The Externalities Of Taxation On Capital Gain

Under Canadian Tax Law, there is an election for companies to defer recaptures and capital gains of property that was involuntarily or voluntarily disposed of. In this research paper, we attempt to prove that the election is a useful taxation strategy for businesses so that they are not subject to pay taxes on capital gains or recaptures until such a time where they may acquire an eligible replacement property that will help them earn business income. We will provide facts, definitions, and examples to illustrate the use of this election throughout the paper by explaining the capital cost allowance system, the offset available to business for capital gains and recaptures, the election process, the rules regarding replacing former business

However, there are also some drawbacks associated with raising taxes. Tax is a form of leakage from the circular flow of income leading to negative multiplier effect. If the government increases income tax rates, it might create disincentives to work. It is because when income tax increases, the opportunity cost for leisure time decreases; and people will have to work longer

Whilst William McBride, chief economist for Tax Foundation website, sided with tax cut policy saying that to strengthen the financial state, “we should lower taxes on the earnings of capital,” “workers and the businesses that hire them,” Chye-ching Huang and Nathaniel Frentz, both are senior Tax Policy analysts, completely debunked the evidence McBride provided to support his argument, which includes the review of twenty-three among twenty-six studies he thought to advocate the idea. Indeed, as one conducts research, regardless of what sources it comes from, agreement over tax issue should never be found as a unanimous answer. One of the reasons why it is so difficult to reach a definite conclusion rests on the fact that although some statistics may show economic growth was in step with tax cut, correlation does not mean causation: just as ice-cream sale and murder rate increase during summer time, it is baseless to assume that higher ice-cream consumption leads to higher odds for crime. Moreover, because there is a great amount of research has been done on taxes, different interpretations from these data are understandable. Before concluding that “nearly every empirical study of taxes and economic growth published in a peer reviewed academic journal” finds cutting taxes improves the financial status quo, thus, people need to consider

Once a gain or loss is recognized, a taxpayer must determine how the recognized gain or loss affects the taxpayer’s tax liability. The character depends on a combination of two factors: purpose or use of the asset and holding period. The purpose or use of the asset is important because the law does not treat all assets equally. The general use categories are: (1) trade or business, (2) for the production of income (rental activities), (3) investment, and (4) personal. Based on these criteria, we can categorize an asset into one of three groups: (1) ordinary, (2) capital, or (3) section 1231. Characterizing the gain or loss is important because all gains and losses are not equal. Ordinary gains and losses are taxed at ordinary income rates, regardless of the holding

The government relies on collecting taxes in order to create revenue and function successfully. A decrease in taxes affects business and the government differently. A decrease in taxes is good for business and bad for the government. Many entitites rely on government funds in order to operate and function

With the advancements in the globalization of the economy, corporations are finding more ways to avoid the extraordinary tax rates set in place of The United States Of America. With the loss of revenue from large companies dodging taxes the government must make up for the loss by either raising taxes or changing the tax code. A recent company to avoid american taxes is Johnson Controls, a company that “…would not exist as it is today but for American taxpayers, who paid $80 billion in 2008…”(The Editorial Board). This use of American resources to get through tough times, and run to another county during an economic incline is an act that calls for reform in the American tax system. However congress has not passed any legislation to fix the

After the passage of the 16th Amendment, the nature and process of taxation changed many times. An author for the Virginia Law Review wrote in 1972, “Developing and maintaining an appropriate tax structure for a nation as economically complex and dynamic as the United States is a mammoth task” (Graetz, p. 1401). Because of this complexity, the nature of the Tax Code would need to be altered to keep up with what the country requires at a given time. Several significant changes have been made to the Tax Code, but none more significant than the passage of the Tax Reform Act of 1986 (TRA 86). TRA 86 was one of the most polarizing changes in tax law and where the current Code gets its name (Spilker et all., 2016, p. 2-11). It brought about more revisions than most people and businesses could keep up with, and it brought to light the deficiencies in implementing amendments to the Code, namely a disturbing lack of awareness from taxpayers of the alterations. Many businesses benefited from the changes—mostly large, well-established firms, but small mom-and-pop stores who have less stake in tax planning suffered (Scholes, Wilson, Wolfson, 1992, p.181). This negative effect would have been avoided if taxpayers had taken precautions and been aware of the impending changes in tax laws and if those changes had been communicated clearly to them.

