Domestic Tax Provisions
The Current tax provisions under the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRRA) provides for 10%, 25%, 28%, 33%, 35% tax rates for taxing income which expires after December 31, 2010. These rates apply for regular taxable income brackets for which marginal tax rate increase to correspond with increase in individuals’ income and status (Auerbach, 2006).
The present law allows an individual to claim a Child Tax Credit of $1000 up to 2010 and $ 500 thenceforth a maximum for each qualifying children (17 years and below) (Joint Committee on Taxation, 2010). This credit is allowable on alterative minimum tax (AMT) and if the tax credit is more than tax liability then the taxpayer can file for a refund using the earned income formula (KPMG TaxWatch, 2010). The formula states that additional child tax is equal to 15% of taxpayer’s earned income in excess of $10,000, which expires on 2010. The additional child credit is calculated only on the taxable income (Joint Committee on Taxation, 2010). The credit or refund made due to this provision is not considered as an income and should not be taken into account for purposes of determining individual for federal or state assistance.
Section the current tax provisions under section 117 excludes all amount received as scholarship for tuition and fees from gross income amounts to taxed. However, scholarship amounts that is for living expenses are not tax-free(Joint Committee on Taxation, 2010). The amounts qualifying for exclusion in gross income are also excludable from payroll tax on salaries. Further to above provisions, is exclusion from gross income for the National Health Service Corps scholarship program and Armed Forces scholarship program which will no longer apply after December 31, 2010.
The 2011 Budget provisions seeks to extend, on a permanent basis the individual tax rates 10%, 15%, 25% and 28%. The tax rates of 33% and 35% will revert back to 36% and 39.6% respectively for taxable years after December 31, 2010.
The Budget 2011 seeks a permanently extension of the $1,000 child tax credit allowable against both individual’s regular income tax and AMT (Joint Committee on Taxation, 2010). Extended on permanent basis are earned income formula for determining refundable child credit and the rule that refundable child tax credit doest not constitute income or earned resources for purposes of determining eligibility of federal assistance. It seeks to stop the indexing for inflation of $3,000 earned threshold.
The Budget 2011 has repealed all the tax benefits for education to continue as the way they are today after December 31, 2010 (Joint Committee on Taxation, 2010).
The roadmap proposal has simplified income taxes to10% on for amounts below $10,000, $50,000 respectively for joint and single filers respectively; 25% for all amounts above these amounts (House Budget Committee, 2010). However, the Roadmap proposal eliminates almost all the tax credits, exclusions and deductions apart from refundable health care tax credit (House Budget Committee, 2010).
Under section 179 in current tax provisions, a taxpayer may expense the cost instead of deducting it by depreciation of a qualifying property placed in service for the taxable year up to a maximum $250, 000 of the cost of that property (Joint Committee on Taxation, 2010). This amount is reduced but not beyond zero by the amount by which the cost of property exceeds $800,000. These amount of $250, 000 $250, 000 and $800,000 are not indexed for inflation. This provision was scheduled to cease beginning of 2011.
This 2011 Budget provisions extends the current provision permanently. However, it proposes $125,000 of the cost of a qualifying property placed in service for taxable year as the maximum amount to be expensed by a taxpayer (Joint Committee on Taxation, 2010). It also includes off-the-shelf computer software as a qualifying property.
The Roadmap proposal suggests that corporate tax be done away with. However, the proposal introduces a simple business consumption tax (BCT) of 8.5% on goods and services as I have illustrated later in table 1.1. The taxation processes is done using subtraction method.
Both the President’s and Roadmap proposals provide a tax relief to a very large component of taxpayers, with an aim of providing an incentive for them to work, save and invest for promoting a healthy economy. The President’s proposal might not achieve that goal since the marginal tax rates of 36% and 39.6% on upper income taxpayers’ will result in reduced incentives. The Roadmap proposal on the upper tax rate of 25% will result in a reduction of disincentives to work, save and invest. The opponents of the Budget 2011 proposal note that small business will fall under the 36%-39.6% tact bracket which will have adverse effect on proposed increase. A lager portion of the marginal gains on successful venture will be taken by the government following implementation of budget 2011 proposal thereby hurting the incentive on business.
