+1(209) 348-9544
order@myessayservices.com
+1(209) 348-9544
order@myessayservices.com
Are you in High School, College, Masters, Bachelors or Ph.D and need someone to help in your homework? All you need is to ask for research paper help written by a specialist in your academic field. When you buy an essay online from My Essay Services, we offer you an original, nil plagiarized and unique paper written by a dedicated writer who is PhD or Masters qualified. MyEssayServices.com is an experienced service with over 9 years experience having delivered over 83,000 essays over the years.
Value added tax is the taxation on the products that have undergone any form of processing. Value added tax is taxed on any single change in the product. The tax is capped at a certain percentage and applied to all processing of raw materials to add value. The tax is applicable to the products that have undergone further processing and manufactured goods.
Common approaches to computation of value added tax are the calculation of the total value added to the product after the processing or further changes have been included. The premise of the tax is the transformation of the product and the improvement that ensues from this transformation (Ashta n.d). The United States does not use the system of taxation. In its place, it applies sales tax that increases with the value of products that the company sells.
In the recent times, the law-making bodies in the United States have proposed the special kind of sales tax in from of value added tax. The lawmakers envision the tax to be the cure for the budgetary problems that are being witnessed in the current taxation systems. Value added tax would be collected from the manufacturer as opposed to the sales tax that is collected from the sales people (Correa Cervera, n.d.). Collection of the value added tax from the manufacturers assures the government of some level of tax inflows that may be composed of the value additions that may occur at later stages in the value chain. Therefore, the tax will be easier to collect.
Only the state of Michigan applies the value added taxation system. However, other states have pondered over the adoption of the taxation system as the most effective way of dealing with the taxation issues that they witness (Correa Cervera, n.d.). However, there are various voices on the issues that may arise from the value added tax. Most of the concerns are voiced by the manufacturers that will have to pay additional taxes to the government on top of the common corporate tax. The paper will investigate the viability of the tax system despite the different voices raised over its suitability in the American context.
Value added tax system working is based on the value added at each point in the production system. The value added in products is the amount by which the prices of the product exceed the costs of the materials used in the production process. The value of the tax paid is added to the final price. Therefore, the customer still is the one that pays the tax in the end.
The fact that the tax is not itemized in the bill to the customer, there is a temptation to view it as a tax on the business. This might be the case; however, the tax is not handled by the company. It is not like the corporate tax that is paid to the government from the profits. The company eventually adds it to the final product. This makes the classification of the tax as a tax on business faulty. Therefore, value added tax is a form of a sales tax. The only difference between this tax and sale tax is the collection of the tax (Ashta n.d). Value added tax is collected in stages as opposed to the sale tax that is collected at the end of the sale has been made.
According to the fairness perspective, value added tax is a regressive system of tax. The tax requires the poor consumers to pay more tax than the wealthier consumers. Poor consumers pay more tax in proportion to their income levels. The wealthier consumers rarely feel the effects of the tax since it is meager compared to their level of income.
The only difference between the taxation systems is that it is collected in the intermittent levels at the end of each production stages (Correa Cervera, n.d.). The advantage of this collection approach is that the government has an assurance of some tax inflow. It also means that the tax net is spread to the companies involved in the different levels of production. At the end of the intermittent tax collection, the customer has an imposed tax in the form of value-added tax (Mikesell, 2014). The customer's perspective on the same is that the government has imposed a tax on the final price.
Reasons behind the adoption of the tax system
The imposition of the tax is determined by two goals that the tax policy makers may want to change. One of the goals is determined directly by the tax system that they would like to replace. The development of the taxation system in Europe was informed by the need to eliminate the structural problems that arise in the collection of the sale tax (Ashta n.d).
This motivation is important more so when the sales tax is imposed on the final retail transaction as well as the business-to-business transactions. The business-to-business transaction ought to be the exempt since the imposition of the tax on them leads to instances of double taxation. The product will eventually be taxed. Therefore, the inefficiency of the taxation whereby the sales between the businesses are taxed, and customer is taxed too motivated the development of the taxation system (Correa Cervera, n.d.). Therefore, in order to reduce such issues, the government can come up with the value added tax system to replace the traditional sales tax.
