Corporate Tax Reform - Research Paper Example

Research Paper - Corporate Tax Reform Research Paper - Corporate Tax Reform Corporate Tax Reform refers to the process of revising the manner in which the government collects and manage taxes from corporate organizations. USA corporate tax, however, remained without significant reforms since 1986 when it had Tax Reform Act. Economists and analysts attribute foreseeable success in the current cooperate tax reforms in America (Sperling, 2014) 1. Bartlett (2012)2, identifies tax reforms as a vital policy concern of the American government. The recent economic slowdown contributed significantly to drop of federal revenue. Aggressive tax avoidance involving hiding profits that corporate earned overseas further diminished federal revenue. Corporate tax revenue share that included total federal tax revenues collapsed (Maples & Graveled, 2011)3. Consequently, federal revenues declined from 28% in 1950’s to less than 10 percent since the 1980’s. A big percentage of corporate profits that contribute a big percentage of federal revenue have also followed the same trend of decline. In 1950’s, corporation groups paid not less than 49 percent to federal income tax. However, the percentage dropped significantly to only 25.3 percent from 1990’s. In addition, despite the boom years of the 1990’s, share of the US economy remained sharply lower representing only two-fifths of GDP share in the 1950’s hence a drop in the federal revenue. Finally, since corporations in America bear the lowest income tax revenue compared to other European countries, United States bore the heavier burden to cater for the deficit in income tax. As a result, federal revenue decreases. Lowering tax rates implies a significant increase in the corporate income. Apart from income increase, tax inversion makes it safer to venture into business opportunities that organizations regarded as too risky to take. In the recent past, for instance, Endo Pharmaceutical made a bid to purchase Auxilium, a close competitor (Sullivan, 2011)4. Lower tax rates covering mergers and acquisitions influenced Endo Pharmaceuticals to proceed into a risky bid. In addition, if shareholders of a foreign company own only up to 80 percent of its shares, a US corporation enjoys payment of lower tax on subsequent earnings. Such corporations also evade paying taxes to the US on any cash they store outside the country. Consequently, companies easily enter into the market, increase market share, expand the list of therapeutic specialists, and use a single opportunity to reduce their tax rate. Furthermore, with tax reversion, corporations use transfer of pricing or shifting of drug patents, trademarks, and assets to lower their tax rates. Tax inversions also aid in providing lucrative alternatives to a strategy of transfer pricing because it provides for more flexibility in profit spending. As a result, future earnings remain subject to a low tax rate in foreign countries and companies as well use it to pay dividends to investors. Lower tax rate also accord companies an opportunity to acquire more companies alongside paying off debts. Tax inversions also have the capability of improving finances of the corporation on paper as well as on in practice. However, tax inversion has weaknesses of giving loopholes to the corporations to cutting their tax rates for years. It also creates frictions at times between profit business models and idealistic beneficence of healthcare (Sullivan, 2011). Tax inversion exerts pressure on companies to produce more affordable products because the companies enjoy tax waiver. For example, biopharm companies face pressure to produce more affordable drugs from both public and government. USA has remained without significant corporate tax reform for the last two decades since the Tax Reforms Act that took place in 1986, while reductions abroad continue to spread. Consequently, income tax rate of America has remained the highest among the industrialized countries. Government can make this possible by creating a fully independent economy. Many US based corporate undergo inversions hence taking advantage of much lower taxes. Any corporate that has undergone inversion does not have to continue pay US taxes, but instead, it only participates in paying taxes on US domestic generated income. Multinational corporations and there are becoming increasingly aggressive in finding means of shifting their US profits, to offshore tax havens on paper. Consequently, they avoid their US tax obligations, thus paying little or no taxes. Tax reform is important to the US economy and the corporate in various ways. First, tax reforms lower tax rates simplifying system and making it work for all US citizens. Individual benefiting from tax reforms include those who have lower corporate and individual tax rates with fewer brackets. Further, tax reforms would reduce inefficiencies as well as unfair tax breaks. Tax reforms will also eliminate or reduce deficits (McIntyre, Gardner & Phillips, 2014)5. In addition, it will also increase job creation and economic growth in America. Consequently, US will become both competitive globally and stronger domestically. In the USA, tax reform begun in the congress between 1913 to1939. The Congress noted the Revenue Act of 1928 as a model of the structure simplicity filled with regulations and rulings. Congress did the tax reforms when the US government need for money was minimal (Galvin, 2011)6. The congress, therefore, just gave a gentle bite of taxation to the households. Corporate only paid tax at a rate of up to 12 percent. During