Proposal For Tax Reform.
Tax deferral is an opportunity that many United States companies have taken advantage of. The citizens who have invested on such companies have also benefited from it. It refers to a situation where companies are allowed to pay their taxes at a future date. This payment is sometimes extremely important for such companies. One of the recent proposals by the American government is to abolish deferral corporate taxes. There are many arguments raised for and against this proposal. This research paper will evaluate the benefits and costs associated with this proposal.
Many united state companies have branches in other countries especially with the increased globalization. These companies face competition from other companies present in these new countries. The taxation system in the United States is such that it allows corporations with subsidiaries outside the United States to submit their corporate taxes at a future date. This allows the corporations to prepare their financial statements and submit them to the main branch so that the company can then pay the necessary taxes to the united state government. The shareholders of such companies benefit in that their capital gains are taxed only after their dividends are paid which takes time.
When the subsidiaries are such that they are incorporated in another country, the United States government receives taxes only after the subsidiaries have paid their profits to their home company. This means that it may take more than a year for the United States government to receive the taxes. This is because the deferred taxes are paid only after the receipt of profits from the subsidiaries.
The new policy requires that United States companies operating in foreign countries pay their taxes like any other company operating locally. This means that the companies operating internationally will not be given additional time to submit their corporate taxes as it is now. Failure to submit the taxes in time will results to interest charges for any unpaid taxes. Tax deferment was meant to enable these companies prepare the financial statements of the subsidiaries to enable them pay the taxes.
The results of this policy have been that companies have delayed the payment of their taxes for the benefits associated with accumulating money for use within the company. The United States government has suffered because these funds rightfully belong to the government. The proposed tax reform by Obama government suggests that a residual tax is imposed on all the deferred taxes. The effects of this tax are that the costs of deferring taxes will increase. The companies will be motivated to defer taxes because the longer it takes to pay the taxes the more cash they pay to the government.
One of the arguments against tax deferral is that it causes balance of payment problems. It plays a role in reducing United States export to other countries. Reduction of exports from United States affects the balance of payment of the country negatively. Another argument is that it reduces employment in the United States. When these companies expand in foreign countries, they employ citizens of that country hence these opportunities are lost by the United States citizens. Deferred taxes also reduce the amounts available to the United States government for expenditure. This income could have been used by the government for beneficial purpose.
With the new tax reforms, the overseas companies will not be motivated to defer taxes. They will realize that the costs of deferring taxes are very high hence will pay their taxes in time. These high costs will eliminate any incentives of evading taxes. The government will be able to collect taxes in time so that development projects planned in a particular fiscal year can be implemented.
The new proposal will result to improved social welfare. This is because the cash got will be used to provide social services now and not in future. The society will therefore benefit with the current improved social services hence their social welfare will be improved. However, the welfare of the companies will be affected negatively. This is because they are required to pay taxes before they have prepared their financial statements. The fines imposed to them if they do not pay taxes in time also reduces their welfare.
The new system of taxation will create fairness in taxation. Since other United States companies pay their taxes in time, it is also just for the subsidiaries to pay the taxes in time also. Any advantage of investing in foreign countries will be eliminated and companies will be encouraged to invest in the United States. This will create jobs for the United States citizens in addition to increasing the gross domestic product of the country. An argument against the new proposal is that it will lead to unfair competition with other companies in the foreign market. The taxes levied by the federal government to companies are very high. This increases the costs of the organization making it difficult to compete with other companies.
In absence of tax deferment, it becomes difficult to run the affairs of the companies. It becomes difficult to meet expenses such as payment of salaries to the employees. This is considering that some sales by the foreign companies do not involve cash. These companies need time before they can collect cash and then meet the payment of taxes.
The new tax deferment policy will make it difficult to re invest the money generated as profits. When there are tax deferment, companies re invent their funds facilitating expansion of the organization. With the new proposal, the foreign companies find it difficult to expand their activities. Growth of these companies therefore becomes difficult.
International companies from the united states are important in that they help in bringing foreign exchange. Even though a new policy is being adopted, the government should evaluate the extent to which the international companies will be affected. There a need to give incentives to the international companies so that they remain profitable even after the new policy is adopted.
The government should however consider the negative effects the new policy will have on the companies. It is obvious that competition between international state companies and companies from other states will be very difficult. Some companies from other countries are charged less tax rates to enable them compete favorably in the international market. Therefore, the government should consider giving the companies’ time before they can pay their taxes. The penalties of differed taxes should also be lowered to enable them compete favorably in the market.
The new tax reform can be observed to be of benefit to the government. This is because it because tax evasion becomes difficult. The government also benefits from deferred taxes as the company also benefits. The government is able to collect revenues in time hence implement various development projects. However, the new proposal threatens the activities of foreign subsidiary companies. However, the new proposal creates fairness in competition between the United States companies. The proposal has more benefits than disadvantages and this is why it is good if it is adopted.