Taxing the business inputs leads to a situation known as pyramiding. This problem arises when the value added tax is imposed on all the inputs used in the production of a certain product. Pyramiding is an undesired effect that has to be eliminated to remove the need for the increased taxation of the people. The tax burden in the taxation system is too much such that it makes the VAT system too oppressive more so to the poor members of the society.
Pyramiding also leads to the regressive nature of the tax system as well as increase in the unpredictability of the system. The number of times that the tax is paid depends on the levels of production or the stages in the production (Mikesell, 2014). This means that the production systems that have more stages of production will have a higher value added tax.
In order to reduce the number of stages in the production of a certain output, the businesses are forced to adopt a vertically integrated system whereby the number of players in the production system is reduced. This means that the business will not pay taxes on the inputs that are present in the production process. Therefore, the VAT system ought to be designed to avoid imposition of the tax burden on the business inputs (Ashta n.d). Taxing business to business, transactions ought to be avoided. Reduction of the number of times and organization is taxed.
Well-designed value added tax systems are ideal in that they do not have the issue of pyramiding which was the main reason for the abolishment of the sale tax system and its consequent replacement with the VAT.
In the case of Michigan, the adoption of the VAT system was to replace the corporate income tax. This means that the rationale did not arise from the need to develop a system that will reduce double taxation on the customer at the retail step (Correa Cervera, n.d.). The fluctuating nature of the corporate tax is hinged on the profitability of the organization over the periods (Zabov, n.d). The states adopted the value-added tax since it was a better mode of taxation.
The taxation is based on the value that the company adds to the inputs before pushing the product to the market. As long as the company is in production, the value added will always be present. Therefore, the tax system is more predictable. The taxation system provides the government with the revenue stability hence enhancing the predictability and budgeting accurateness.
VAT has the merit of the enhancement of the horizontal equity. The taxation system ensures that the products are taxed in the same way regardless of their level. Each transaction receives the same treatment regardless of the sale price (Ashta n.d). The sales tax tend to tax the highly priced products more than the other products that may be lowly priced. Replacement of the corporate income tax with the VAT increases the predictability of revenues that the state will collect at the end of a certain period.
The adoption of the taxation system in the United States will be more difficult than anticipated. On one hand, there is a widespread clamor for the adoption of the taxation system given the success in the European context (Mikesell, 2014). However, in the United States, it is not a guarantee that the other states will adopt the same approach. This creates issues when dealing with trade between the states. Therefore, the value added tax has to be applied in all the states.
The common tradition is not to itemize the tax on the receipt unlike in the case of the sales tax. This means that the customers will be unaware of what proportion of tax they will be paying. The invisibility of taxes will cause issues in terms of the knowledge of customers. It may also affect the vigilance by the customers on the proportions of the prices that contribute to the tax. Therefore, the government ought to shift from this tradition by itemizing the tax on the receipt.
The reference to the tax as a single business tax, as it is the case in Michigan may fool the people into believing that the tax is imposed on the business (Ashta n.d). This reference will aggravate the fact that the majority of the people are unaware of how the VAT system works.
References
Ashta, A. Strategic Aspects of Value Added Tax (VAT). SSRN Journal.
Correa Cervera, J. The Single Rate Business Tax: A Value Added Tax?.
Mikesell, J. (2014). Misconceptions about Value-Added and Retail Sales Taxes: Are They Barriers to Sensible Tax Policy?. Public Budgeting & Finance, 34(2), 1-23.
Zabov, L. Comparison between Value Added Tax and Sales Tax. SSRN Journal.
The taxation history in the United States is marred with an impressive number of rebellions. In the 1760s, the British in that were working in the United States started complaining about the taxations approaches used by the British government on them. The rebellion on the tax was the beginning of the American Revolution. The gain of independence led to the development of new approaches to tax collection. The independent America started collecting taxes on imported goods, Whiskey and glass windows for a short while.