this time, US government was operating on surplus. Further, government at one time even asked the Congress to refund some portions of taxes that they collected in 1925. The Congress released blueprints for Basic Reforms in January 1977 followed by a major shakeup when report of the Royal Commission on taxation. Blueprint proposed two plans that included an income tax base that is comprehensive and would treat all achieved accretion equivalent to income. The taxable base would comprise the taxable base that had to ensure low expenses than the income produced. Secondly, the blueprint proposed that cash flow and consumption should utilize the same comprehensive base. However, it would allow a deduction for all savings or investments. The Blueprint was the most constructive beginning of US tax reform. In 1981, US government instituted into law the Economic Recovery Act, which reduced expenditures across the economy except for an increase in military expenses. Finally, the American government duplicated efforts that arcane rules designed. The 1981 fiscal stimulus that advocated tax cuts in America were successful. It brought down the level of inflation while preventing the occurrence of a recession in the economy. Tight monetary policies applied by the Fed were fundamental in enhancing economic recovery in the post 1970s American economy. The first income tax Canada imposed was in 1917, though survived through forces of amendment until 1948 until the government enacted other tax rules. Between 1920’s and 1930’s, tax rates remained low through rates improved by 1966 from 12.8 to 80 percent. Both Canada and USA systems experienced dissatisfaction with their development on tax measurements. Duration of 1962 to 1967 marked the most significant Canada’s venture into tax reforms. It reviewed tax policy using a body known as Royal Commission on Taxation. The commission showed contrast to the American system where the congress, a political body, took over the tax reform process. The commission was an independent body free from political influence and interference. The commission published its multivolume report in 1966. Like the case of America, Canada also proposed adoption of The Haig-Simons definition that income equals accretions to wealth as well as consumption and gift transfer (Galvin, 2011). The Carter Commission of Canada made revision recommendations that were fundamental though similar to those of the United States. It gave the benefit of a comprehensive tax base. The Carter Commission Report spread across both in USA and abroad attracting a response from all stakeholders. In 1969, Canadian government released a white paper concerning tax reform to give a response to Carter Commission Report. At this point, parliamentary response came in the form of Income Tax Act of 1971. The Act provided for lower rates, tax base broadening, and half integration of corporate and individual income tax. Canada led the route to achieving tax objectives contrary to the U.S. Business week article expresses the push by Obama in collaboration with congressional Democrats to make a rule that will limit corporate ability to evade US taxation. Obama administration wants to achieve the strategy by merging corporate with foreign corporate. Companies under target include Medtronic and Abbvie that have not completed their mergers. Mergers cause a huge drain to the U. S. Treasury, and it would be sensible to stop corporate tax as soon as possible. Coy (2014)7, suggests that even though pulling tax advantage is lawful, it expresses unfairness. Senate Finance Committee Chairman made a publication on Wall Street Journal that revealed their differences on reaching a solution for corporate inversions. Coy, (2014), outlines how republican finance committee cautions the democrat wing on taking a punitive or a retrogressive step. Coy, (2014), also reports on the decline of Democrats on the finance committee to support limiting inversions by retroactive tax bill. Coy, (2014), concludes by commenting that even retroactive bills are to some extent constitutional if not constitutional. Coy, (2014), further recommends that both the congress and the white house to reach an amicable solution for corporate inversions that drain treasury as soon as possible. He finally warns that undermining legally accepted corporate mergers, and then retroactive may prove dangerous. References Bartlett, B (2012). Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take. Simon and Schuster. Coy, P. (July 28, 2014). Obama Wants Tax-Avoiding Companies to Pay Up, Starting Yesterday. BusinessWeek. Retrieved on November 11, 2014 from http://www.businessweek.com/articles/2014-07-28/obamas-corporate-tax-reform-would-be-retroactive-to-may-8 Galvin, C. O. (2011). Tax Reform in the United States and Canada: A Comparison. Law and Contemporary Problems, 44(3), 131-142. Maples, D. and Graveled, J. (September 25, 2014) Corporate Expatriation, Inversions, and Mergers: Tax Issues. Congressional Research Service. Retrieved on November 11, 2014. McIntyre, R., Gardner, M. & Phillips, R. (2014). The Sorry State of Corporate Taxes: Citizens for Tax Justice. Retrieved on November 11, 2014 from http://www.ctj.org/corporatetaxdodgers/sorrystateofcorptaxes.php Sperling, G. (October 8, 2014). Believe It or Not, Corporate Tax Reform Is Doable in 2015. The Wall Street Journal. Retrieved on November 11, 2014 from http://online.wsj.com/articles/gene-sperling-believe-it-or-not-corporate-tax-reform-is-doable-in-2015-1412808733 Sullivan, M. A. (2011). Corporate Tax reform: Taxing profits in the 21st century. Apress. Read More