How Policies in the United States Affect Businesses - Coursework Example

How policies affect businesses: Name: Institution: Introduction Business in the modern world has been changing rapidly due to increased globalization which has brought about new opportunities and challenges as well. This has seen many policies being put in place to regulate business. Among these policies is the policy on taxation which plays a significant role in the day to day operations and profitability of many businesses. According to Hungerford (2012), tax affects businesses from two perspectives. First it is considered an expense for a business every time it is paid. Increase in the amount of tax paid by a business would have the same impact as increase in the cost of sales or any other expense such as an electricity bill would. . Tax also affects businesses due to its complexity in that, the business does not only incur the tax expense but it also needs to incur the cost of hiring an individual to compute and determine what the amount of tax to Be paid is, and also to keep records as evidence of payment. The main top agenda for most businesses is increasing profitability which is vital for the continuity of any business. A business can be in a position to absorb a rise in an expense such as tax in the short run but in the long-run, the business would require to cover these raised costs by raising their charges as well (Viard, 2007). How tax policies in Australia affect business The business and tax outlook has changed drastically in the recent past and the pace and complexity of the change continues to increase. Due to this, tax authorities are forced to re-strategize their tax enforcement by changing their policies and attention so as to adapt to the changing business environment and remain competitive (Hungerford & Jane, 2010). Businesses on the other hand are balancing between competing priorities, maintaining compliance with the set rules while also adding value. Attracting investments in Australia will improve the revenue from working as well as saving which is of much significance in bolstering the national income of the country. To attain an internationally competitive business environment, a country should well be able to balance the bases of tax and rates and put in place policies that motivate and seek to bolster this development. However, Hufbauer, (2002) notes that reduction in the amounts of taxes paid by businesses to bolster economic development with no corresponding change in the quality of public services offered transfers the tax burden to households. Australians living standards are attributed to the county’s economic performance. This is in a greater extent influenced by the level of productivity of investment in Australia which affects the level of economic output. Tax on these investments affects many of the drivers of economic growth. This effect could be on fixed capital, innovation, entrepreneurship, labour productivity and the exposure to trade and foreign direct investments hence supporting the argument that over relying on capital income taxes mostly corporate income taxes is not enough to maintain a stable and vigorous revenue base. However, in Australia individual businesses or companies are required to pay taxes to all levels of government; that is local, state and federal governments which is a major source of their revenue, which is in turn used to enhance the business and economic environment of these states and the country at large (Grubert & John, 1995). Companies and corporations in Australia pay tax on profits. The corporate charge is charged at a fixed rate of 30% on the profits of the company. The federal government also charges a value added tax of 10% on the supply of goods and services registered for this type of tax. This tax is then distributed to the states. The major source of finance for local governments is largely from taxes on land values charged on residential industrial and commercial properties. The country has tax policies which oversee and are followed by individuals as well as tax authorities with different forms of levies being charged on different instances. Additionally tax is also levied by state governments on land values for investors and primary residences of high value. Stamp duties are levied on transfers of land and other similar transactions (Gittins, 2009). Gittins further notes that the federal government of Australia policy to cap research and development tax incentives for enterprises whose annual turnover does not exceed $20 billion, is a sensible approach from a tax policy perspective. This measure would save the government about I billion dollars of public funding. The government of Australia is also considering lowering the corporate income tax rate so as to create a more competitive environment. How tax policies in the United States Affect Business The United States of America being a federal Republic is made up of states and local governments. Each of these governments has a tax it charges on the individuals, businesses and property in accordance to the federal or state tax policies. The tax policies can influence competitiveness through making the market more attractive than other foreign markets to other countries (Clausing, 2004). International competitiveness entails the ability of a domestic firm to compete with international firms in the international market. The current tax system of the United States is not attractive to international firms to conduct business or else make profits. The system also drives U.S multinational firms to invest in foreign markets where they pay lower taxes. This is because; the U.S does not exempt foreign income from taxes as compared to other countries, hence disadvantaging