The main source of government income is taxes. The government taxes various organizations in the economy differently to ensure that adequate revenue is collected. Corporate use loopholes in the tax system to reduce the tax paid to the federal government. The government should eliminate these loopholes to improve tax collection. Some taxes such as gift and estate tax as they are counter productive. Changes made to the federal tax collection systems will increase the tax collected by increasing compliance.
Research the most common tax loopholes used by corporations and partnership to avoid paying federal income tax. Discuss two (2) loopholes identified and what strategies you would recommend to the federal government for closing these loopholes.
The federal government gets most of its revenue from collection of tax used to fund most of the expenditure. The government should ensure that the tax collection avenues are free from loopholes to facilitate efficient revenue collection. The aim of a business is to ensure maximum revenue is gained from the market. Some businesses have identified loopholes that they can use to increase their profit by reducing the amount of tax paid to the federal government. These loopholes can be defined as legal exceptions that the businesses use to avoid hefty taxes. The government should ensure that all loopholes are identified to ensure that undeserving business do not take advantage of the government.
One of the tax loopholes that the federal government needs to address is the corporate jet deductions. Large organizations have corporate jets to transport their executives and clients. The law allows corporate to claim tax deductions on the depreciation of the corporate jets at a faster rate compared to the commercial airlines. This reduces the amount of tax paid to the federal government thus the need to close the loophole. The suggested manner to deal with this loophole is to ensure that the rate of depreciation claimed by the commercial airlines is the same as that claimed by the corporate airlines. This will enable the government to collect up to 4B dollars in a decade which may significantly reduce the countries debt (Pechman, 1987).
The accounting system used by some companies also provides loopholes for tax collection. Oil companies are some of the organizations that benefit from this form of tax loophole. The organizations that use the LIFO method of accounting pay less tax is the cost of the commodity in the future is of a higher price. In the event company buys oil at the beginning of the year at thirty dollars per barrel and later buys more at forty dollars per barrel, then sells it at fifty dollars per barrel the tax charged on the profit will be lower as the profit would be 10 dollars instead of 20 dollars. Adapting a uniform accounting system like FIFO will enable the government to increase the tax collected. Closing this loophole will increase the revenue collected by the federal government.
2. Evaluate whether or not the federal government benefits from allowing corporations to select S. status.
According to the U.S. federal tax, an S corporation is a corporation that decides to be taxed under chapter one subchapters of the internal revenue code. According to this code, the corporation with the S. status does not pay federal tax to the federal government. The corporation passes its profit or loss to its share holders. The shareholders then post this income or loss to individual tax return forms for tax purposes. The organizations that qualify for this group have one class of stock, have less than a hundred members, share holders must be Americans and the entity must be eligible. The profit or loss in this organization is shared proportionately with regards to each shareholders contribution (Pechman, 1987).
The tax collected from an individual is subject to deductions which reduce the amount of money earned by the government. By allowing companies to determine their S. status, the government is giving the shareholders the power to limit the amount of taxes paid. The government uses a constant corporate tax rate for such organization which is usually higher than individual tax rate. Manipulation of the tax rate by the company is possible as the company should have at most hundred members. Allowing companies to determine their S. status will enable the shareholders to select a tax system that allows them to save more money.
Corporations with the S. status will file expenses that are incurred during dividing the profit or loss among the members of the corporation as allowable expense. Allocating the income or loss of such an organization will attract a large sum of money which is allowable. This will reduce the taxable income of an individual and in case of a loss the shareholders may claim a reimbursement. This reduces the revenue generated by the company. Companies that have the S. status may attract some fringe benefits to the shareholders that will reduce the revenue generated by the governments. Members willing to take advantage of better tax treatment will apply for S. status. Tax collection by the federal government is made harder when organizations apply for S. status. This can be attributed to the compliance requirement for an individual being different from the organization.
3. Discuss whether you believe the current gift tax laws are fair to the taxpayer. Recommend a change that you would like to incorporate into the tax code related to gift taxes.
Current tax laws may be considered fair as they allow the person receiving the gift to only pay tax to the government when the property is being sold. The giver of the gift is taxed by the government thus the receiver can not be taxed. The receiver of the gift will pay tax upon selling the gift based on the fair market value and tax basis at the time of sale. The current tax laws can also be considered fair gifts below the tax limit are not taxed and not included in the tax payer's liability. Charitable donations of qualified property are not taxed by the federal government.
The government does not also require the tax payer to include the fair market value of the gift in the tax returns. The gift giver according to the tax laws is required to pay the tax if the gift is over his tax limit that year. The value of a gift below thirteen thousand dollars is considered below the tax levels thus the gift is tax allowable. Gifts paid directly to an educational institution or a medical institution for a spouse qualify to be gifts and thus tax allowable regardless of the fair market value of the gift. People who own property together can combine their allowances for gift giving to give gift that exceed individual tax limits. Tax laws regularly change thus the need to consult tax advice first when filling once returns (Conklin, et al. 1990).
The changes that I would like on the gift tax law are the interposal transfer. The limitation of nationality of the spouse should be eliminated from the law to allow tax allowable transfers among the spouses regardless of the nationality. The same should also apply for civil marriage, this is because civil unions are being allowed by the changing society and taxing a couple due to sexual orientation can be termed as discrimination. This change should also be monitored to ensure that some of the people do not abuse the changes to avoid paying taxes. A limitation of the interposal gift may help deter the people from fraud. The price limit on the gift can change with the time the couple has been together to ensure cases of fraud are eliminated.
4. Create an argument for or against abolishing estate taxes.
Estate tax refers to the tax paid when transferring property after the death of an individual. According to estate tax law, the value of the property is accounted for at the time of the death. The fair market value of the property which is the value of the property at the time of the transfer is used in calculating the tax to be paid by inheritor. The value of the whole estate is referred to the gross estate. Deductions are made to the gross estate to determine the taxable estate. This tax is increases the government revenue thus should be scrapped as the taxes are not that significant to the government.
Criticism against the estate tax revile that it has a negative effect on savings and economic growth. The critics have been able to provide empirical evidence using the economic theory that estate tax reduces the savings in an economy. Estate tax discourages saving for bequests as the cost of making a net bequest increases with the net amount of tax required to attain the net target. Estate tax has some effect on the assets accumulated for deterrent reasons. Savings by the heirs can also be reduced by the bequest due to the increase in resources for consumption.