Taxation of Small Businesses - Assignment Example

Taxation Taxation Q The fundamental issue inherently discussed within the chapter relates to taxation system concerns over small business. In discussing the taxation related issues of small business, the chapter also addresses both incorporated and unincorporated tax systems by providing the plausible need to tax capital income at reduced rates than that of labor. It is imperative that the chapter elusively elaborates the set of structural issues, which relates to how tax systems collect revenues from owner-managed businesses and other small business investments. The chapter also addresses the most fundamental implications of tax policies on small businesses in relation to a country’s economy and development. It is indispensable to understand that the issues here in addressed directly affects taxation systems including the manner in which governments design such revenue collection agencies. In addition, issues regarding taxation of small businesses directly affect the interactions between income from capital and income from labor. It is extremely fundamental to address the structural issues within taxation systems as they directly involve interface between taxation of unincorporated and incorporated firms. Moreover, the structural issues within taxation systems regarding small businesses directly affect the inherent relationship between business and personal taxation (Crawford & Freedman, 2010). The aforementioned issues regarding taxation of small businesses and structural issues remains authoritative in designing the most sensible corporate or personal tax system. Therefore, the chapter specifically aims at conducting a special study that would critically address the aforementioned taxation issues. It is imperative to understand that the inherent structural issues herein discussed restricts the chapter discussion to addressing only specific issues regarding taxation of small businesses. Consequently, the chapter focusses on structural issues that relate to business activity taxation beginning from self-employment that entails unincorporated ventures, sole-proprietorship, or partnership. Other plausible taxation issues addressed by the chapter relates to incorporated businesses including owner-managed companies, employed individuals and small business entities. The chapter addresses the great divide that exists within taxation systems involving the substance and practicalities of tax variation amongst different taxpayers. It is domineering to explain the rift existing within the spectrum of taxation amongst different groups of taxpayers from unincorporated to incorporated businesses. It is authoritative to understand that permanent, full-time, and standard employees require different tax treatments compared to other incorporated businesses. It is essential to address the great divide that exists between taxation systems for incorporated, unincorporated, employed, and the self-employed individuals. Need to address the aforementioned divide results mainly from the different rights, obligations, and legal relationships that inherently exist amongst the tax groups. The chapter discusses various solutions that remain plausible for taxation systems in addressing the aforementioned divides amongst taxation groups. It would have been plausible to address the great divide between the two taxation groups by treating employees, companies, and small business spectrum in similar manner during taxation. Such suggestion would involve incorporating the different taxation groups on similar receipts and rate. However, it is domineering to understand that the aforementioned suggestion may not remain attainable in a normal tax system for various reasons. First, differences in legal systems implicate that employees incomes cannot remain equated to those of businesses mainly because the latter aims at gaining profits. In addition, the suggestion may not remain plausible due to the inherent lack of neutrality between taxation of varied types of business. Besides, there exists significant difference between taxation involving labor income and those levied on income generated from capital invested in businesses. Addressing the aforementioned structural problems requires the new taxation system to tax capital income at lower rates than that of labor. Such new strategy would enable the taxation systems to achieve the suggested remedy without exploiting re-characterization of labor income mainly as capital income. It is imperative for taxation systems to remain practical and equitable to address the aforementioned issues. Q 2 The most plausible approach to begin with in addressing tax implications of the differential tax treatment would first involve making the systems remain neutral cognizant to legal form that must comply with commercial factors. It is imperative to understand that tax differentials do not affect the choice of legal forms. In addition, the tax differentials do not always target entrepreneurs. However, the tax differentials normally create costs for revenue authorities and business. In addressing the implications in tax systems by reducing inequalities, the below-mentioned approaches are indispensable. It is imperative to restate that tax systems that address the tax differential implications demand neutrality and equality. Addressing the inequalities would be vital in applying effective tax rates to the defined small unincorporated and incorporated businesses. Authors of the inherent chapter have proposed several approaches including deterring or preventing incorporations, having mandatory pass-through treatment and initiating optional pass-through treatments. Other approaches of addressing the implications include special rules for companies with active owners, and rejection of definition-based approaches. Deterring or Preventing Incorporation The most amicable method proposed by several taxation systems would involve preventing the small businesses from incorporating mainly by increasing minimum capital