The state authorities collected tax on voters and property tax on commercial buildings. There are also exercise taxes levied on the people by the state government as well as the federal government. The inheritance taxes levied by the federal and state governments commenced after 1900. This paper will look at the developments on the inheritance tax that have ensued since the offering of the speech by President Roosevelt in 1906.
A few pointers prompted the president to make the assertion about the federal tax. The president acknowledged that the government was in the process of revisiting it tax policy so that it would meet the standards placed by other nations. This is a pointer that the president was under pressure to conform the tax collection policies and practices to the ones that were in force in other countries. He was able to make various suggestions that made the tax system fair to all the people. He was of the point of view that the inheritance from the parents to their grown up children was a major deterrent to the development of a hardworking nation.
He was also advocating for the adoption of a taxation system that would be both accommodative to all and progressive in nature. Similar to the position held by the president, the proponents of this type of tax hold the point of view that this approach to taxation of the rich people will reduce the trend of concentration of wealth among the rich families. The opponents of the same tax are of the opinion that this approach to taxation leads to the reduced capital accumulation, which is detrimental to economic growth. This tension among the people has led to the development of a series of revisions of the tax policy.
Historical overview of the tax system
The application of the term death tax is used to refer to the various classes of taxes related to the ability to transmit or receive the property by death. The stamp taxes are taxes levied on the recordation and execution of wills the estate taxes are levied on the ability or the privilege of a person to transfer property to other people at the time of their death. The general practice in the execution of the estate tax is that the more the value of the property under transfers, the more the estate taxes. The inheritance tax (also known as legacy tax) is an exercise tax levied on the privilege of obtaining property from a deceased person. The general practice in dealing with the taxes is that they graduate the taxes according to the property under transfer and the relationship between the beneficiary and the decedent.
The modern taxation on the estate followed the repelling of the inheritance tax. The periods after the tax were repealed witnessed an unprecedented increase in mergers in the manufacturing industry owing to the rise in a new approach of investment in the form of holding companies. The result of this approach of investment is that there was an increase in wealth concentration in a small number of powerful companies and the people that headed them.
The increase in wealth led to the development of great political power. The imminent power in the new breed of the rich led to fears in the people that the small group of people in this class would end up developing a class of plutocracy. The plutocracy would be undesirable for the people and it would challenge the foundation of the American nation since America prided itself as the land of the free people (Schmalbeck, 2000).
Progressive movements started emerging all over the nations that sought to counter the possibilities of the American companies holding too much political influence that they would end up controlling the nation. Among the people that stood strongly against the emerging trend was President Theodore Roosevelt (Roosaevelt & Hagedorn, 1926). The progressives advocated for the development of an inheritance tax and a graduated income tax that would play a crucial role in solving wealth distribution inequalities. The reasoning of the progressives led to the development of the foundation of the 16th amendment of the American constitution alongside the enactment of the federal income tax. The start of the First World War generated another trend on the American tax system. The congress enacted the federal estate tax.
The revenue act of 1916 led to the development of a tax on the transfer of wealth. This is also commonly known as the estate tax in the modern day. This tax is applicable when a person is transferring his wealth to his or her beneficiaries after the demise. Estate tax is charged on the will in the transfer of the property. Therefore, for the estate tax to become applicable in the United States, the person whose wealth or estate is under transfer must be dead.
This type of tax is often confused with the gift tax (Roosevelt & Hart et al., 1941). A gift tax is a form of taxation that is applicable on the transfers of property during the lifetime of a person (Roosevelt, 1920). The gift taxa was put in place in order to deter the efforts employed by the people to avoid paying estate or inheritance tax by giving away their properties prior to their deaths. In the event that the estate is under the care of a spouse or a reputable charity organization, the tax is not applicable. In addition, a varying amount is not subject to estate tax. This amount is not constant but it varies per year while ranging at the region of 5000000 million dollars.
