Corporate Tax Policy
Executive Summary
The overall report covers the corporate tax policy that mainly focuses on the US corporate tax system of the policy. The report will discuss the background of the US corporate tax system and previous and current tax policies. Further, the report will illustrate the three strategic approaches and its advantages and disadvantages along with one optional policy that can be applied for better corporate tax policy. Hence, the report has been concluded with some recommendations and suggestions concerning the US’s corporate tax policy.
Table of Contents
Previous Corporate Tax Policies. 5
Advantages and Disadvantages of Strategic Approaches. 11
Introduction
Background
The United States has separate state, federal, and local governments for tax imposition. The taxes are levied on property, income, dividends, estates, and imports, corporate, sales, and different fees. The corporate income tax is levied at the federal on all subjects treated as corporations. There are also some corporate income tax policies on the Domestic Corporation and foreign corporation having activities or income under the policy. In 1861, the first federal income tax was enacted and expired in 1872 due to constitutional issues. In 1894, a corporate income tax was enacted, but the major feature of it has soon become unconstitutional. Congress implemented an excise tax on corporations on the basis of income in 1909. Following the sanction of the sixteenth amendment of the Constitution of the US, it became the corporate policy f the federal income tax. The amendments to different policies impacting the corporation have been all revenue act ever since. The corporate tax policies are included in Title 26 of the US code called the Internal Revenue Code. In 2010, corporate tax revenue made around 1.3 percent of the GDP (Gross Domestic Product) or 9 percent of the total federal revenue (Leo et al., 2016). The corporate income tax increases $230.2 (billion) in 2019 fiscal, which makes 6.6 percent of all federal revenue, and there was a 9 percent change in 2017.
Some transactions of corporations are not taxable. It includes many formations and some short of acquisitions, mergers, and liquidations. The shareholders of the corporate are taxed on the distribution of the dividends by the corporation. It is not known that many corporations’ shareholders are not directly taxed on the income of corporate but should tax on payment of dividends by the corporation (Rosenthal and Center, 2016). Though, shareholders of mutual funds and corporations are taxed presently under the corporate income and do not make the payment on dividends.
There has been an issue in the policy of the corporate tax of the US, which affects the individual and people related to business. The government of US taxes entire income made by the firm, which is registered as the domestic corporation despite the corporation earning income in the US or abroad (Toder and Viard, 2016). Regrettably, the corporate tax policy of the United States’ becomes the major issue for many new firms and individuals for business. The US has the highest rate of corporate tax in the world. The rise in corporate tax also affects the economic policy of the nations. Thus, better tax policies can balance the economy of the nation and firm revenue.
Previous Corporate Tax Policies
The change or reform in corporate tax policies had been discussed with a huge range of intensity after the 1909 beginning of the corporate income tax. In the past few years, there was a heated discussion on the statutory rate of corporate income tax that stood at 35 percent after 1993. It has been stated that the rate of statutory corporate tax is one of the greatest in the industrialized arena. The previous tax policies of the US were considered uncompetitive for international use, cost recovery, and great statutory rate. The evidence from economic shows that corporate income taxes are considered as the major damaging tax type, and employees bear a portion of the burden. Between 1993 and 2017, the rate of margin was stable at 35 percent. It was a high rate of corporate tax, but it was not new in the history of the US. From 1951 to 1964, businesses in the US had to give around 52 percent in corporate taxes. The rate of corporate tax maximized by 52.8 percent from 1968-1996. It was totally different from the early times of the corporate tax that comes under 10 percent in around 1909 and 1917. The tax report act of 1986 brought a huge statutory tax rate of 50 percent to 28 percent when corporate tax rates were minimized from 50 percent to 35 percent. Many tax brackets were minimized, and personal exemption and standard payment were raised and recorded for inflection. Though, the act or policy also made new corporate and personal choices minimum taxes that offered to be pointless, complex, and economically harmful. The tax policy change of 1986 was rough revenue that it was not planned to lower or raise taxes, but it changed a few tax burdens from persons to businesses (Clausing, 2016). The 1986 policy of the corporate tax declined the real estate market of the US that pushed to the huge failure of the loan and saving industry. The corporate tax system of the US also includes various exemptions, tax credits or tax expenses, deductions, and deferrals. All these provisions collectively reduce the tax payment.
