6. (TCO 2, 3, 6, 8, 9, and 10) You are chief counsel to the chairman of the Join

Question

6. (TCO 2, 3, 6, 8, 9, and 10) 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 five-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. He has proposed permanently abolishing all capital gains taxes. He has also proposed eliminating the double taxation of dividends by excluding them from shareholders' income. To partially offset these reductions, however, he has proposed eliminating the deduction that self-employed individuals receive for medical insurance copayments as well as the home mortgage interest deduction.

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. (Points : 50)

Explanation / Answer

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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