The proposition of the estate tax by the president set the stage for constant political debates. In most of the times, the political debate on this contentious issue leads to the formation of hardstand (O'connor, 1980). The same matter has taken the resemblance of a political football where the governments have developed various polices to deal with the issue. Most of the policies developed by the governments are just sources of political mileage just as the argument by president Theodore Roosevelt was.
In the Bush administration, the tax regimes targeting the estate taxes sought to extend the phase out and added a sunset clause. The Obama administration has brought about continued adjustments on the taxes alongside exemptions. However, despite the tax policies debate manifested in the current times, the debate centers on two opinions. One side of the debate is the one that thinks that the taxation approach is fair to all the people. The other side of the divide is of the opinion that the approach to taxation is unfair.
There are various opinions given on the issue of the estate tax. The opponents of the tax hold the point of view that the current approaches to taxation are tantamount to punishment to the people that work hard to earn their wealth (Janinga & Harrison, 1993). The other point of contention in the current tax system is that it does not define what amount of wealth qualifies to be taxed as excess amount since all people have different definitions of excess.
They also argue that the taxes are in disparity with the ones applied by the rest of the civilized nations. The critics of the taxation approach term estate tax as the death tax. This neologism seeks to send the connotation to the people that the government taxes them even after they are dead. This approach has made the taxation a real issue among the Americans, which has consequently translated to constant revolts over the taxation.
The proponents of this approach to taxation cite the same reasons that Theodore Roosevelt and other progressives of the time cited. The proponents of the taxation regime claim that the taxation is an effective check on the wealth inequalities. The approach seeks to reduce the gap between the rich and the poor. They also see the taxation as an important tool in increasing the productivity of the young people that would otherwise be after the wealth that they would inherit from their parents.
Bibliography
Janiga, John M and Louis S Harrison. "Case for the Retention of the State Death Tax Credit in the Federal Transfer Tax Scheme: Just Say No to a Deduction, The." Pepp. L. Rev. 21, (1993): 695.
O'connor, Edmund. Roosevelt. St. Paul: Greenhaven Press, 1980.
Roosevelt, Theodore and Hermann Hagedorn. The works of Theodore Roosevelt. [New York: C. Scribner's Sons, 1926.
Roosevelt, Theodore, Albert Bushnell Hart and Herbert Ronald Ferleger. Theodore Roosevelt cyclopedia. New York City: Roosevelt Memorial Association, 1941.
Roosevelt, Theodore. Theodore Roosevelt. New York: Charles Scribner's Sons, 1920.
Schmalbeck, Richard. "Does the Death Tax Deserve the Death Penalty-An Overview of the Major Arguments for Repeal of Federal Wealth-Transfer Taxes." Clev. St. L. Rev. 48, (2000): 750.
Taxation plays a vital role in the attainment of the development of the nation. Out of the money collected from the taxes, the government has the power to fund both its development and recurrent expenditure. Despite the good that taxation brings into the society, there are constant efforts by the adults contributing to the exchequer to default or avoid the taxes levied upon them. Defaulting is tantamount to a criminal offence. This aspect leaves the taxpayers with tax avoidance as the only safe way of reducing the taxation burden that is upon them. Charitable donations feature prominently among the most common approaches that the taxpayer uses to avoid paying taxes (Mcclelland & Greene, 2004). This paper will look into the very act of tax avoidance and its effect on the gross payment of the taxpayer.
The paper will also look into the rationales that people give for charitable contributions that warrant the deduction of the donations when determining the final tax payable. The tax law allows the taxpayer a total of 10000 dollars per household in tax breaks or tax expenditures. However, the elimination of all the tax expenditures does not necessarily translate into an addition of the amount onto the tax base for the household. Despite the aforementioned aspect, the tax experts have a common ground on the gains made on the tax deficit by scaling back the tax expenditures.
