Question

List at least 1 pro and con for each item. The more the better.

1.Tax Method: State Sales Tax

Scenario: The Governor is proposing a $x increase in sales tax, along with reductions in exemptions.

2.Tax Method: Corporate Income and Inventory Taxes

Scenario: State legislators are pondering a recommendation to reinstate the inventory tax in exchange for lowering corporate income taxes.

3.Tax Method: Tax on Yachts, High-end (i.e., expensive) Cars, Second Homes, etc.

Scenario: Congress is weighing a proposal to increase tax rates for the above listed items.

4.Tax Method: Tax on Tobacco, Alcohol & Gambling

Scenario: The Indiana General Assembly is weighing a proposal to increase tax rates for these items listed (at left).

5.Tax Method: Federal Personal Income Tax

Scenario: Congress is considering reducing income taxes, to be offset by reducing deductions, credits and exemptions.

6.Tax Method: Gasoline Tax

Scenario: A new version of the federal budget adds a $x tax per gallon of gasoline.

7.Tax Method: Property Tax

Scenario: A taxpayer organization is discussing shifting a portion of property taxes to income tax.

Answer 1

(1.)

Pros:

• Additional Revenue:- While some propose the sales tax as an alternative to the income tax, others propose it as a supplement to the income tax. A sales tax adopted in addition to an income tax would provide additional revenue for the federal government. In the case of White Plains, New York, a mere half of a percent sales tax netted $10 million extra in the city's general fund, according to an article in the New York Times.

• ProductivityL:- Some critics of progressive income tax consider it to be restrictive of productivity. Where an income tax places a tax on productivity, a sales tax taxes consumption. This, proponents say, will lead to an increase in productivity by releasing fetters.

Cons:

• The higher sales tax rates and taxes on additional goods and services that would be required to maintain state revenue without the income tax would almost certainly lead to more tax avoidance through online, mail-order, and out-of-state purchases.
• Connecticut's small size makes it easy to buy goods and services in states with lower sales tax rates.
• Businesses pay nearly half of all sales taxes, so a very high sales tax could make the state less economically competitive.
• Because the sales tax is more regressive than the income tax, higher sales taxes would shift the state's overall tax burden toward residents with lower incomes.

(2.)

Pros:

• Separate legal identity
• Limited liability for the owners
• Perpetual existence
• Separation between ownership and management
• No restrictions on who can hold shares
• Readily transferable shares
• Well-established legal precedents
• Widespread acceptance by the venture capitalists and other investors
• Ability to offer stock options
• Tax planning opportunities

Cons:

• Complexity:- A corporation is more complex to operate than an LLC. The corporation laws require more formalities in how a corporation is managed. For example, shareholder and director meetings are required. Proper notice must be given, and minutes kept. In contrast, LLCs can be managed more informally. Corporation laws also tend to have stricter record-keeping requirements.
• Double Taxation:- A corporation is a separate tax-paying entity unless it makes an election to be taxed as an S corporation. This means a C corporation pays corporate income tax on its income, after offsetting income with losses, deductions, and credits. A corporation pays its shareholders dividends from its after-tax income. The shareholders then pay personal income taxes on the dividends. This is the often-mentioned “double taxation”. However, there are ways to reduce or eliminate double taxation that a tax adviser can recommend.

(3.)

Pros:

• Tax benefits:- By setting your boat up as a business, you take advantage of the many tax saving strategies that any other business does. Because you are putting equipment into operation, you can use the Section 179 Deduction, which allows a business to deduct the full purchase price of equipment up to $1,000,000. The equipment must be placed into service in the same tax year that the deduction is taken. Additionally, all expenses of ownership, berthing, maintenance, insurance, property tax, and more, become business expenses. The boat can also be depreciated over 10 years.
• Turn-key use:- Boats in charter programs have to be ready to go out at any time. After every use, the boat is inspected, maintenance and repairs made, and it’s ready for use again. The benefit to you is that when you’re ready to boat, your boat is ready for you – just step aboard and go.
• Professional Maintenance:- A boat in charter use receives regular maintenance, both cosmetically and mechanically, to keep it ready to go and looking good. You can have maintenance scheduled and performed for you or you can manage this yourself. Regular maintenance extends the life of the boat and all its onboard equipment, keeps operations safe, and preserves the boat’s resale value.

(4.)