The government of the US used an international tax policy system that taxes incomes, not considering its earnings. It means that the US’s corporations were taxed by the government on the income earned abroad and domestically. Any firm which functions outside the US was also taxed by the nations in which that work. It means that the companies of the US were taxed twice- by the countries in which they operate and by the US government. The double tax system puts a load on the US corporations and also drives towards the disadvantages when compared with other foreign competitors. Many developed nations do not use the international tax policy, but they use territorial tax policies that only tax corporations on their revenue under a particular country. The higher corporate taxes did not just affect the corporation, but they all affect the economy and the workers of the US. The greater tax policies made many firms to relocate to other countries under the more favorable tax laws and policies. Many jobs in the US at the huge multinational corporations were also shirked due to the movement of the business corporation to another country. Many experts show that domestic employee bears more burden of the corporate tax in the US.
Present Policies
For the reduction of the burden of the higher tax rate, the policy of TCJA was introduced in 2017. After the TCJA (Tax Cuts and Job Act), the corporate tax system of the US has been reduced to 21 percent from 35 percent by President Donald Trump. During that time, Trump’s administration stated that its reduction in corporate tax would raise the average income of the household by around 4,000 (dollars). However, after two years, there is little sign in which the reduction in tax is even stated to trick downwards in the method it made the claims. The makers of the laws and policies had a huge reform to each of these aspects in the new tax policies in 2017 December. The TCJA initiated the deduction of 20 percent on eligible business income, and the deduction ends after the year 2025 (Loayza, 2020).
After the 2017 TCJA, the US Federal government implemented different policies on various income types for US Multinational corporations earning in other nations. The few points of the different rules are as follows:
- The income which shows the normal return on physical resources considered to be 10 percent every year on the value of depreciation of those resources were exempted from the corporate income tax.
- The income tax greater than 10 percent return, which is known as GILTI (Global Intangible Low Tax Income), is yearly taxed as earned at half the 21 percent of the US corporate rate on the domestic income. It is with the credit of 80 percent of foreign income tax payment as half of the US corporate rate is 10.5 percent.
- Income for passive resources like bonds or some categories of simple changeable resources is taxable at 21 percent of the corporate rate (Boot, Logue and Spatt, 2017).
The personal service corporations such as corporate law, accounting, and health services that were historically being imposed on higher tax rates cannot be benefited from the lower increasing tax rate. They are now taxed at a similar rate as any other corporation. After the tax reduction act, the business investment increased to some extent, but it was not as much as the predicted rate. Additionally, the IMF (International Monetary Fund) stated that comparatively better business investment in 2018 was pushed by the huge total demand in the economy, not from the side of the supply factor, which reduces tax (Kim, Nessa, and Wilson, 2018). In simple meaning, the rise in business investment from the comparatively ineffective 2015 to 2016 appears as another instance of economic sign returning to a more normal range. Recently the business investment has been reduced. The data shows that private foreign investment actually reduced in 2019 second quarter, driving to an overall growth reduction. Thus it has considerably made uncertainty for businesses driving away for the investment.
Strategic Approaches
For ensuring better decision-making methods, it is significant that strategies are appropriate to aid the policy recommendation for corporate tax in the US. The three strategies for the basis of policy recommendations are given below:
1- Competitive based Strategic Approach- The competitive strategy is the major kind of strategic approach for policymaking’s strategic management. It relates to the plan, which unites the influence of the corporate tax policy’s external circumstances. Additionally, it integrates concern of corporate status. The competitive strategy tries to provide competitive benefits to the corporate in the marketplace over other foreign competitors in case of the corporations’ tax payment policies. Competitive advantage comes from strategic that tries to benefit the corporate for the advantageous competitive viewpoint. Having a competitive strategy is related to sustainable competitive benefits such as lower tax rates and exclusion of some corporate-based its earning and competitive analysis of the corporate. The competitive strategy refers to the plan and business approach (Vasyltsiv, Lupak and Kunytska, 2018). It takes corporate account for its benefits in the market structure. The US firms have to pay more and double corporate tax when compared to other competitions, which become a major issue in the corporate tax policy of the US. Thus, the notion of the corporate strategy has the angle of the competitors for the policy recommendation. The competitive strategic approach contains those plans which lay down different ways to make a competitive benefit for the single firm or the whole corporation in the business. The competitive approach’s major aim is to take corporate into account for its benefits rather than the whole stakeholders’ benefit related to the US’s tax policy.