Many tax expenditures are applicable in the federal tax code. Tax deductions made on the charitable donations is prominent if one views it from the estimated revenue impact point of view. Owing to the Joint Committee on Taxation (2011), the revenue cost incurred in the five-year period ranging from 2010-2014 is below $246.1 billion. The charitable donations ranked in the top 15 of the federal tax expenditures. There are no significant changes made on the charitable deductions. However, the ongoing discussions on the way forward on reducing the federal budget deficit look at revisiting the tax deductions made on the people that give to registered charitable organizations.
The main point that the research paper wishes to address the main debate that is unfolding on the issues of the size and scope of the tax deductions on the donations made by the taxpayers to charity. The paper will summarize the treatment of the charitable contributions under the current legal framework. The paper will provide a short discussion on the changes in the tax deductions applicable under the proposed system. The discussion will look at the proposals in as parts of the bigger picture of tax reforms as well as means to reduce the current tax deficit for the federal government (Powell & Steinberg, 2006). The paper will finally look at the impact of the proposed tax changes on charitable contributions as well as the financial resources in the domain of the not for profit organizations. Finally, this paper will look at the broad taxation issues on the scaling back or modifications of the charitable deductions.
According to Brody and Cordes (2006), the federal government is a major benefactor of the not for profit organizations since it allows individuals and corporations that give to charity income tax deductions that are commensurate with their contributions or donations to charity. The main view of the proponent of this practice of the federal government is that it is an incentive for the private donors to offer their financial support to the philanthropic causes. The acceptance of such donations leads to the automatic reduction of the out of pocket cost of funding the not for profit organizations by the amounts that are inherently dependent on the individual donor rate.
If the rate is 30 percent, the donor saves 30 cents in taxation for every dollar that he or she contributed to the cause. The system has two controversial areas. Among the issues raised is that the system has the provision for subsidies to the taxpayers that itemize the deductions and claim it. The other issue is that the rate increases with the tax bracket. Therefore, the higher earners have high deduction compared to the low-income earners. Therefore, the system favors the high-income earners. The taxpayers that donate property that has an appreciated value end up avoiding the taxes applicable to the capital gain owing to the increase in value of the asset.
Contrary to other tax expenditures, there has been a broad consensus that the charitable deductions are sources of reasonable and almost efficient means of offering subsidies to the people that contribute to the important public purpose. However, the seeming consensus has been subjected to scrutiny since charitable deductions attract a lot of change just like other tax expenditures. The change has taken the shape of proposals seeking tom make the income tax simple and transparent. The pundits for change have also taken the possible impact of the deductions on the reductions of the income tax deficit for the federal government.
The main reason behind the wide acceptance of the tax reduction to the charitable giving was that the price elasticity of contributing to the charitable organization equaled the unity. It even exceeded the unity if one looked at it from the absolute terms. Some of The researchers have characterized the magnitude mentioned above as a golden rule. This is because the amount that is forgone by the federal government in tax deduction is equaled or exceeded by the amounts that people spend on the charitable goods or/and services. Recently conducted research has indicated that there price elasticity of the charity is less than unity. The issues of the price sensitivity of giving have led to the development of different views on the seeming consensus witnessed in the previous research. This means that portion of the revenue that the federal government forgoes does not necessarily translate into charitable giving since there is no stimulation of giving.
Questioning of the charitable deductions has also received backing from the preexisting issues on whether the charitable deductions contribute to the equitability in the society. Various scholars have raised questions on whether the current form of the charitable deductions is fair to all the people. The scholars have been of the opinion that the deductions serve the interests of the public rather than the private sector. Thaler (2010) raised questions on what is mainly termed as the underlying policy rationale by fronting the argument that states that subsidizing the contributions made by individuals and corporations to the not for profit organizations is the same as subsidizing the individual tastes of the donors just as it is offering support to the entities that have a true social purpose in mind.
The issues identified in the existing charitable deductions made it necessary for the government to come up with various proposals that would seek to reduce the negative impacts on the federal budget deficit. The proposals seek to modify the charitable deductions by reducing the extent of the contributions made by individuals as well as organizations that give to the charitable organizations. Some of the proposal that various stakeholders in the tax policy are incremental in nature. Such incremental proposals include the one contained in the Obama budget. This particular proposal seeks to maintain the structure of the charitable contributions just as it is in the current system.
