosen soda for this. Selection of alcohol and tobacco products for increased taxation has been somewhat homogeneous; hence less contradictory.

Other products are less common, but still important sources of sin tax revenue for federal governments. They include charges on strip club patrons usually called Pole tax and heightened sales taxes on sexually explicit products such as movies and magazines.

These products are considered sin tax because they encourage habits that are either morally or medically objectionable. Society is governed by certain moral codes which dictate these habits.

Using sin tax to fund medical care costs has raised a lot of eyebrows in the political scene because Legislators are afraid of the objections raised by players in the beverage industry such as: Coca cola, Kraft foods and Pepsi Co. The manufacturers also have their own lobbyists who argue that sin taxes would affect low income earners.

Consumer watchdogs have warned that the move could create a backlash from buyers who may oppose the idea of paying more for their favorite drinks. Others warn that taxes can never really cure a bad habit as they do not get to the root cause of the problem (Chaufan et. al 90). In the wake of so much opposition, it is likely that employing sin tax to cope with healthcare expenditures may backfire.

Medical Care

Medical care in the US makes up one of the most complex health systems in the world. No single party is responsible for the costs as the government, employers, the uninsured and insurance firms all have a stake in it. Estimates indicate that in 2006, the US spent sixteen percent of its budget on healthcare. This amounted to 2.1 trillion dollars. In 2007, those costs increased to 2.2 trillion dollars. In 2009, the figures plummeted to 2.5 trillion dollars (Jones 4).

The amounts refer to expenditures incurred by federal and local governments alongside personal and corporate expenditures; The Office of the Actuary of Centers for Medicare and Medicaid services releases these annual figures. The US government is accountable for 30% of these costs while the rest of the population either resorts to private funding through employers or is uninsured. In total, the US government spends approximately 793 billion dollars on publically provided health care.

Senators and the Obama government have suggested that collecting taxes on soda would provide the government with a total of 24 billion dollars worth of revenue. The amount may seem like a lot of money but it is less than ten percent of total health care costs; it is merely 3% of all healthcare expenditures.

The public has objected to the use concept of sin tax since it believes that the government is acting paternalistically. Citizens argue that adults have the right to choose what they consume and should not be forced to change that because of the values of their government. Deontological ethics opposes sin taxes.

Freedom of choice and fair treatment are undermined according to this school of thought. Consequentialists would focus on the general welfare of society to support sin tax but there are still an equal number of consequentialist arguments that show how utility will be reduced (as explained earlier). Ethically speaking, sin taxes would be quite problematic to the public (Dorsey 58).

Recommendations for action

Given the economic, ethical, political and social ramifications of sin taxes, it is unlikely that this strategy will do well. The budgetary problem lies in the country’s taxation system. Unlike other developed countries, the US does not collect value added tax. It largely relies on excise tax for consumables. Most of the government’s budget is funded through income tax rather than consumption tax. Sin tax is classified as a type of consumption tax. However, the moral, political and social issues surrounding this kind of tax make it unreliable.

The current budget deficit calls for creative solutions, but sin tax would not be one of them. It would be more effective to think along the lines of value added tax. Americans are suffering from these dire economic constraints because their government is focusing their attention on ineffective tax strategies. Overreliance on income tax by the government has caused a negative effect on the economy.

This discourages investment in the state and therefore reduces the GDP (Hines 52). Ultimately, the government ends up having less to collect, and even less to spend on expenditures such as health care. The government needs to consider consumption taxes seriously before the medical care situation spirals out of control.

Conclusion

The government should not use taxes raised from sin tax to reduce medical care costs owing to a number of reasons. Implementing this policy would not raise sufficient revenue because sin products would need to be prohibitively high; this would prevent a number of people from purchasing them and there would be no taxes to deduct. Even the concept of price elasticity is debatable since smoking has reduced after introduction of cigarette sin tax.

The idea has certain moral implications as well. Citizens oppose paternalistic tendencies from the government, so they would not welcome such a move. It could also create a backlash from targeted corporate bodies that play a large role in the economy of the country. In order to deal with spiraling health care costs, the country should focus on improving consumption tax. Failure to adopt value added tax has led to this challenge and should be addressed.

Works Cited

Chaufan, Claudia;Gee Hee Hong;Fox, Patrick. “‘Sin-Food’ Taxes and Sugar-Sweetened Beverages–The Right Policy for the Wrong Reasons?” American Journal of Health Promotion 25.2 (2010), 87-90. Academic Search Complete. EBSCO. Web.

Creighton, Robert. “Fat Taxes.” Journal of Legal Medicine 31.1 (2010), 123-136. Academic Search Complete. EBSCO. Web.

Dorsey, Roger. “In defense of ‘sin taxes’: tax policy, virtue ethics, and behavioral economics.” Southern Law Journal 20.1 (2010), 53-67. Academic Search Complete. EBSCO. Web.

