Term Paper on "Tax Law"

Term Paper 8 pages (3529 words) Sources: 6 Style: MLA

[EXCERPT] . . . .

Tax Law

The Nature of Federal Income Tax

The Federal Income Tax, History & Implications

Issues in the Taxation process

The need for reform

The tax laws of a country determine the profitability and adaptability of any business. The fundamental consideration in any economic system is the income and income tax. Income tax provides the state with revenue more than any other type of tax, and it has a lot of impact on economic growth and macroeconomic equilibrium in the economy. Consequently individual income tax and corporate income tax are seen as vital source of revenue and also an instrument to control inflation and bring out the economy during recession. For business, the income tax is a deterrent tin many spending and investing avenues, while at the same time forming an important part of the balance sheet, salary consideration and payments. The law therefore is very important in transactions of any commercial nature. The penalties for even inadvertent violations can be quite severe. This paper aims at unraveling the relation between the business economy and the federal income tax which is itself a subject of controversy.

The Nature of Federal Income Tax

Federal taxation is the major factor of funding for the U.S. government. In other words the existence of the Federal government is based on the generation power of its tax policies. The federal government relies on a number of tax instruments; the chief being income tax, the government also relies on excise tax, gift tax and so on. Business decisions are often made without considering the incidence of tax, which proves to be erroneous. Individuals are concerned with personal income tax while corporate ought to be concerned with the corporate income tax. Cost difference exists even between the different types of business entities like companies, partnership and proprietary concerns. The consideration of the tax consequences of any financial transaction or activity is a vital need to be successful in personal and corporate savings on tax. Non-payment or miscalculation of tax payment can have very disastrous consequences.

In the U.S. individual form of income tax is considered to the important factor with regard to revenue, accounting for 55% of government revenue. Corporate income tax after the tax reform act of 1986 created revenue of 35% from corporate entities. Corporations are taxed to almost 52% on their income. Tax evasion is a crime but avoidance is not. When the tax payer does not report an income taxable by suppressing it, an offence is committed that can lead to heavy penalties and even imprisonment. On the other hand tax avoidance is legal and that is one of the economic considerations of transactions. The IRS which is the authority that collects tax considers understatement of income, wrong deduction or accounting lapses. Corporate tax avoidance is important in creating policies, for all transactions including payments to stock holders as these are also taxed. The Internal revenue code, which lays down the rules for assessing tax, does not limit an entity from saving taxes. With this information it is easily possible to see the importance of taxes especially federal income tax and its impact on business.

The chief contribution in tax revenue is by federal income tax - to the amount of over nineteen billion Dollars in 1996 followed by social security to ten billion Dollars, and all other state and property taxes following suit. The economy which is composed of agrarian and business sectors have different tax burdens. For example the agrarian sector can use the cash accounting method to compute tax while the business and individuals have to use the accrual method. The difference in tax on investment in real estate and development is designed to give a boost to the industry. The current subjects of tax in the income tax sphere are individuals and corporations. Every U.S. citizen is liable to be taxed on their annual income from all sources. The tax is computed after deductions legally allowed.

The IRS code defines income as being attained from any source and will also include gains from any situation like interests, alimony, pensions, insurances and most of the earnings will be treated as income. The income of the individual accrues from either service or business activity. Wages and salaries form the major tax subject for individuals. Corporations are legal entities and income of corporations and business is also taxed as for the case of individuals. Under this policy, the income of the company is also paid out as dividend to shareholders, and for this also the company would have paid tax, and the dividend holder also pays tax for the amount as added to his or her private income. This anomaly is called as 'double taxation'. The governments in the economic interest of the country must always strive to avoid double taxation. Some of the deductions allowed are contributions to specified charity, interest available on the mortgages, tax which is being paid on the property, and certain deductions allowed on other taxes paid to the state of residence. These exemptions are available to individuals and corporate entities.

The Federal Income Tax, History & Implications:

The power of the U.S. government to levy the Federal income tax is derived from the 16th amendment to the constitution. The act called as the Federal income tax law came into force in the year 1913. The procedures and codes were later codified into the internal revenue Code in 1939. The code was re written a number of times. The latest - the 'Internal revenue Code of 1986' came to be after the legislature had passed in 1986 the Tax reform Act of 1986. The official orders of the IRS are called revenue rulings, and are procedures to be followed in all aspects of the tax matters. Revenue rulings ought to be obeyed and must figure in transaction cost calculations. Sometimes the authority issues procedure guidelines which also help in keeping up with the tax incidence and if necessary be used of avoidance of tax.

Issues in the Taxation process

Former U.S. President Jimmy Carter has considered the income tax as being a shame for humanity. This opinion is probably based on the enormous complexity of the tax acts. The Internal Revenue code is Greek and Latin to most people and the resultant chaos has given birth to many industries catering to the demand for elucidation. There are over four hundred forms that have to be filled for appropriate filing and the Internal Revenue Service works with one hundred million tax payers, and deals with over eight billion forms, in the course of the year. For the economy, the tax caused two important costs for all entities, which can be called the compliance costs.

The other economic cost which retard growth is called 'excess burdens' also called 'welfare costs' which include the fall in output and production caused by a high rate of federal income tax. In 1985 the business tax compliance cost was estimated to be Dollar one hundred and two billion. The important distinction and power of this tax is the effect it has in reducing the returns from investment in trade of stocks. In this manner the tax indirectly affects the economy and has become too complex and costly to continue. The total loss caused by the deadweight is a critical factor in any economic consideration. It is a factor that economists consider to find "means of achieving the program's goals that involve less government financing." For example such a decision could have been involved in the estimate of deadweight loss "that would result from financing an increased level of spending can be decomposed usefully into two conceptually separate parts."

This is considered to be an important element if made application to the federal income tax, need in-depth and thorough analysis about the amount of deadweight it has created. In alternate to it economists suggest a flat tax structure in its place which ought to be simple to comply and the incidence and burden of taxation curtailed. Flat taxes are not new, only that it is suggested to modify the income tax act to make it a type of flat tax. It is argued that at present the social security is a type of flat tax. Uniform rates are levied from all employed. A similar arrangement for the income tax has been mooted. There is no denying that individual and corporate income tax is the most important of the tax array that plays crucial roles in national development and the fate of business in the U.S. economy.

The payroll tax and income tax produce as was seen before, more than fifty percent of the revenue. Taxation is a major method to bring about social progress. Federal tax gains are inversely responsive to business trends. The tax serves to offset spending of private income, and the tax is progressive, that is higher the income, greater the tax. In contrast to the flat tax theory advocated, progressive taxation is advocated for the reason that tax burdens must… READ MORE

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