Question

Our Federal corporate tax laws provide numerous incentives intended to promote certain activities, industries and job creation. Some argue that these measures are ineffective while others say that they do not go far enough in stimulating the economy and employment. Four examples of tax incentives offered by the Federal government are: (1) the Credit for Increasing Research Activities (IRC Section 41), (2) the Work Opportunity Tax Credit (IRC Section 51), (3) the Energy Tax Credit (IRC Section 48), and (4) the Domestic Manufacturing Deduction (IRC Section 199). Carefully review the Grading Rubric for the criteria that will be used to evaluate your assignment. In an eight- to ten-page paper (formatted according to APA style guidelines), provide an analysis of the following: For each of the four above federal corporate tax programs: Provide an overview of the program citing changes in the legislation since inception. Analyze the effectiveness of the program in terms of meeting its intended purpose. Evaluate unintended tax and non-tax consequences of this legislation that have resulted from its passage. Next, design and describe specific modifications that you would recommend to each of the above-mentioned programs. Evaluate the projected impact of these changes including the effect, if any, to: Gross National Product Unemployment rate Federal tax revenue Finally, include in your analysis a discussion of the likelihood of passage of these proposed changes taking into account the potential effect of these changes on federal deficit levels and the political process involved in enacting federal tax reform. Writing the Final Paper The Final Paper: Must be eight to ten double-spaced pages in length (not including the title and reference pages) and formatted according to APA style as outlined in the Ashford Writing Center. Must include a title page with the following: Title of paper Student’s name Course name and number Instructor’s name Date submitted Must begin with an introductory paragraph that has a succinct thesis statement. Must address the topic of the paper with critical thought. Must end with a conclusion that reaffirms your thesis. Must use at least five scholarly sources, in addition to the text. Must document all sources in APA style, as outlined in the Ashford Writing Center. Must include a separate reference page that is formatted according to APA style as outlined in the Ashford Writing Center.

Answer 1

Federal Corporate Tax Laws

Introduction

As a common practice in the United States, graduated tax rates, which range from 15 to 35 percent, are levied on the profits of all resident corporations. A significant share of the corporate earning attracts taxation at the maximum rate. A business's receipts minus the allowable deductions provide the threshold for the taxable profits. Some of the allowable deductions include nonfederal taxes, the cost of goods, advertising, interests, and depreciation. Others are wages as well as other employee compensation expenditures. Corporations can calculate their corporate tax, and this begins with them knowing what their taxable income amounts to.

To get this, they either refer to the previous year's taxable income as a basis or complete what is known as the Form 1120. The resident multinationals also have an obligation to remit taxes on the profits earned worldwide. As an entity enshrined in the Internal Revenue Code, corporate income tax applies to all the C corporations that operate within the jurisdiction of the U.S. The federal tax laws provide various incentives intended to promote industries, employment, as well as other activities that can aid growth in the general economy. They include:

The Credit for Increasing Research Activities (IRC Section 41)

The qualified research aims at discovering information that is technological in nature whose application can better the component of the taxpayer. The activities carried out form part of the experimentation process that ultimately validates the purpose or activity. Various activities within corporations meet the threshold for research and can thus be treated as particular areas of interest that the government wants to be expanded. Among the activities that qualify for the above include development of prototypes, certification testing, improvement or development of software technologies, and development of new technology.

Others are improving or developing new products, formulas, or process, internal process streamlining, development of new technology, and improvement or building of facilities for manufacture. This incentive also comes in handy when applying for or developing patents. For instance, they can capitalize the concerned expenses and over duration of less than 60 months ratably amortize them or wholesomely deduct research and experimentation expenses as is provided for by the laws. Additionally, taxpayers are entitled to a tax credit for the purpose of research activities under Sec. 41. The section is however not permanent and is subject to reform by the Congress.