requirements. Consequently, majority of small business would remain as unincorporated and be taxed using personal taxation system. The method would enable tax systems to eliminate, the existence of re-characterization of income. In addition, preventing incorporation of small businesses strategy would attract political support in UK as it remains as an acceptable policy amongst politicians. Mandatory Pass-Through Treatment Mandatory pass-through treatment would involve taxing particular incorporated businesses as unincorporated. The strategy would involve aligning the NICs treatment of both the self-employed and employed individuals. Aligning such treatments would involve integrating NICs and income tax. In addition, it would be vital to treating income generated from owner-managed companies mainly as labor income. Consequently, tax rates would remain aligned on capital and labor income for the specified group. Special Rules for Companies with Active Owners The existing dual income tax systems in UK and other Nordic countries face various challenges relating to taxation of small businesses. Dual income tax systems have the potential of combining relatively low, flat rate of income from capital investment with progressing taxation of income from labor. The special rules have been essential in addressing income taxation related issues defined by active shareholders Rejection of Definition-Based Approaches Rejection of definition-based approaches has been imperative in addressing various taxation issues in very many countries. The approach is essential in eliminating the inherent problems associated with subjecting income to compulsory divisions and components of income from labor and capital. It is imperative that the approach have been vital in addressing the aforementioned tax related issues in Sweden and Norway. Therefore, a similar scenario in United Kingdom would comprehensively be authoritative in eliminating tax implications. Moreover, the approach has been imperious in addressing issues experienced with defining MSCs and PSCs in United Kingdom. The most formidable solution in dealing with issues of taxation would largely rely on defining the existing sub-categories of types of shareholders or companies. Q3 The most fundamental historical trend amongst self-employed and the employed individuals within the taxation system relates to the difficulty in aligning boundary between the two taxpayers. The historical trend between taxation systems of employed and self-employed have resulted into various structural issues in association with taxation systems within United Kingdom. The structural issues of boundary between the two taxpayers have resulted into various implications for taxation UK taxation system and even prompting the need to address the existing tax differentials. The government of UK has addressed the structural issues that have affected taxation of employed and self-employed individuals through withdrawal of the known starting rate mainly for corporation tax. In addition, tax systems have solved the structural issues by increasing rates of social security contributions mainly referred to as National insurance contributions (NIC) that self-employed and employed individuals pay. The aforementioned developments within the taxpayers have heightened the taxation systems and led to emergence of the potential tax advantages that may remain in existence for both the employed and unemployed individuals within United Kingdom. The inherent tax trends that have existed within United Kingdom have resulted into many taxpayers problems including lack of fundamental choice other than to remain as an employee to experience the existing tax advantages. The inherent structural issues have led to the perception that being an employee within the economy of United Kingdom would result into considerably fewer tax burdens compared to existing as self-employed. The perceptions have led to various implications amongst the taxpayers including making the choice of either being an employee or self-employed when remitting tax. Consequently, to avoid taxation disadvantages associated with self-employed taxpayers; most individuals make the choice of representing themselves as employed. It is imperative to understand that the existing distortions in historical trends of taxation systems have resulted into various effects mainly on taxpayers. Mostly, large proportions of employees feel that the tax system treats them unfairly. However, it is imperious to understand that any attempt aimed at counteracting the unfair treatment felt by the employees within the economy may result into anti-avoidance provisions. The anti-avoidance provisions may remain targeted at only owner-managed business entities or the self-employed. In addition, mitigating the unfair treatments felt by employees within the taxation systems may led to great influence on the entire design of the corporate taxation systems in United Kingdom. Based on the existing historical trends between self-employed and the employed within the taxation systems in United Kingdom, it is essential for the government to consider making needed reforms to the existing entire spectrum of legal forms. For instance, treating the self-employed individuals as employees during taxation may consequently contribute to a great difference between the unincorporated and incorporated businesses. In addition, it is imperative to understand that it may remain extremely difficult to attain total alignment within the tax system and NICs treatment for all the taxpayers. The inability to attain an alignment across the spectrum of taxpayers mainly emanates from the underlying differences in legal forms amongst the groups. Mostly, the self-employed individuals may not have similar legal obligations and rights that exist for unincorporated businesses and the employed persons (Crawford & Freedman, 2010). The main solution to the underlying issues between the taxpayers in United Kingdom including the self-employed employed and difference business entities remains need