The most beneficial of these tax policies is the capital gains preferential tax rate. When comparing the ordinary income marginal tax rates to the capital gains tax rate, the highest ordinary income tax bracket has a 39.6% rate, while the long-term capital gains tax rate only goes up to 20%. Even with the attachment of the social security surtax imposed by the Affordable Care Act of 3.8%, the highest long-term capital gain rate will be 23.8%, which remains lower than the ordinary income tax rate. Even with the long-term capital gains tax rate applies to investment dividends and capital gains, which are activities mainly practiced by those with the monetary means to do so. A large percentage of the very wealthy generate income from investments rather than wages, and thus their income is taxed at a lower rate. The top 1% holds approximately 50% of American investment in stock and mutual funds, and the bottom 90% holds approximately 9% of the national wealth in stocks and mutual funds. “…the nonpartisan Congressional Budget Office, or CBO, estimates that the

Tax began in America during the Civil War when congressed passed the Revenue Act of 1861. This was a tax on personal incomes to help pay the wages of the ongoing war. From this time different acts have been included and repealed on capital gain and taxes. From the past to current, the United States has shown the importance capital gains tax. This paper will give a brief history of how capital gains tax began in America, where the United State is now, pros and cons for arguments for and against capital gains tax and how America stacks up to other countries.

Because of its importance to wealthier and politically powerful people, capital gain tax has been extremely controversial. These gains have been taxed from the beginning of the income tax, but the rates and other provisions have changed frequently contributing to a baffling history. Ironically there has been only two times when capital gain income was taxed same as ordinary income, once during 1913-1921 and later under TRA' 1986. Rest of the time there was significant differential tax on capital gain than ordinary income.

Assessing the likelihood of each option and assigning weight to each possibility is an inexact science, but I believe it in unlikely that in the current political climate we will not see both a reduction in the tax rate and an increase in the length of time over which we are required to depreciate capital assets. I have assigned weights to each option with this in mind, and have come up with an average weighted estimate of the net present value of the investment of: $1.7 million.

In addition to economic issues, taxation is also a political issue. Political leaders formulate tax policies to bring reforms in the taxation system in order to promote their agendas. The major tax reforms include: increasing or decreasing the tax rate, imposing new taxes on certain products and changing the definition of taxable income. It is evident from the research studies that no one deliberately wants to pay taxes. U.S’ tax policy reflects expression of influence - i.e., those who have power are successful in paying low taxes and their burden is shifted to people who have no power. Therefore retired individuals, small business owners and farmers find ways efforts to reduce their tax burden. Since its existence, tax policy has been enormously used for promoting political and economic agendas.

Lower rates of corporation tax and other business taxes can stimulate an increase in business fixed capital

The United States is in a recession; it has been facing some of the worse economic times since the Great Depression in the 1930’s. One option to fix the economy is to change the corporate tax rate. To lower it or to raise it, that is the question economists have been speculating. America's high corporate tax rate and worldwide system of taxation discourages U.S. companies from sending their foreign-source revenue home, which makes U.S. companies defenseless to foreign acquisition from the international opponents (Camp). Corporations and United States citizens have been fighting for a tax reform, which would hopefully help the American economy; either by lowering the corporate tax, or by raising the tax.

This is a glaring flaw and one that blatantly allows the wealthy to become wealthier, with no checks on that wealth. Unfortunately, this policy does not just aid the wealthy, but it hurts the poor and middle class that use public goods that are funded by taxes. Demonstrating this, the Congressional Budget Office (CBO), predicts that “Normalizing the capital-gains tax rate so that it’s the same as the income-tax rate is an easy way to bring a lot of money into the public fisc — some $161 billion per year”(CITE). For comparison, the poorest 50% of Americans paid a total of $34 billion in taxes in 2013. Taxing capital gains as if it were normal income would remove the tool that the rich and powerful use to become even more rich and powerful, as well as inject billions of into public projects. Therefore, it would go far in solving the issue of wealth inequality that we face today.