However, the proposal seeks to cap the tax rate that is applicable when making charitable contributions. The proposal seeks to cap it at 28 percent alongside other itemized deductions. Other proposal put forward have a more fundamental objective than the incremental proposal contained in the Obama budget. One of the fundamental proposals includes the Simpson-Bowles plan. The proposal in this plan seeks to abolish the current system and replace it with the tax credit that is applicable on a flat rate. Other plans seek to reduce the contributions by abolishing all the charitable tax deductions such that all the people pay the same taxes to the government (Reich, 2005). However, under the latter proposal, the government will have the role of offering the some agreed grant to the charitable organizations from the amount collected that it would be otherwise losing if the charitable deductions were still in play. However, all the proposal have a commonality in that they search for the retention of a federal government subsidy to act as an impetus to charitable giving albeit in a scaled back structure.
The stirs that have been taking place in the nonprofits are understandable owing to the proposal and implementation of some of the proposals mentioned above. The cause of the disgruntlement in the nonprofit sector comes from the obvious effects of scaling back of the charitable deductions on the will of the people to donate to charity organizations. The organizations have fears that the scaling back will affect their financial bases in a significant manner such that they will be crippled.
The incremental policy proposed in the Obama budget will have the modest impact on the financial basis of the charitable organizations. This proposal will retain the current structure. However capping the deductions at the ceiling of 28 percent will lead to a change in the mode of operation witnessed in the industry. The proposal will reduce the amount deductible charitable contributions by a modest 1-7 per cent if the price elasticity is -0.50. When the price elasticity is at -1.0 the reduction in the deductible charitable deductions will be 3.2 per cent. Show ever, since the tax deductible contributions comprise over half of all the contributions made to charity, the same change will lead to the development of a reduction in the total earnings made by the charitable organizations by margins in the range of 1-2 per cent.
The implementation of the proposed flat rate approach will lead to the reduction to the individual contributions to charity by a margin ranging from five to fourteen per cent. This will in turn affect the total contributions made to the charity organizations to fall by 3.2 to 8.7 percent. This means that all the charitable organizations will experience massive changes under any of the proposed plans. The tax rate will be segregating in nature since the charities favored by the rich have the highest charitable contribution reductions.
In case the government makes an adoption of the flat rate approach to taxation, the majority of the taxpayers will experience some increase in the costs of giving after they have paid their taxes. This will have an exception in the taxpayers that have a marginal rate of ten per cent. This class of taxpayers will have a decrease in the cost of giving even after paying their taxes. Asserting a flat rate of twelve per cent will affect taxpayers that belong to the high tax brackets more than it affects the taxpayers in the lower brackets since they will not have the deductible charitable contributions ending up at high levels ranging up to 35 per cent. This will lead to the cost of giving after tax to rise by over a third (Joint Committee on Taxation, 2011).
According to the above discussion, it is evident that the impacts of the proposal on the modification of the policy or introduction of a new framework will range from modest to consequential. This reality leads to the next question of whether the government made other considerations when arriving at the proposals apart from the obvious reduction of the deficit. This leads to the search of the affirmative rationales on policies that are applicable in the limitation or modification of the charitable deductions. Two broad rationales are taunted as the most inclusive changes on the rationales for the charitable deductions (Roberts, 1987). One of the rationales uses in the modification of the charitable deductions seeks to indicate that there are massive disparities when it comes to the fairness of the current systems. The other rationale in the policy discussion seeks to discredit the public interest claim in the justification of the charitable deductions.
