Research Proposal on "US Tax Policy"

Research Proposal 7 pages (2407 words) Sources: 5

[EXCERPT] . . . .

U.S. tax policy

Although smokers may hate to hear it, tax policies used for the purpose of social engineering do seem to work. According to USA Today, "Cigarette sales fell 18% in North Carolina last year after the tax was raised in two steps to 35 cents from a nickel" (Cauchon 2007). Eventually, no matter how powerful the addiction to cigarettes may be, the economic law of scarcity and finite resources must win out -- eventually people cannot afford to smoke, and so they quit or reduce their consumption. Smoking not only hurts the individual, it also harms the individual's friends and family who are exposed to second-hand smoke. It harms society, as smokers suffer more health complaints, not just long-term health complaints like lung cancer, but also more minor illnesses like colds because of their compromised immune systems, which results in lower productivity and higher health costs that must be born by the entire nation. The argument made in 2007 in favor raising the tax on smoking in Congress, even during a time of an economic slow-down, was that it could be used to support health care for children (Cauchon 2007). Smokers 'tax' the health care system with their illnesses, the argument goes, so why not force smokers who refuse to quit to give back to the health care system, taking away at least some of the money that they are channeling into the pockets of the companies that feed their addiction.

Although this attitude may seem puritanical, even regressive, given that smokers tend to be poorer on average than non-smokers, it is worth remembering that there are few 'morally neutral' taxes that do not engineer social policy to some degree. The recent economic stimulus package that gave back tax dollars to Americans to encourage them to spend on consumer goods suggested that spending more to stimulate the economy was a moral imperative, even if many Americans are in debt. Sin taxes on alcohol reflect the attitude that alcohol is an unnecessary substance that acts as a drain upon society, even though for many individuals from many different cultures it has profound religious, social, and spiritual significance -- more so than so-called 'junk food' that is not similarly 'sin taxed.' Placing sales taxes on certain goods but not on other goods in general suggests what we think of as necessary or unnecessary goods as a society, while giving sales tax holidays in certain cities or states implies that spending to stimulate the economy, even on luxury goods, is positive for society.

Taxes on goods and services are regressive taxes, taxing individuals regardless of income who feel or must buy certain goods. The idea is that there is 'choice' to pay these taxes, unlike income taxes, which are progressive or based on income. This is to ensure that individuals who make less money have more money to buy basic goods and services, and is based on the assumption that the more money an individual makes, the less he or she 'needs' every extra dollar. There is a moral implication in this as well, that the richer members of society should give back more to that society than the poor. Everyone beyond a certain income pays something, in exchange for the goods, services, and opportunities they have received. However, people with children in the public schools do not pay more than people with children in the private schools, as the assumption is that we all benefit from education, even though people might argue that individuals with children benefit more from these services than other tax payers. The moral implications of tax policy vary, mixing progressive and regressive measures, and reflect the philosophy of 'giving back what you receive' to some degree, but not perfectly, and perhaps cannot reflect this ideology perfectly.

Works Cited

Cauchon, Dennis. Smoking declines as taxes increase. USA Today.

August 9, 2007. http://www.usatoday.com/news/health/2007-08-09-1Alede_N.htm

Question 2 tax shelter is a legal or extralegal "method of minimizing or decreasing an investor's taxable income and, therefore, his or her tax liability. Tax shelters can range from investments or investment accounts that provide favorable tax treatment, to activities or transactions that lower taxable income. The most common type of tax shelter is an employer-sponsored 401(k) plan" ("Tax shelter," Investopedia, 2008). Other examples include real estate and losses on investments (Wong 2005). Thus, although the concept of 'tax shelter' may sound like a shady proposition, it does have legitimate uses. Social security is not enough for retired individuals to live off of, in today's economy. Thus encouraging individuals to save for retirement and to be less of a burden on society seems like a legitimate reason to create a tax shelter. The government is wise enough to know that people are unlikely to save for retirement, because as a young person, the individual is more focused on the short-term (such as paying off student loans or saving for their children's college tuition). Thus by creating a tax shelter of a 401(k), legitimate social policy that is beneficial for both the individual and society is engineered. Even being able to deduct losses on investments encourages individuals to take risks, funding risky new corporate ventures that could benefit society.