to have an effective tax rates system. The effective tax rates systems must only remain in consideration after taking into account the inherent capital investment issues within the taxation system. It is imperious to understand that the existing problems within employee and self-employed boundary issues may greatly affect taxation systems. Addressing the inherent boundary issues through initiation of equitable taxation systems would be domineering in avoiding implications such as tax avoidance issues. In addition, maintenance of an effective UK tax system that addresses the historical trends of employed and self-employed boundary issues would require increase of neutrality across the spectrum of taxpayers. Increasing neutrality would only remain possible through alignment of NICs rates mainly for all of the employed and self-employed individuals. Besides, increasing corporate tax for the small companies and attempting to align it with the central corporate tax rate would improve neutrality within the taxation system. Moreover, such an alignment would greatly raise the effective tax rate that the system levies on dividend income. Q 4 There is need to address the differential tax treatment within the economy mainly for the purposes of enabling survival of the small businesses. It is imperative to understand that a sustainable economy should have all of its segments beginning form the highest-level rank to the lowest including that of small businesses completely active. Addressing differential tax issues would consequently allow government of United Kingdom to support survival of small businesses within the society. There exist various reasons in support of the need to address differential tax issues and consequently make taxation systems favorable for small businesses within an economy. First, there exists enough rationale suggesting that addressing differential tax issues would lead to ability of an economy to counteract the inherent market failures. Various market failures may exist within the economy that may directly affect survival of small firms for instance, the asymmetric information that results into monopoly of the market by larger firms. It is imperative that the complete dominance of larger businesses in the market makes it extremely difficult for small businesses to practice or venture (Crawford & Freedman, 2010). In addition, the asymmetric information that may directly affect small businesses includes issues relating to inability of small businesses to raise enough finances that may foster their development. It is essential to state that the aforementioned market failure related issues might be vital in giving the most plausible reason for justification of general tax reliefs. Tax reliefs are vital in relieving small businesses and fostering their survival within the economy. It is indispensable to understand that addressing the tax differential issues would remain essential in assisting small firms and the market in general mainly because of spillover effects resulting from innovative activities initiated by smaller businesses. Addressing tax differential issues is indispensable in dealing with capital market failures that may affect small businesses. Though established small businesses in United Kingdom have lesser needs for capital mainly due to availability of support programs that grant them financial support whenever requested, there is need to assists the upcoming businesses. Research indicates that small upcoming businesses within United Kingdom find it extremely difficult to access finances. Addressing tax differential problems would help in mitigating the factors that directly contributes to the principle finance gap issues that exist amongst start-up small businesses. For instance, mainly due to address of tax differentials, there have been attempts to target tax assistance with the aim of raising external finances for the small businesses that experience finance problems. Enterprise investment schemes, Corporate venturing schemes and venture capital trusts remains as some of the most fundamental tax assistance groups. The government of UK has established the schemes with the aim of addressing finance problems that affect small businesses. Based on the aforementioned market failure issues mainly resulting from inability of the small businesses to support themselves financially or monopoly from larger firms, there exists need to address the differential tax problems. Addressing the differential tax issues would help in providing amicable solution to reduce monopoly of large businesses in the economy and provide financial support to small businesses through the aforementioned schemes (Crawford & Freedman, 2010). The second plausible rationale for addressing the inherent differential tax issues involves the need to mitigate inherent disadvantages of existing as small businesses in the economy including regressiveness of compliance costs, asymmetry of taxable losses and profits. Third, addressing the differential tax issues would enable small businesses to survive within the economy by preventing any potential break up that would threaten continuity of the important parts of the economy. It is essential to note that the survival of small businesses within the economy remains extremely necessary in addressing unemployment issues and creation of wealth. Small businesses can provide employment opportunities for several citizens in United Kingdom besides ability to provide constant flow of wealth to the economy. Besides creation of employment opportunities and wealth, existence of small businesses is also imperative in stimulating business competition that would consequently raise the economic status of United Kingdom. It is imperative to understand that the aforementioned rationales justify the need to address the tax issues with the main aim of making taxation systems more favorable to all economy stakeholders. Bibliography Crawford, C. & Freedman, J., 2010. Small Business Taxation. In: Taxation. New York: Oxford University Press. Read More