multinational firms with their headquarters in the country. These consequences are considered undesirable due to the tax system hence making United States less competitive in the global trade and driving some multinational firms away from the country (Zandi, 2011). The tax policy can boost the domestic capital stock by favoring local investments instead of investing in markets or economies outside the country. This can be achieved by taking foreign tax payments by multinationals based in the U.S as a deductible expense related with engaging in foreign trade, instead of allowing firms a tax credit for such payments as done currently and to necessitate current taxation of foreign income instead of the standing rule. Hungerfold & Jane (2010) notes that, it is argued by some economists, that the U.S tax system disadvantages local goods and services as compared to other countries that are more reliant on VAT on value added taxes. Under the current U.S federal laws and regulations, small firms tend to be treated more favorably than large firms. The tax code for instance indicates that small businesses can expense the cost of certain property in the year that it is placed into service, instead of recovering the cost over a prolonged time frame through annual depreciation deductions (Clausing, 20004). This benefit minimizes the tax liability for small firms straight away and eliminates the need for these businesses to monitor capitalization and depreciation. Under the tax code small businesses also enjoy the benefit of favourable treatment in capital gains from individual investments. For example in the year 2011, capital gains of up to 10 times the taxpayers basis in the stock ensuing from new equity investment, were exempt from income taxes if the business held stock for more than five years. The ability of a business to organize itself as a sole proprietorship, S corporations, partnerships or limited liability companies, exempts them from corporate tax. If a business is in a position to avoid the corporate tax code, the only left t tax obligation is the individual income tax. Due to this the growth of businesses that do not pay corporate tax has been on the increase hence leading to relatively low levels of federal revenue as compared to what the situation could be like were the businesses filed as C corporations instead of S corporations or limited liability companies (Grubert, 2010) Conclusions With both countries having the federal and local governments and being charged taxes on both levels, businesses are keen to move into localities where the tax burden is minimal so as to reduce costs and increase profitability. For instance a business can move its operations from one state to another one whose tax rates are abit lower. The tax policies in the United States seem to be less compact especially with the case of exemptions on corporate tax as compared to Australia that charges a flat fixed rate of 30% on incomes of corporations, especially where a business is registered as an S corporation or partnerships. Both countries however need to ease their tax policies with regard to international trade so as to attract investments from multinational firms and remain competitive in the global market which is a key source of income for the active countries. Tax as an expense, cuts a business’s profits and the company’s value of stock. For this reason, most governments create jobs by relieving the tax burden of workers in a company. If a state or country charges higher rates of taxes than other states or countries, businesses in this state cannot be in a position to compete with those in other regions where the tax rates are abit lower. Reducing taxes lowers the cost of operations for a business hence making the locality or the country more attractive to businesses. It is widely perceived that for a business to rapidly grow, taxes must be minimized at every available opportunity. However, most businesses today don’t pay a lot of focus on taxes when making location and expansion decisions. Other factors considered to be of more importance includes; access to suppliers and buyers, labour skills, and improvement of life quality. References Clausing, K., A.(2004), The American Jobs Creation Act of 2004: Creating Jobs for Accountants and Lawyers, Tax Policy Issues and Options Brief 8 Washington: Tax Policy Center. Desai, M., A. and James, R., H. (2003), Value Added Taxes and International Trade: The Evidence, working paper, Harvard Business School. Grubert, H. (2001), Enacting Dividend Exemption and Tax Revenue," National Tax Journal 54, no. 4 (2001): 811-27. Grubert, H., & John, M. (1995), Taxing Multinationals in a World with Portfolio Flows and R&D: Is Capital Export Neutrality Obsolete? International Tax and Public Finance Journal 2, no. 3 : 439-57. Hufbauer, G., C. The Foreign Sales Corporation Drama: Reaching the Last Act?" International Economic Policy Briefs PB02-1. Washington: Institute for International Economics, November 2002). Gittins, R. (2009), A light on the hill for our future tax reformers. The Age. Hungerford, T., L. (2012), Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945. Congressional Research Service http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf Hungerford, T., L. and Jane, G. 2010, Business Investment and Employment Tax Incentives to Stimulate the Economy. Congressional Research Service. http://assets.opencrs.com/rpts/R41034_20100122.pdf Viard, A., D. (2007) Border Adjustments Won’t Promote Competitiveness," Tax Notes (December 4, 2004): 122-24.Author: Kimberly Clausing Last Updated: October 17, 2007 Zandi, M. (2011). An Analysis of the Obama Jobs Plan. Moody’s Analytics. http://www.economy.com/dismal/article_free.asp?cid=224641 Read More