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Tax Reform - Essay Example

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 Tax Reform Name: Institution: Tax Reform Since the 19th century, Americans seek tax reforms to reduce forms of taxation subjected on citizens and corporations. In the US, the issue of taxes is a touchy subject with the government and other stakeholders seeking to find a mutual ground (Shapiro, 2005)…
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Tax Reform Essay
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"Tax Reform"

Common Tax Loopholes In principle, the US has one of the highest rates of corporate tax globally. However, in practice, US corporations pay low taxes. The Government Accountability Office estimates that the average tax burden is 25.2% because corporations use loopholes to escape taxes. This lack of tax payment emanates from the many exceptions and loopholes in the US tax code (Reinhart, 2008). Some of the common corporate tax loopholes include deferral of income earned overseas, deductions for overseas shipping jobs, and reductions for domestic production, last-in first-out system of accounting, deduction of accelerated depreciation, corporate jet reduction and deduction of punitive damages (Shapiro, 2005). Deferral of overseas income allows multinational companies to defer payment of income taxes on profits realized overseas until they transfer the profits home. In reality, corporations leave their profits overseas thereby deferring taxes indefinitely (Shapiro, 2005). In addition, the transfer pricing accounting technique allows corporations to transfer profits from the US to offshore havens so the profits become overseas earnings. The federal government accrues a $100 billion loss per year because of offshore tax abuses (Steuerle, 2008). The federal government should prohibit transfer of profits earned in the US to offshore accounts by illegalizing the transfer pricing system of accounting. The government should also require companies to account for overseas profits and pay taxes on such profits (Reinhart, 2008). Companies also elude taxes through deduction of punitive damages. The tax code provides that when companies pay punitive damages, they can write them off as necessary and ordinary company expenses. Therefore, after paying punitive damages, companies typically pay lesser taxes than they should pay. For instance, Exxon’s settlement of $1.1 billion for the oil spill in Alaska, in reality, cost the company $524 million after deducting taxes. It is paramount that the federal government does away with this deductibility to seal the loophole (Steuerle, 2008). Benefits of S Status The US government established rules on S corporations in the mid 20th century to simplify the process of business ownership. However, when a company attains S status through the ratification of the IRS, the company’s owners or shareholders enjoy lenient taxation protocols. In S corporations, profits and losses pass to shareholders thus tax payment occurs once (by individual shareholders). S status for corporations is, therefore, disadvantageous to the federal government because S corporations are ineligible from paying federal income taxes (Reinhart, 2008). While some states charge state tax to S corporations, the companies are still ineligible from federal tax (Shapiro, 2005). The federal government also suffers loses when company owners give personal loans to S corporations (Steuerle, 2008). When S corporations incur losses, owners can inject company capital then deduct the losses from their personal returns. This means the business owner will pay low amounts of personal returns to the government. Gift Tax Laws The US tax law on gifts is quite unfair to the taxpayer. This law on gifts holds that a donor pays tax on the transfer of money or property to another person if the donor receives nothing in return for such a transfer. The gift tax law applies regardless of whether or Read More
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