Hines, James. Taxing consumptions and other sins. Journal of economic perspectives 21.1(2007): 49-68

Jones, Brent. “Medical expenses have very steep rate of growth”, USA Today. 2011. Web.

The article called “Federal employees ask taxpayers to buy them personal items” posted on The Washington Examiner news portal by Sarah Westwood discusses the areas of expenditures of the federal employees and the prohibitions concerning the spending of taxpayer dollars. The Washington Examiner is a well known and respectable publication focused on a variety of political issues. It is important to mention that the article by Westwood was found in the section called Watchdog News. Watchdog is the team of the Washington Examiner investigators and researchers that is focused on revealing information about manipulative politicians, tricky bureaucrats, and various frauds.

The article exposes the policies and prohibitions established by the Government Accountability Office for government employees. It turns out that the employees are strictly forbidden to spend the funds coming from the taxpayers on the items that are deemed unnecessary. This regulation resulted in a number of questions from the side of the government employees concerning the exact limitations of spending. The employees started to ask about particular cases and situations they come across. For example, some of them wondered if buying an umbrella or a raincoat during the rain, when an employee needs to rush to a meeting, would be viewed as a necessity (Westwood par. 12). Others asked if the taxpayer dollars could be used for watering a golf course or to pay for the spouses accompanying government employees on their business trips. Westwood notes that the Government Accountability Office said no to all of these questions (par. 14).

The author of the article also describes some of the purchases that were permitted. Even though the regulations enforced by the Government Accountability Office seem rather strict, some unique payments passed the control. For example, buying Christmas decorations was allowed, the only condition established by the GOA was that the purchased decorations were appropriately sensitive when it comes to the use of religious symbols (Westwood par. 15). The other allowed purchases were not as harmless. In the article, it is mentioned that the Government Accountability Office permitted the Interior Department to use its funds for construction to buy bullets and guns (Westwood par. 17). The weapons were used to get rid of woodpeckers destroying the power transmission lines. The most interesting of the purchases highlighted in the article was mentioned at the very end of it. The Department of Agriculture has secured permission to use taxpayer money to pay for a chartered bus transporting a group of female guests, “providing social and recreational services” (Westwood par. 21). The permission for this request was granted only because there was no specific statutory rule concerning expenses of this kind, even though paying for non-government personnel is generally prohibited.

The article posted on the Washington Examiner underlines that there is a series of very strict rules designed to limit the financial activity of the government employees involving taxpayer funds. This demonstrates the seriousness of anti-corruption policies in the United States of America. The government employees, their actions, and expenditures are carefully watched. At the same time, the article reveals that the Government Accountability Office that forbids the employees to buy umbrellas may, from time to time, allow them to purchase guns and bullets or pay for the bus carrying female entertainers using state funds coming from the taxes. This shows that statutory language can be twisted and manipulated by the properly educated and determined employees.

Works Cited

Westwood, Sarah.Federal employees ask taxpayers to buy them personal items. 2014. Web.

Diversity of tax revenues at Swobodaville

Cities always prefer a diversified tax base to avoid being vulnerable in the event of an economic downturn. Additionally, having a diversified base ensures a continuous stream of income. An assortment of tax mixes such as sales, property, natural resources, income (both individual and corporate) and licenses make up for a healthy city. Most of the tax rates are imposed by either the central government or the local authority.

Property tax generates a more stable source of revenue unlike sales tax. It can easily be carried out and unrealized capital gains can be taxed. Its disadvantage lies on the fact that an increase in its tax can cause loss of home ownership. In the U.S.A, the Great Recession caused a decline in property tax due to foreclosures (Chernick, Langley, and Reschovsky, 2011, p. 1). In the U.S.A, the national average for property tax is 30.1% (Wash Park Prophet, 2009, para.9).

Comparing Swobodaville at 36% with other cities at 38%, a margin of 2% is found. This shows that property tax is one major mainstay of the cities. The sales tax is very expedient and is normally imposed on expenditure rather than savings (Advisory Commission on Intergovernmental Relations, 1988, p. 4). Its demerits include the fact that it is very regressive and in some instances, it causes a hostile business environment. Income tax, both individual and corporate, offers flexibility to the tax structure with increasing costs and demand for service.

When the income tax rates are set locally, there is a tendency for the authority to offer lower tax rates such that majority of people on payroll tax are retained in the city as well as offering tax breaks to the corporate bracket. Sales and property taxes are the major sources of revenue in Swobodaville (36%).

Sales taxes are very cyclic while property while property tax remains constant. The loss of personal or corporate income tax may have minimal impact on the tax collections since property and sales taxes are sufficient to cover their loss. The comparator cities have almost the same trend as Swobodaville with slight deviations. Therefore, Swobodaville tax types represent a good mix of revenue which could be due to its diversified economy.

