Tax Law the Nature of Term Paper

Excerpt from Term Paper :

With regard to the salaried people the federal tax system has improvised a method to flush the surplus spending funds in advance by the mandatory provision of requiring employers to withhold tax from payments in advance which on remitting will be computed as part of the total tax liability of the employee. This method of advance collection is an important feature said to be the pillar of the tax system. The collected amounts are either adjusted to the next year tax if surplus, or credited if equal. This collection method raises revenue to the tune of seventy billion Dollars annually.

The taxation of company income is the subject of a debate. While individual income is taxed, the taxing of corporate income by legal fiction of considering it an entity has caused ire to noted economists and business persons. Heavy burden is shouldered by the stock holder, who also pays the tax for the income received as part of his personal income tax which is one instance of double taxation. The deductions allowed to the tax must allow costs for earning income, according to an argument. There is a cost involved in earning the income which must be allowed as deduction. However the principle "is hard to apply because of the difficulty of distinguishing between costs and personal consumption. Among doubtful items, a strong case can be made for more liberal deductions for educational expenditures that increase earning capacity." Some deductions that could be considered would be commuting expenses, income of working wives, are mooted. There must be a method of computing the cost of earning income and then deducting it, other wise the taxation is unfair.

The need for reform

The confusion and the mind boggling procedures, arguments and counter arguments with disgruntlement in the system of progressive taxation and double taxation has prompted alternate suggestions which include separating the income from stocks and limiting its tax. Similarly the insurance companies which could hold a part of their income as future liability have now been restricted in the amount that can be held in this manner. This passes on the incidence of taxation to the end users.

It is pointed out that the subject of the federal income tax both in a legal context and in the context of economic discussions has become so complex that there is no one single solution to alter it and make it universal and functional and keep the principles of the cannons of taxation intact. Some other tax structuring alternatives like VAT or value added tax has come in vogue. However the income tax remains! Some of the alternate to income tax which was promoted as being simple and whole were a national sales tax as discussed, the VAT, and consumption tax which will be flat and for the business a cash flow tax. The income tax was sought to be kept 'pure' with the narrowed down proposal of income. The globalization of the economy and the prospect of American ventures abroad and Joint Corporation or partnering with corporate from other countries have thrown up a plethora of new demands. The opinion held by experts now is that there must be a reform, a reform such that the federal income tax is completely eliminated, which will lower the cost of capital. It is argued that the lowering of the cost of capital will have two implications, one the fund for expansion overseas and second by simplifying the process attract the investment from abroad.

The Opinions and alternate suggestions to the federal income tax are plenty and the arguments for its removal as explored above are also numerous. Some scholars have come out with workable alternate suggestions. The savings in the economy, it is argued is very important for investment and stability. Savings if made is taxed by the income tax and therefore in today's economy the trend is to save less. The savings rate in the U.S. economy is declining very fast. Its impact will be on investments in the future because in a macroeconomic model, savings ought to be equal to investments. Eminent economists like Laurence J. Kotlikoff studied the impact of tax on "U.S. saving, investment, and growth of the total elimination of federal personal and corporate income taxes in favor of a uniform national sales tax." The argument goes to show that when ever a person purchased something a uniform sales tax will ensure that it is paid at the final point of sale thus distributing the tax burden while at the same time doing away with the entangled and complicated law regarding income tax.

Such a switch will be a total departure from the current government system and the new tax must be made so clear and unambiguous that there will not be any room for confusion over assessment. The argument is that "in choosing a national sales tax we also would finally be making a choice between taxing consumption and taxing income, and we would be picking the tax base, namely consumption, that is most conducive to growth of saving, investment, labor supply, and output."

Taxing is based on changes as it is perceived by the authorities and the subject of the tax has been varying from unit to unit. Tax and its subjects are kept changing continuously and this coupled with targeting, like targeting consumption in 1981, and finally the last reform in 1986 has created destabilization in the economy and also a mixed tax structure half way suited to income tax and another half an amalgam of all the policies that were experimented with. It is argued that the solution is to do way with the federal income tax and replace it with a flat national income tax. Eminent personalities and thinkers are of the uniform opinion that the federal income tax is a mammoth that serves the treasury but depletes the economy with un-computed cost in its collection to all the components of the economy and is therefore too costly to maintain further. The general opinion is that it must be scrapped. Various authors have given various view points as to what must replace it. Some of the suggestions like VAT have been implemented in Europe and Asia. However the personal income tax still remains. Corporate tax avoidance can be interpreted by the IRS under section 249 as a sham.

The 'principal purpose' that needs to be established for corporate expenditure as it was stated, can also be avoidance of tax. But the interpretation of every action of a corporate entity has to be assessed by the experts for tax liability on account of the shadow of the federal income tax on the activities. To a great extent this hampers the market forces from operating in the economy. These are some of the greater difficulties and the effects of the law that is pointed out for its abolition. However we must also concede the point that being the greatest revenue earner with no other single agreeable solution in sight, what ever is their stand, any ruling party or government will be very slow and choosy in removing this tax which appears to have outlived its value.


In analyzing the federal income tax laws, we may conclude in the light of substantial evidence that the tax is the most revenue earning source for the federal government with a contribution of over 55% of all revenue. Tax form the corporate sector is 35%. The constant amendments, additions and modification to the law has made it so complicated that it is now costly to sustain it both from the view point of the taxpayers and the view of the establishment. The Internal Revenue Service causes excess burdens and overheads in introducing procedures. We can consider some alternatives like the proposed flat tax. But the arguments that it is not just to impose such a tax which will tend to favor more rich, and alternates like uniform sales tax, and other suggestion shave shown that the act can be replaced. It is true that the complicated nature of the tax and the fear of loss for investors reduced savings and retarded investments. Then the consideration to abolish the tax and seek some other system that can generate revenue exactly in the same proportion is necessary. To avoid stagnation and promote investments, there must be a separation between the income from stocks and other incomes. The globalization of the economy with venture abroad, and foreign investment in the country and the necessity of entering into tax treaties have made tax reform very urgent.

Now is the time when we must consider the method of reform such that the federal income tax is completely eliminated, which will lower the cost of capital. This is imperative to overcome not only the current market slump but also see that economic depression never occurs in the economy as a result of poor savings and investment. Strong supporters of reform have come out with suggestions like a 'uniform sales…

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