Taxable events
- Arguments in favor of corporate formations as taxable events: Taxable events refer to financial transactions that are likely to lead to tax consequences. In most cases, taxable events involve transactions that lead to financial gains or losses. A corporate formation may be categorized as a taxable event. This assertion arises from the fact that it is an exchange transaction. Therefore, the parties to the transaction should recognize losses and gains. Categorizing corporate formations as taxable events enables a country to increase its tax revenue. Moreover, taxing corporate formations simplifies the process of administering tax law. The tax administrator does not have to weigh options on whether corporate formations are taxable or not. Recognizing corporate formation as taxable events enables taxpayers to structure their transactions effectively. Consequently, they are in a position to avoid specific requirements of section 351.
- Argument refuting the claim: Categorising corporate formations as taxable events may have adverse effects on start-up companies. One of the ways through which this aspect may occur is by reducing the firm’s capital via the income tax that the transferor pays during the process of transferring an asset. Secondly, corporate formations should not be taxed for there are no economic gains or losses during the transfer process. The transfer process only involves a change in property or asset ownership. Therefore, it is not right to recognize economic gains or losses at this stage. Moreover, the contemporary structure in the US does not allow taxpayers to realize losses, which gives the government more in terms of taxes. Taxing corporate formations would prohibit investors from incorporating their enterprises due to the associated tax consequences and this move may affect the economic growth of a country adversely.
The complexity of the tax system
Designing an effective tax system is one of the most important aspects that governments should consider. Simplicity and fairness are amongst the most important elements that should guide the process of designing the tax system. However, achieving these goals is challenging; for example, ensuring simplicity in the federal income tax system is difficult, which arises from the fact that it would entail foregoing other important objectives. One of the ways to make the income tax law simple is by designing it in such a way that it becomes similar to a flat tax rate. However, this move may result in unfair treatment to some taxpayers and to illustrate this argument, consider two taxpayers, X and Y, whose total annual income is $100,000. If the two individuals are required to pay income tax at a flat rate of 20%, each of them will pay $20,000 annually as income tax. However, consider a scenario where party B suffers from severe illness hence incurring $60,000 in medical expenses in a year.
This scenario presents a major challenge in determining whether the two individuals should be subjected to the same annual income tax. The variation to this scenario arises from the definition of the term ‘fairness’. Making the federal income tax simple should not be the priority of governments in their effort to reform the tax system. In summary, one can assert that complexity is a necessary element in the tax system. Therefore, governments should focus on ensuring that the internal revenue code developed contributes towards the maximization of the revenue collected to enhance countries’ efforts to achieve economic growth.