Since its inception by the 97th Congress through the Economic Recovery Tax Act of 1981, the Credit for Increasing Research Activities has undergone some changes. These are aimed at keeping up with ever changing economic environment worldwide. For example, in the year 1986, the first significant amendment was made, giving rise to the Tax Reform Act of 1986. This prolonged the tax period and changed it into the general federal tax code. Also, the act allowed for the reduction of the statutory rate of the credit to 20%. Moving forward, several changes, and adjustments have been implemented into the law to prevent declines in research and experimentation. The most recent modification was the Tax Increase Prevention Act of 2014 which protracted all the constituents of the credit. The changes are always effected through calls made business and congressional supporters through the support of the president.

a. Effectiveness of the Program

Research tax credit has been praised by both lawmakers and analysists as a useful undertaking since its inception. Economists have used different approaches to establish the effectiveness of the tax credit initiative. The most efficient methodology is the determination of additional qualified research that stems from the regular credit then estimating it with the gains made on the dollar against the initial investment through the credit. In other words, the revenue loss through the direct costs is compared with the direct investments that come in the form of added research investment. Such comparisons point to a greater social return value, which makes it a positive initiative with the potential to drive the economic fortunes of the country towards a positive direction.

b. Unintended Tax and Non-Tax Consequences of This Legislation

There are numerous studies available concerning the effectiveness and the unintended consequences that have resulted from the tax credit incentives. Regarding the ineffectiveness, the primary concern has put forward by the critics has been the design. According to them, the program still has the potential to achieve its intended purpose but only if certain technicalities are sorted out. The main issues raised are a lack of permanence, not targets at investments, uneven and weak incentive effects, lack of clear definition of qualified research, as well as the fund being non-refundable. The credit mostly benefits firms that have high research incentives and can immediately use the funds for the intended purpose. The situation is slightly different for businesses that have lower capacities and those that have shifted slightly towards new formations. As a result, tax credit incentives do not have a similar effect on different ventures as would have been intended by the proponents.

The Work Opportunity Tax Credit (IRC Section 51)

This section of the Code allows for a Work Opportunity Tax Credit (WOTC). This incentive is given to those who hire as their employee's people who are regarded as targeted groups in the community. Further congressional deliberations led to the inclusion of the disconnected youth and unemployed veterans among the targeted groups. Unemployed veterans are persons who have previously served in the United States Armed Forces for a specified period. Disconnected youth primarily refer to youths who have attained the age of 16 but are below the employable age of 25 or those that failed to attain reasonable academic qualifications.

The application of this incentive is predicated upon the acquisition of the necessary certification by the employer from a designated local agency. This has to be done either before or on the day the individual begins work in the said institution. The Work Opportunity Tax Credit program has its roots in the Target Jobs Tax Credit program that was enacted by the federal government in the year 1978. Even then, it was intended to help grant tax credits to employers who hired persons categorized in certain groups. The amount is worked out as a percentage of qualified wages that an eligible worker is paid within their first year up to a maximum statutory limit. The amount is also dependent on the number of hours the employees committed to their duty during their initial year at the workplace.

a. Effectiveness of the Program

The Work Opportunity Tax Credit has been a good incentive to employers and employees in equal measure. There is a large group of target persons having the ability to perform even at the highest levels but are on many occasions denied the opportunities to showcase their skills and experience. Therefore, the WOTC provides a good basis for such individuals to get equal chances to fend for themselves. With the provision of this tax incentive to employers, they have been encouraged to engage the target people such as qualified ex-felons, unemployed veterans, summer youth employees, among others. The corporations can exploit as much as 40% tax reliefs on the wages paid to such employees. As the employers get good returns, the workers are left happy while the government prides itself at having fulfilled its duty to the citizens.

b. Unintended Tax and Non-Tax Consequences of This Legislation

Given the attractive tax incentive provided by this program, there have been fears from some quarters that some rogue employers would adopt unethical behaviors to gain maximally. For instance, there have been claims that some employers lay-off these workers as soon as their eligibility to attract the relief expires. They do so with the intention of hiring other workers from the targeted groups in a bid to continue getting the tax credits from the government. In the event of such unethical habits occurring in the employment sector, the target groups would feel disenfranchised and subsequently be condemned to dependence on other members of their families or society. The Work Opportunity Tax Credit is a non-refundable credit that is not plowed back into the federal system’s tax reserve. It is, therefore, a loss regarding revenue collection.