2- All-purpose or broad Strategic Approach- The all-purpose or general strategic approach is related to the relation of means and end of the matter that is between the result that decision-makers try to get and the resources at removal. The plans and strategies are related to the whole issue in the policy, then performing the plan or strategic system for providing recommendations for the overall attainment of the goal. The reduction in tax rate with the change in tax rate policy in 2017 did not provide many benefits to the increment of investment and development of the US’s economy (Migone, 2018). Thus, it has been found that a reduction in all corporate tax does not mean an increase in the country’s economy and investment. The broad strategic approach can help in providing an overall benefit to the corporate and economic development by providing better policy recommendation.
3- Functional based strategic approach- In this approach, the benefit of the government is taken into consideration for the recommendation of the policy with the accounts of corporate functions in the market place. It helps in making a policy plan on the viewpoint of the US government and its economic development. The government tries to maintain economic development and to maintain public earnings in the United States. The TCJA was the offshoot that reduced tax for the maintaining of the earnings of the firm and the individual. It raises the corporate income level to some extent, but it did not surpass its prediction for a greater increase in investment in the US and better results (Pröllochs and Feuerriegel, 2020).
Thus, the functional strategy approach is related to making unique rights and changes for the tax policy for a particular functional base, such as the country’s economic development, corporate development, individual earnings growth, etc. If economic development is taken into consideration, then the tax policy can be changed to increase the tax rate. However, the individual earnings maximization will be taken into consideration; the policy can be changed to reduce tax or levied tax based on the income.
Policy Options
All companies that deal with public policy face a lot of difficulties while conducting operations. Public policies are generally considered as the overall actions undertaken by the government. Public policies generally comprise various directives, regulations, laws, and certain government programs. The report’s policy option is the desirable public policy wherein the concept might help the US corporate act concerning the public interest and what is good for the public. The desirable public policy can have very comprehensive and general connotations, and hence, anything that acts in breaches of law shall be measured against the desirable public policy.
However, in favor of the desirable public policy, it is rather than what open flexible and textured, and this flexibility can be the cause of legal reproach. For the desirable public policy, there may be an agreement that the judge might extend the existing policy to new conditions, and the difference amidst expanding on existing code as divergent a new one will frequently be wafer emaciated. Desirable public policy must not be absolute (Harvard Business Review, 2020). Laws that rest on the base of desirable public policy under corporate law must not be rules that belong to the predetermined customary law, competent on appropriate events, modification, or expansion relying upon conditions. Hence, in the comprehensive viewpoint, the desirable public policy is comparable to the law policy under corporate tax law and whatever guides to integrity obstruction or breaches of a figure or is against the good ethics when made the object of contract that would be against the desirable public policy and is void, should not vulnerable to enforcement.
Advantages and Disadvantages of Strategic Approaches
Competitive based Strategic Approach– Profit is the baseline for almost all the corporate sectors in the market. Without profit, the firm cannot exist as it builds the operational baseline. Hence, in order to acquire a profit, the corporate has to have a better sale of its services or products. Hence, it is done only with the assistance of better prices, products, or exceptional selling proposal. Likewise, it can be said that a competitive-based strategic approach will help the economy of US to balance the corporate tax within the business firm as well as the sole traders. On the other hand, the disadvantages of the proposed policy are an unfavorable condition that causes a firm to underperform in an industry. Generally, the disadvantages of the policy include aspects such as process effectiveness, costs, and productivity. The competitive strategy might be considered by benchmarking against a top business or competitor average for a particular aspect. It does not essentially involve that a firm is at an overall disadvantage to other corporate. It is because a specific firm may have an advantage of cost and a disadvantage of quality.
All-purpose or broad Strategic Approach– The policy of app-purpose or broad strategic approach can benefit the corporate tax by positively encouraging, minimizing the capital cost, and improving top-level decision-making. Hence, it will generally enable better strategic planning for corporate tax law and maintain the nation’s economic conditions. It can include a more effective allocation of capital and resources. Thus, the government’s strong framework will further support the board in certain of the following ways and interpretation within the dictatorial environment governing the business, leveraging technology from distribution, production, and viewpoint of interactions within the public interest. On the contrary, for attaining the overall goal, the broad strategic approach can negatively impact the decision-making for the public interest, as it will only focus on the increment of investment and development of the US economy rather than the public interest.
Functional-based Strategic Approach– The advantages of a functional strategic approach can directly influence the operational speed, clarity, and specialization. These are the most obvious advantage of a functional-based strategic approach concerning the corporate tax policy. Specialization under this approach can help the policy ensure a reliant level of departmental competence and speed can help solve any problems concerning the corporate tax issues and clarify the responsibility and the allocated task to the administrative bodies. On the other hand, the functional-based strategic approach has some disadvantages: segregation, common bonds weakening, lack of coordination, and territorial disputes with the strategy-based functional groups that look after the public interest.
