Project Discussion on Federal Income Taxation Paper Example

Introduction

Federal Income Taxation entails the taxation that the U.S Internal Revenue Service levies on annual earnings of people, trusts, corporations, as well as legal entities. These earnings make up the taxable income of taxpayers, which may be capital gains or earnings from employment. The government uses this tax collected to enhance the growth of the country (Ljungqvist, Zhang, & Zuo, 2017). When different entities and individuals pay taxes, they invest in the economy as the government uses such funds for building, repair, and maintenance of infrastructure. This paper identifies the area of Federal Income Taxation law that requires change, the reason for the change, proposed change to be incorporated, and a proposal on how to compensate for the change if it would cost the government money.

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Area of Law to Change About Tax

The area of Federal Income Taxation law that would be changed is on corporate income. In the United States, the corporate income has two taxation layers. The first one is in the form of corporate income tax while the second one is that at shareholder level paid in the form of dividend tax and capital gains. In essence, this shows double taxation, which makes the taxes on corporate investment high. For instance, a corporation earning $100 will have to pay 39.1 percent for both state and federal corporate income tax (Brownlee, 2016). As such, the corporation will only remain with $60.90 income that it has to distribute to its shareholders. After distributing the income, the shareholders will still have to pay a dividend of 28.7 percent. Consequently, the total tax bill would amount to $56.57 of the income earned by the corporation.

Reason for Change

When the corporate income tax change is ensured, it would eliminate double taxation of corporate income, as well as reduce the tax charged on corporate income. In this way, corporations will have adequate income to pay their shareholders. They would also realize high earnings per share, which make it easy to ensure efficient capital allocation for different projects. Moreover, corporations will realize sizable improvements in income acquisition and cash flow by reforming the tax code of the business. The change will increase incentives that organizations can use to expand productivity, as well as eliminate any barriers to productive capacity (Brownlee, 2016). In essence, a free enterprise system would drive a higher capacity of production as the income obtained is put into essential tasks. The benefits will be distributed to the stakeholders and other actors in the economy. It will produce incentives that can be used for both investments and savings hence bringing forth incentive returns to facilitate various economic activities. The capital expenditures would lead to a significant increase in wages. As such, this drives competitiveness among different companies. There would also be confidence in a range of strategic projects undertaken by corporations (Bankman et al., 2017). Since the current tax code on corporate income requires payment of income tax and dividends, it poses a threat to the growth of corporations due to inadequate income earned. The tax change will be essential in enabling corporations to use the income they receive for productive activities, which improve organizational growth.

Proposed Change

The proposed change for Federal Income Taxation involves integrating the corporate and individual tax systems. Currently, the U.S federal system places high taxes on corporate income, which stands at 56.6 percent (Ljungqvist et al., 2017). The high taxes are challenging for corporations as they are not capable of funding their strategic projects efficiently. The tax codes for individuals and corporate entities can be integrated into various ways. One of these is through the elimination of tax imposed on corporate income either at the business or shareholder level. For instance, in Estonia, the rate of corporate income charged is 21 percent after the income is distributed to the shareholders. 21 percent capital gains are also charged to help capture the retained earnings (Brownlee, 2016). Another option would involve the deduction of dividends and credit systems. Through this, only the corporations will be required to pay income taxes as no dividends or capital gains charges will be imposed on the stakeholders. Ideally, corporate tax integration will ensure that all the businesses have equal tax treatment. In the current tax system, the tax rates for C corporations and pass-through enterprises are different. The difference comes in where the C corporations pay taxes at corporate and shareholder levels as opposed to pass-through businesses, which pass their income to the tax return of shareholders (Bankman et al., 2017). Importantly, it would be appropriate to tax the income of companies only once and not at two levels. In essence, this can involve the taxation of income on capital gains or distributed profits at the shareholder level. In this aspect, the corporate income will be left untouched. For equal tax treatment in corporations and businesses, taxes will not be imposed at the corporate level. When this happens, there would be a balance between wage income and dividend income tax rates. Therefore, different companies will find it easy to invest their corporate income on productive processes that boost the performance and productivity of organizations.

Proposal to Compensate for The Proposed Change

When the government imposes taxes on capital gains and dividends only, it may incur some costs since it will not benefit from the corporate income. As such, there would be the need to compensate for the costs incurred. In essence, this can be ensured through stock-based compensation. Corporations may receive substantial tax benefits when they compensate the government in the form of stock. The incentive will encourage business enterprises to share their stock. When the corporate tax rate reduction is imposed, there would be the need for profit-sharing between companies and government entities. Sharing the profits would be more beneficial compared to paying for corporate income tax (Ljungqvist et al., 2017).

Additionally, to compensate the government, corporations can collect taxes on products sold to customers across different regions where there is sales tax. Companies can review how tax credits will attract great employees who promote the success of their businesses. These tax credits can also reduce the tax bills charged on company earnings. Businesses will also need to re-evaluate their tax strategies.

Conclusion

The U.S Federal Income Taxation levies uncompetitive tax rates across international markets. As such, by incorporating the change on corporate income tax, the government will deal with the issues facing tax codes currently. Concisely, it will allow corporations to spend their capital investment efficiently and define the business income appropriately. Reducing the corporate tax rate will lead to the competitiveness of U.S businesses in the international platform. Therefore, most companies will invest and grow thereby improving productivity. The tax system would be neutral hence lifting wages for employees and creating job opportunities.

References

Bankman, J., Shaviro, D. N., Stark, K. J., & Kleinbard, E. D. (2017). Federal Income Taxation. Wolters Kluwer Law & Business.

Brownlee, W. E. (2016). Federal Taxation in America. Cambridge: Cambridge University Press.

Ljungqvist, A., Zhang, L., & Zuo, L. (2017). Sharing risk with the government: How taxes affect corporate risk taking. Journal of Accounting Research, 55(3), 669-707.