In contrast to these positive acts of social engineering, an abusive tax shelter is an action created merely to hide income, resulting in "no meaningful [real] change in a taxpayer's income or assets," unlike a 401 (k) which defers income that the individual could otherwise spend in the present to the future ("Abusive Tax Shelters," Missouri Department of Revenue, 2008). "Abusive tax schemes may involve the use of multiple layers of domestic and foreign pass-through entities such as Trusts, Partnerships, S-Corporations, and Limited Liability Companies," that lack real merit ("Abusive Tax Shelters," Missouri Department of Revenue, 2008). For example, someone could create an LLC that was not really a company at all, except in legal name, but use personal expenses or losses as deductions that could be interpreted as business expenses. No greater social interest is served other than the enrichment of the individual. Thus, in contrast to the 'good' served by the tax shelter of a 401 (k), no greater good is served by this type of abusive tax shelter.

Another example might be creating a business loss that only exists on paper: "Joe wants to create an artificial loss to shelter it from taxes. To do so, his accounting firm advises him to enter into offsetting options. In our example, Joe will buy and sell options in identical amounts at identical prices on the euro/U.S. dollar foreign exchange rate... Joe creates an overstated tax cost for a partnership interest by transferring offsetting options to the partnership, but he really didn't lose any money" (Wong 2005). The line between abusive and illegal tax shelters is often very fine, where "transactions like these are conducted solely for the purpose of evading taxes" and thus the IRS is beginning to take an increasingly dim view of what was once considered abusive but not entirely illegal.

Works Cited

Abusive Tax Shelters." Missouri Department of Revenue. October 22, 2008. http://dor.mo.gov/tax/taxshelter.htm

Tax Shelter." Investopeida. October 22, 2008. http://www.investopedia.com/terms/t/taxshelter.asp

Wong, Grace. "Anatomy of a Tax Shelter." September 9, CNN. 2005. October 22, 2008. http://taxes.about.com/gi/dynamic/offsite.htm?zi=1/XJ/Ya&sdn=taxes&cdn=money&tm=13&f=20&tt=14&bt=0&bts=0&zu=http%3A//money.cnn.com/2005/09/09/news/fortune500/scandal_taxshelters/index.htm%3Fsection%3Dmoney_latest

Question

No one enjoys paying taxes. The letters 'IRS' (Internal Revenue Service) can send a chill down the spine of even the steeliest individual. In theory, the IRS is fairly benign, merely a tax collection agency that enables modern government to function. The average United States citizen actually pays less of his or her income in taxes than many Europeans and other members of the developed world. However, accusations remain that taint the IRS. The IRS, during the Nixon years, was accused of targeting individuals for audits deemed enemies of the state (Thorndike 1997). It is worth reflecting that being subjected to an audit by the IRS is considered such a terrible experience that having one inflicted upon you is a kind of punishment. Individuals are regularly audited by the agency, selected somewhat at random, or flagged because of what may be innocent inconsistencies, such as the fact they operate a home office or own a small business with many deductions. The bureaucracy and the regulations regarding federal tax policy are so complex it requires a professional to understand one's taxes, for the most part, even though every citizen is required to pay taxes.

In response to an argument for the existence of the IRS it could be countered that America was born as a nation where no taxation without representation was a slogan that propelled the colonialists to revolt, and Americans have always hated taxes, regardless of the source. But the red tape and secrecy of the IRS has proved to make it a particularly hated agency. While no one would seriously consider abolishing the IRS, given the need for substantial revenue to support the modern military, and even the most basic functions of modern government, greater simplicity and transparency is required to restore faith and… READ MORE

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