Factors to consider when carrying out a complete analysis of the tax mix

• To conduct a complete analysis of the tax mix situation in Swobodaville, one ought to know how the central government contributes towards funding the city. In some countries, the central government gives grant to the local authorities to ensure equal treatment of all persons especially in the education and health sectors.
• Some central governments also maintain and regulate the taxing authority. This means that a city can use a tax rate however, its base and rates are governed by the central government. When the taxing authority is local to Swobodaville, it may be offering tax breaks to corporate income consequently less revenue is generated from them. Moreover, distortion in markets for mobile goods may occur if the set rates are not synchronized across cities (World Bank Group, 2001, para.15).
• Cities/states may be sharing taxes or revenues from the central government and this may reduce the states efficiencies as well as accountability.

Actions to improve the tax base

• When taxation is done locally, there is a tendency of double taxation or no taxation on some revenues hence policies and rules should be formulated for assigning rates and ensuring 100% of the revenue is collected.
• States should ensure budgets and accounts are balanced yearly to match expenditures and revenues to avoid carrying forward deficits over time.

References

Advisory Commission on Intergovernmental Relations, (1988). Local revenue diversification. Local income taxes. Web.

Chernick, H., Langley, A., & Reschovsky, A. (2011). Revenue diversification in large U.S cities. Web.

Wash Park Prophet, (2009). Colorado tax mix typical. Web.

World Bank Group, (2001). Decentralization & sub national regional economics. Intergovernmental fiscal relations. Web.

Companies choose to refer to the legal tax shelters while attempting to reduce the taxable income and increase annual profits. From this point, tax shelters are the methods and operations necessary to reduce the taxable income and general tax payments, and they can depend on the appropriate financial analysis of the companies’ revenues and opportunities to invest. Thus, to contribute to the companies’ development, tax shelters should be legal and legitimate, and one of the effective tax shelters is based on controlling financial operations with references to choosing the effective pattern for investment (Burman, 2000, p. 129). From this point, realizing the financial control, companies receive the opportunity to choose and develop the most effective investment strategy which can be based on such patterns as the limited partnership, rental real estate investment or annuity contracts.

The effective investment strategies are based on the proper financial control and analysis of all the company’s operations and transactions. To achieve the most significant results while focusing on money control, it is necessary to refer to the long-term investment strategies. Long-term investments are discussed as the effective tax shelter methods because they save the company’s money indirectly while reducing the annual taxes slowly, and the noticeable results can be observed only after analyzing all the financial operations (Cascarino, 2012, p. 134). As a result, long-term investments can legally reduce the company’s annual taxes by 20% (Hanlon & Slemrod, 2009, p. 129).

Furthermore, long-term investment is the right choice for small and low-income companies because of the insignificant taxes related to this type of investment. From this point, to use the advantages of the tax shelter, the company should focus on the proper financial analysis of the company’s properties, revenues, and investment opportunities to choose the most advantageous variant of the legal tax reduction (Daily, 2009, p. 114). In this case, the attention should be paid to the expected barriers associated with the tax policies and to the expected tax savings to develop the most effective investment plan (Lawrence & Weber, 2011, p. 204).

While concentrating on the financial controlling and planning systems, many companies choose such variants of long-term investments as the limited partnership or the flow-through share because this strategy can guarantee significant tax reductions for the company. In this case, the task of the financial analyst and consultant is to analyze the company’s possibilities to provide investments and avoid risks and to focus on the effective money control strategies to choose the most appropriate variants of long-term investment (Cascarino, 2012, p. 102). As a result, much attention should be paid to choosing the tax shelter variant based on the long-term investment principle which is most advantageous for the company because the drawbacks in the financial analysis and control systems can lead to maximizing the taxes instead of their reduction and to minimizing the revenues (Daily, 2009, p. 134).

In most cases, the focus on the money control approaches and long-term investments can be discussed as the effective methods to reduce the companies’ taxes because using such strategies; the companies can rely on the expected tax savings and potential rewards associated with the industry’s development. From this point, the long-term investment can be discussed as the effective tax shelter method to reduce the taxable income and tax payments.

References

Burman, L. (2000). The labyrinth of capital gains tax policy. USA: Brookings Institution Press.

Cascarino, R. (2012). Corporate fraud and internal control: A framework for prevention. USA: John Wiley & Sons.

Daily, F. (2009). Tax savvy for small business. USA: Nolo.

Hanlon, M., & Slemrod, J. (2009). What does tax aggressiveness signal? Evidence from stock price reactions to news about tax shelter involvement. Journal of Public Economics, 93(1), 126-141.

Lawrence, A. T., & Weber, J. (2011). Business and society: Stakeholders, ethics, public policy. Boston, MA: McGraw-Hill Irwin.