The Energy Tax Credit (IRC Section 48)

This tax incentive was introduced by the federal government to scale the level of investment in the energy sector up. The energy sector falls among the most crucial ones that drive all the other branches of the economy. As a result, the decision to grant targeted incentives to the industry is a good move to the government, the consumers, and the investors. In calculating the energy credit regarding a taxable year, attention is paid to the power percentage of all the energy properties that have been in service during that particular taxable year. The energy percentage here refers a qualified figure of 30% that is calculated on some solar power equipment, minimal solar energy property, fuel cell property, and specified geothermal energy equipment. For all other energy properties other than the ones mentioned above, the energy percentage is set at 10 percent.

a. Effectiveness of the Program

Energy a valuable resource in all the sectors that help drive the country's GDP hence the need to provide the players in the industry with some tax relief to enhance production. The act is vital because, in addition to providing the much-needed relief on taxes to the producers, it also plans a phase-out procedure for solar energy property. This percentage is not constant as it last certain duration then reduces to 265 from the year 2020. A further reduction of 16% is also expected in case there is a roll out to 2024 before the solar energy property fails to pick up operations by that time. The program is useful in the sense that it will increase the activities in the solar power sector. Solar energy is considered a clean source and its widespread use would be a good step in the right direction in the struggle to reduce global warming promoted by the use of other energy sources.

b. Unintended Tax and Non-Tax Consequences of This Legislation

The Energy Tax Credit has numerous positive non-tax consequences onto the society as a whole. The fact the higher tax credit is offered to the cleaner sources of energy is a helps in promoting clean energy production. Consequently, the release of environmentally hazardous material is reduced with as competition to exploit the higher tax incentives increase. Regarding taxation, there are dangers of massive losses in revenue collection as vast sections of the income would get consumed in the facilitation of the credit incentives.

The Domestic Manufacturing Deduction

The tax break incentive provided by Section 199 is for businesses that perform manufacturing domestically and engage in other activities of production. The American Jobs Creation Act passed in the year 2004 was responsible for its establishment with the aim of easing the tax burden on domestic manufacturers. It was intended that such a tax break would inspire and even make local manufacturing better leading to a proliferation of new manufacturing plants. There incentive targets various production activities such as real property construction, architecture services, qualified film production, and tangible taxpayer personal property. The production of water, electricity, and natural gas is also considered in this category.

a. Effectiveness of the Program

Granting incentives to local producers is a good move that fast tracks local investment by different entrepreneurs. Most manufacturers or producers rely on foreign outsourcing of most parts of their production to increase profitability while reducing the production costs. When they are provided with the tax breaks domestically, they get the urge to perform better and expand their business ventures. Eventually, the returns are plowed back to the government in the form of taxes.

b. Unintended Tax and Non-Tax Consequences of This Legislation

Some producers have the habit scaling down quality when they are sure that they are not likely to expand to the international market. Such attitudes lead to low-quality production coupled with customer complaints. Whenever clients feel cheated, they stop purchasing such products, which is not good for the government this would mean low tax collection.

Suggested Modifications

Regarding the Credit for Increasing Research Activities, the government should tighten the qualification for the incentive to avoid unnecessary loss. For instance, those institutions that fail to produce acceptable results from their research activities should be fined. For the Work Opportunity Tax Credit, employers should be barred from firing the targeted persons once their period of their credit relief expires. Also, the tax incentive period should be prolonged with reduced tax reliefs. The Energy Tax Credit should be reformed to cater even for low-level investors so as to increase investments in the clean energy sector.

The period should also be extended to allow investors to plan adequately and source for the required capital. Concerning Domestic Manufacturing Reduction, it is important that quality of products is stressed on as a requirement for the tax relief. Only those who adhere to all the set standards should be granted the relief. When all these are put into consideration, there will be increased production and investment. Consequently, more people will be employed while the Gross National Product will improve from the increased earnings.

Conclusion

In closing, it is clear that federal tax incentives are necessary to drive the economy of the country. Providing the tax credit to persons in different areas of investment increases their productivity which translates into increased revenue for the government. Allowing for research helps in new discoveries while work opportunity tax credit gives an opportunity to the marginalized groups to get work and fend for themselves. Also, increased domestic manufacturing is vital to help reduce commodity priced and increase sales.