Pros:

• Discourage unhealthy or immoral behavior:- Research shows that the sin taxes imposed on tobacco and alcohol actually discourage the consumption of the substances. The reduction in the consumption of tobacco and alcohol leads to a decline in health issues associated with the consumption of the harmful substances.
• Cover the costs:- Revenues from sin taxes provide the government with funds to cover the costs imposed by the consumption of the harmful goods. For example, the government may use the revenues to subsidize the healthcare to reduce the adverse effects of the consumption of the goods harmful to the society.
• Viable option compared to other taxes:- Sin taxes are a more viable option to increase the government’s revenue than other types of taxes such as income taxes. It can be explained by the positive connotation of the taxes that the society views as beneficial from the social and moral perspectives.

Cons:

• Regressive tax:- Sin taxes are regressive in nature. Thus, sin taxes discriminate against the poorer classes by placing the bigger financial burden on them relative to the burden placed on wealthier people.
• Illegal activities:- The imposition of sin taxes may result in the illegal activities such as the black-market operations and smuggling.
• Consumer behavior differences:- Sin taxes do not equally affect the behavior of all consumers. Although some consumers may stop their consumption because of sin taxes, others may not be willing to change their behavior.

(5.)

Pros:

• Generally the income tax is employed in a progressive manner, meaning as one earns a higher salary a higher proportion (percentage) of his income is taxed. The idea of a progressive income tax has garnered support from economists and political scientists of many different ideologies, from Adam Smith in The Wealth of Nations to Karl Marx in The Communist Manifesto. Income taxes used in most countries around the world are characterized by a progressive scheme.

Cons:

• The implementation of an income tax system is very complex, especially when trying to regulate the rich and the corporations. So complicated in fact that an entire industry exists to simply monitor and control the system. The government must enforce every line of the tax code, for example in the US the IRS requires 90,000 tax accountants. The IRS and tax audit industry might do more for the economy if they were retrained to in some other manner.
• Another part of the same industry of tax accountants consults the big corporations and the rich on ways how to exploit tax policies’ loopholes. Tax evasion and deceitful avoidance favours the wealthy as they are the ones able to pay for costly tax ‘advice’. As legendary investor Warren Buffet has been known to say, it is unfair that his secretary pays 30% in taxes while his accountants manage for Buffet to only have to pay 17% on his income.

(6.)

Pros:

• Reducing gasoline taxes stimulates the state's economy by increasing discretionary income available for other consumer spending.
• Lowering gasoline taxes gives customers an incentive to stop at Connecticut service stations instead of driving straight through the state. Service station customers often buy other items, generating additional sales tax revenue.
• The taxes are regressive because they are a disproportionate expense for people with middle and low incomes.
• Capping the petroleum products tax makes the state less reliant on a volatile commodity (oil) that is subject to big price swings.
• Sudden sharp increases in gas prices have been attributed to speculation, which hurts the economy. The state budget should not benefit from oil price speculation.
• The state should not rely on a petroleum products tax that is complicated, invisible to consumers, and hard to explain and understand.

Cons:

• Because revenue from both taxes goes to the STF, revenue reductions reduce the state's ability to address transportation infrastructure needs.
• Lower gas taxes encourage people to drive more and to drive bigger cars, leading to (1) faster depletion of a finite natural resource (oil), (2) adverse effects on the environment and air quality, (3) more traffic, and (4) faster road and bridge deterioration.
• Capping the wholesale oil price subject to the petroleum products tax merely protects against additional price increases; it does not reduce gas taxes or gas prices.

(7.)

Pros:

• The property tax is a more stable and reliable revenue source than any other tax.:- That’s because property values are usually less susceptible to short-term economic fluctuations than other major revenue sources, including sales and income taxes.
• Since property taxes can be secured by the property, they are difficult to evade:-  This ensures that a broad segment of the population shares in the costs of government.
• Property tax systems are more open and visible than those for other taxes:- For example, property owners can examine their assessments and those of nearby properties; they have the opportunity to appeal the assessment; and they are usually faced with a bill that shows their entire liability, which makes the full magnitude of the tax obvious. This is not the case with taxes that are collected in small amounts as part of the purchase price (sales tax) or are withheld from pay throughout the year along with many other items (income tax).

Cons:

• The large lump-sum payments often associated with property taxes are seen as a major disadvantage:- Since property taxes fall on unrealized capital gains, they may not be correlated to cash flow. This makes payment more difficult for companies that are property rich, but income poor.
• There is often a misunderstanding of the relationship between appraised value and tax;-  This can be viewed as a disadvantage when compared to fixed-rate taxes, such as sales and income taxes. The problem is magnified when tax jurisdictions permit long or irregular periods between reappraisals, leaving taxpayers ultimately hit with sticker shock.
• Property tax appraisals may be perceived as inequitable, especially since assessment ratios differ between property classes:-  In many cases, appraisals may truly be inequitable. Lack of adequate state or local oversight and demonstrably poor uniformity among comparable properties are prime indicators of inequitable treatment.