Recommendations
The three key policy recommendations that have been implemented as part of the strategy are:
- Reduce the deficit, be revenue neutral, or increase revenue
Reducing the deficit and being revenue neutral or increasing revenue in the corporate act will benefit the US economy and private companies. In financial terms, a deficit takes place while expenses go beyond revenues, imports exceed exports, and liability exceeds investments. It is the loss or shortfall and can occur when a company, government, or an individual spends more than it acquires in a given period, generally in a year. Hence, the concept of revenue-neutral is a system in which all revenues that accumulate to the government from a system of pricing that is returned to the businesses and households by a certain mechanism such as tax cuts, and though, that is where the simplicity ends (Parks, 2020). With revenue neutral, the income tax falls more greatly on the economy’s income than on income used for utilization. However, the depreciation rules in the tax code seriously understate the equipment and plant cost, resulting in the overstatement of profit and higher rates of tax on businesses.
- The tax system should not play favorites.
There should not be a disadvantage to any company that is based in the US and in world markets. The corporate act should consider all the companies based on US and other international markets into equal consideration, which will help the businesses perform accordingly. This will help the government and the corporate firm grow without any causing any problems to the nation’s economy. However, it can be said that a better corporate tax system can have a comprehensive foundation with few deductions or exemptions and rates just high enough to subsidize only the legitimate central functions of the government. Thus, this system can be equal and fairer for every individual and bring the public as well as the companies with its shareholders closer to a community that is based on the shared value and making benefit for others. It is said that when an individual is free to save and invest as they see fit, every individual gets benefits. Through the giveaways of subsidies and tax, the government regularly selects the successful business and poor in the economy. The successful business is almost always dominant, well-linked, and favored by the political bodies. Additionally, they get higher taxes and more supervision (Americans for Prosperity, 2020). On the other hand, not an individual will consider that it; is an accident that the economy has goes further expectations after a shift of policy away from high taxes and the government’s heavy hand to a lighter touch and low taxes.
- Give businesses an incentive to grow and invest.
Various incentives can be implemented by the business in order to grow and expand their business. The general objective of investment incentives is to influence general investors’ decisions and inculcate the effects of foreign direct investment. Incentives related to investment can be offered to locally based companies so that they can invest in highly advanced technologies. The government can also assist in granting financial assistance by utilizing economic incentives. Incentives generally comprise reductions based on tax, sharing tax revenue, infrastructural facilities, special grants, free land, tax credit, etc. By offering assistance through the issue of incentives, the government’s main objective is to utilize public resources in an efficient manner, make private investments reliable, and receive higher returns based on economic impacts. These small business incentives can help provide opportunities for creating a job, training of staff, and even creating a new location. Incentives based on expansion can serve as a great help regarding decisions required to set up a new location. A detailed framework must be prepared since incentives offered by small businesses can be a little tricky. Giving businesses an incentive to grow and invest gives the company an incentive to meet certain conditions and spend at least 2 percent of the average profit of previous years on social construction projects. It is mandatory for the government to review all additional obligations or issue similar research based on such obligations and establish funds.
Conclusion
The history of corporate law in the United States is mainly associated with the corporation’s development, functioning as a business organization under various corporate laws of the United States. The supreme court of the United States framed the United States Constitution so that corporations may be allowed as per their choice without taking note of the location of headquarters. A simple registration procedure was required for the free incorporation of businesses in the late 19th century. At the end of the 19th century, trust systems were used to regain control into the hands of a few people. Since the 1980s, the basic concept of Corporate law in the United States has remained consistent. The number of investors had no effect on corporations, the corporations would be small and democratically organized, and directors would regularly conduct the elections. The concept of revenue-neutral is regarded as a system in which all incomes that are gathered by the government form a specific system of pricing that is subsequently returned to various households and businesses by certain techniques such as tax reductions. The main purpose of investment incentives is to motivate the decisions of general investors. A tax deduction, tax revenue sharing, facilities based on infrastructure, special grants, free land, tax credits are generally included in incentives undertaken. For ensuring better decision-making methods, it is quite necessary that strategies are appropriate to carry out the policy recommendations for corporate tax in the US. A desirable public policy is also implemented, which will serve as a great significance for the corporation’s law.
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