Small businesses will no longer be interested in the expansion of their operations since in so doing, they will increase their pretax earning that will be heavily taxed if the Budget proposal in implanted (Joint Committee on Taxation, 2010). On the other hand, there will be increased investment occasioned by lower cost of capital as evidenced in the immediate depreciation of the expenditure of full amount of the expenditure on qualifying property.
International Tax Provisions
The income taxation on worldwide income is almost similar to one that is earned domestically. Companies that have earnings from the operations of their foreign subsidiaries are subject to taxation on their earnings if repatriated to US. However, it is subject to tax credit if the earnings are taxed in the foreign country. Territorial tax system would exclude the foreign earnings of a company’s foreign subsidiaries from home country income taxations.
Our tax system requires that all companies pay income tax and payroll taxes with application of tax credits where applicable on all income earned either domestically or internationally. Our major trading partners enter their goods in our country almost free of tax apart from custom duties since their prices have no country of origin tax. They have a territorial tax system which applies the border-adjustable taxes which makes goods and services produced by their companies so completive even here in our country. Our corporate taxes are higher and more complex than our major trading partners (Sullivan, 2006)
Border-adjustable taxes are consumption taxes that are discounted upon the export of goods from producing nations (Auerbach, 2006). Such nations may reciprocate when importing incoming goods with sales taxes. This system imposes tax at each stage of production of goods and services and reimburses any tax paid by previous stage of production. It also makes exports tax free since they are not consumed locally. It seeks to make the end user pay the entire tax.
Subtraction method uses business consumption tax which is gathered by applying the tax to each and every purchase of goods and services made by the business final consumers (Itai, 2009). It is similar to sales tax at each stage of production as illustrated below. The business entity s suggested by Nellen (2003). files the tax with regards to values added which is calculated as:
Value added = Total sales- purchases cost
Table 1. Source, Itai, (2009) “Where Credit is Due: Advantages of the Credit-Invoice Method.
|Stage of production:||Sales||Less purchases||Value |
|Raw materials||$200||$0||$200||$200 x 10%||$20|
|1st processor||$240||$200||$40||$40 x 10%||$4|
|Distributor||$280||$240||$40||$40 x 10%||$4|
|Retailer||$360||$280*||$80||$80 x 10%||$8|
|Total VAT Liability||$36|
For a Partial Replacement VAT”
each business applies a flat 20% tax rate on consumption for which business make a sale either to another business or a final consumer.
The Budget 2011 proposes greater investment occasioned by the investment incentives on cost of capital will aid in speeding the growth of technology innovations which will eventually increase production by local corporations (Joint Committee on Taxation, 2010). The treatment of taxations of worldwide earnings will increase amounts brought back in US. Many multinational companies will be seeking to invest the bigger share of their operations local unlike in the past where they preferred offshore to local investment (Fair tax organization, 2010). This would expand this sector and more jobs would be created hence national economic growth in the long run (Furchtgott-Roth, 2010).
The Roadmap proposal would ensure that investors who have been moving their operations offshore would now stop and reverse the trend. The proposal will promote the corporations in bringing the foreign earnings to US (House Budget Committee, 2010). This trend will promote creation of local jobs and expansion of production by US corporations due to greater incentives to capital intensive industries (Fair tax organization, 2010). Since most US trade is facilitated by multinational corporations, their taxations are of vital significance to us economic growth (House Budget Committee, 2010).
Auerbach, A. J. (2006). The Future of Capital Income Taxation. Web.
Fair tax organization. (2010) The impact of the FairTax on American manufacturing, agriculture, trade, and international competitiveness. Web.
Furchtgott-Roth D. (2010). Where Tax Policies Diverge. Tax Notes,989- 990.
House Budget Committee Republicans Roadmap. Roadmap for America’s Future. Web.
Itai G. (2009). Where Credit is Due: Advantages of the Credit-Invoice Method for a Partial Replacement VAT. Web.
Joint Committee on Taxation. (2010) Present Law and the President’s Fiscal Year 2011 Budget Proposals Related to Selected Individual Income Tax Provisions Scheduled to Expire Under the Sunset Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (JCX-36-10). Web.
KPMG TaxWatch. (2010). Summary of Tax Provisions in Administration’s FY 2011 Budget Proposal. Web.
Nellen A. (2003). Consumption Tax Information. Web.