You are chief counsel to the chairman of the Joint Committee on Taxation, the bo

Question

You are chief counsel to the chairman of the Joint Committee on Taxation, the body primarily responsible for identifying taxation issues and their consequences as Congress seeks to implement a comprehensive and coherent tax policy. Currently, the United States is in a bit of an economic slump. Corporate earnings reports are relatively weak; the stock market is about 25% off of its 5-year highs, and tax revenues are down. Largely as a result of the last issue, the government finds itself operating under an annual deficit, and the national debt hovers around $7,000,000,000. Interest rates, however, remain at historic lows. The president has suggested a multiple-pronged attack to revitalize the economy. First, he has proposed going to a flat tax rather than the current progressive tax system. (No recommendation regarding what that flat tax rate should be has been made, although the president has indicated he would not be likely to accept any figure above 15%.) As part of this plan, however, the president has proposed eliminating many of the current individual income tax deductions, including (I) the home mortgage interest deduction and (II) the property tax deduction. He has also proposed eliminating the deduction for dependents. Furthermore, he has proposed eliminating the child care and earned income credits to help make up for any potential shortfalls in revenue.
The chairman has asked you for your analysis of these provisions. Please prepare a memorandum outlining your thoughts on each, including, but not necessarily limited to
(I) the effect of each recommendation on revenues and deficits, both in the short and long run;
(II) the effect of each recommendation on the economy;
(III) the relative effects of each recommendation on different socioeconomic groups of taxpayers;
(IV) the relative "fairness" of each recommended change; and
(V) your conclusion regarding whether any or all should be adopted.

Explanation / Answer

ANS;

I) When corporate earnings are relatively weak and they can not provide sufficient funds for the growth of the company. Tax revenues become low. It can not cover the company's expenditure in the long run. Burden of deficit has accumulated leading to debt to the company.

II) Lower stock market will affect the company's ability to raise finance. It also affects the company's performance.

III) Lower stock market can lead to lower jobs and growth for socioeconomic groups. It can affect lower the cost which can affect the regular taxpayers.

IV) & V) To avoid situations like low tax revenues, tax rates should not be too high. Tax base should be lower. Abolishing capital gain taxes will result in economic growth and competitiveness. Double taxation of dividends can be eliminated by paying out salary equal to net earnings.

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