It is general knowledge that the tax deductions are sources of subsidies to the taxpayer that increase with the level of income of the same. The distributional incidence evident in the tax deductions stems from the fact that the deductions are only applicable in the event that people have itemized them. The itemization is the prerequisite for the increase in the deductions which also depend on the marginal tax rate applicable in the given tax bracket. Various researches indicate that the current deduction among the taxpayers that have taken upon themselves to itemize the contributions has an inclination to favor the taxpayers that belong to the highest tax brackets. This means that the tax savings made by the members of the public and corporations that itemize the charitable contributions would be better distributed under a flat rate system other than the current system that is incremental. This proposal is common among the people that believe that the tax savings resulting from charitable contribution are inequitably distributed.
On the flipside, the progressive nature of the charitable deduction is often misunderstood. The progressive nature of any of the provisions may not be applicable for the whole system. Therefore, in order to make a determination of the overall progressivity is determined in the event that one looks at the system without focusing on the deductions made in each of the income groups (Gravelle & Marples, 2009). Thus, making any elimination on the charitable deductions or changing the deductions to a credit does not necessarily make the whole tax system progressive or not. The adjustment rates are the determinants of the progressive or otherwise nature (Hopkins, 2007).
In addition to that, the distribution of the tax savings emanating from the charitable deductions that favor the taxpayers that are in the high income bracket creates a lot of concern in the event that one believes that the charitable giving is a part of what is essentially termed as private goods. This view is also consistent with the self-actualization motive of giving to charity. This motive is different from the altruistic motive of contributing to charity (Fleischer, 2008). A similar point of view can come up if the charitable giving is not sensitive to the cost of giving after the tax is deducted.
A different point of view is on the efficiency of the charitable deductions. This perspective differs in the event that one has the belief that making contributions to the charity comes from the altruism motive of supporting the provision of social goods. If that is the entire motive, the argument shifts since the now the person evaluates how efficient the nonprofits are in the provision of the social goods (Fishman et al., 2006). The argument looks at the treasury efficiency and the fact that the range of goods made by the nonprofits is the indeed social goods. Treasury efficiency looks at the revenue cost of charitable giving vis-a-vis the additional giving emanating from the subsidies extended by the government.
The other issue comes from the historical point of view that is the source of impetus for exempting the not for profit organizations from paying income taxes from the contributions made to them. The source of the justification of the exemption comes from the tax defining objectives that indicate a desire by the government to keep off from the activities of what came to be known as the third sector. This approach sought to avoid any sort of interference by the government on the activities of the church and the secular philanthropic successors that have evolved into the current charitable organizations (Ferris, 1998). This is the justification that apart from the charitable contributions, the exemption of the nonprofits from income taxes is not treated as a tax expenditure. This means that right from the onset of federal income taxes; the federal government is keen on subsidizing the charity organizations by extending tax saving to the people that contribute to charity.
A different viewpoint of looking at the issue of contribution to charity is floated by the economists who view the charity organizations as crucial players in reducing or doing away with the ineffectiveness or failures of the private sector (Brody & Cordes, 1999). This point of view has different stands. One of the arguments supporting the seeming underhand assistance of the charity organization in the stemming out of the inefficiencies of the private sector is that the indirect subsidies have a direct impact on the reductions of crowding out. This aspect means that the taxes are better than the direct subsidies that would otherwise replace them.
For instance, in the event that the government provided the subsidies directly, the chance of crowding out would be highly eminent (Hopkins, 2005). The crowding out is not possible in the event that the subsidies are provided indirectly by the offering tax savings to the taxpayers that contribute to charity organizations that are registered and recognized by the federal government. However, the success of the replacement is only real when the charitable subsidies are operating at their optimal level. The success of the charity organizations in reducing the crowding out are only attainable in the event that the following parameters are met; price elasticity in giving; a high degree of charity organizations financing goods and services that have positive externalities (Saez, 2004).
Summary and conclusions
While the debate on the future of the charitable deductions rages on, the stakeholders must put into consideration various issues. The points discussed in this paper are also important in providing the policy makers with the direction that they ought to follow as far as this debate is concerned. Among the issues that come out is that the proposals brought forward on the scaling back of the charitable contributions acknowledge the fact that the nonprofits sector serves an important role in the public (Boris et al., 2010). However, the proposals ought to be treated with caution. This is contrary to the other activities that have fewer implications on the delivery of the public policy.
However, despite the acknowledgment of the role of the charity organizations in the propulsions of the public interest is not a good reason to maintain the status quo. The case between the retention of the status quo and the scaling back of the deductions depends on two factors. One of the issues that are significant is the price elasticity of giving to charity. The other issue is the nature of the goods or activities subsidized by the charitable deductions. The sensitivity of the price to giving is of immense significance. The case for the retention of sensitivity to giving is weaker in the event that the charity organizations are not sensitive to the changes in the prices after the deduction of taxes.
The rate of giving ought to be commensurate to the price elasticity of giving to charity. This is worrying since the price elasticity of giving is occasionally less than unity as it is indicated by some of the research conducted (Gravelle and Marples, 2009). On the other hand, there is evidence as it is indicated by other research studies that the rate of giving among the rich people declined after taxation. The decline was consistent with the economic theory. Recent high tech research indicated that the rate of giving was on a decrease among the rich after they pay taxes.
On the other hand, while the data and operation of the third sector indicate that they provide goods with positive externalities, research also indicates than some of the nonprofits in the third sector provide goods that fall under private or club category (Andreoni, 1989). This is the most credible basis of the renewed efforts to reform the mode of operation in the third sector. However, it is difficult to provide a distinction between the nonprofits industries and the goods that they provide in terms of the benefit of the goods to the public. The reduction in the charitable contributions would possible have a small impact on the revenues of the nonprofits since they also have other source of revenue. The Obama proposal ought to be implemented as long as it has no effect on the operations of the nonprofits.
References
Andreoni, J. (1989). Giving with impure altruism: applications to charity and ricardian equivalence. The Journal Of Political Economy, pp. 1447--1458.
Boris, E., Cordes, J., Todo, M. & Toder, E. (2014). An analysis of potential tax incentives to increase charitable giving in puerto rico: final report.
Brody, E. & Cordes, J. J. (1999). Tax treatment of nonprofit organizations: a two-edged sword?. Nonprofits And Government: Collaboration And Conflict, 141 pp. 149--150.
Ferris, J. M. (1998). The role of the nonprofit sector in a self-governing society: a view from the united states. Voluntas: International Journal Of Voluntary And Nonprofit Organizations, 9 (2), pp. 137--151.
Fishman, J. J., Schwarz, S. & Fishman, J. J. (2006). Taxation of nonprofit organizations. New York, N.Y.: Foundation Press.
Fleischer, M. P., (2008). Generous to a fault? fair shares and charitable giving.
Gravelle, J. & Marples, D. (2009). Charitable contributions. [Washington, D.C.]: Congressional Research Service, Library Of Congress.
Hopkins, B. R. (2005). The tax law of charitable giving. New York: Wiley.
Hopkins, B. R. (2007). Charitable giving law made easy. Hoboken, N.J.: Wiley & Sons.
Joint Committee on Taxation, 2011. Background Information on Tax Expenditure Analysis and Historical Survey of Tax Expenditure Estimates. JCX-15-11. Joint Committee on Taxation, Washington, DC.
Mcclelland, R. & Greene, P. A. (2004). The estate tax and charitable giving. [Washington, D.C.]: Congress Of The United States, Congressional Budget Office.
Powell, W. W. & Steinberg, R. (2006). The nonprofit sector. New Haven: Yale University Press.
Reich, R. (2005). A failure of philanthropy: american charity shortchanges the poor, and public policy is partly to blame. Civic Investment In, p. 42.
Roberts, R. D. (1987). Financing public goods. The Journal Of Political Economy, 95 (2), pp. 420--437.
Saez, E. (2004). The optimal treatment of tax expenditures. Journal Of Public Economics, 88 (12), pp. 2657--2684.
Thaler, R. (2010). It’s time to rethink the charity deduction.
Browse More Essay Topics 24/7/365 Support 11+ Yrs in Essay Writing Pay for Quality not Quantity Score that A+ Grade
