4th Packback Assignment – Due October 14 at 5 p.m.
Write an initial post (containing your own original question title) of no more than 300 words, good citations and submit a response to two other questions from classmates. Citations for each.
Topic: President Biden has proposed several new taxes (or tax increases) to pay for the infrastructure bill that he wants Congress to pass. Discuss one or two of his proposed increases and explain whether you think this is an appropriate tax or not? Are there any alternatives you would recommend?
1. Tax avoidance vs tax evasion, which route benefits corporations and why?
Tax avoidance is a legal and recommended method used by corporations and individuals to reduce the amount of income tax owed. By claiming various deductions and credits, one can achieve to reduce the amount of income tax owed.
Businesses and individuals have taken other routes to “reduce income tax owed,” but these measures are illegal. The term is tax evasion, which requires companies/individuals to underreport income, falsify deductions, claim personal expenses as business expenses, and even keep two sets of books to falsify records.
An example of a corporation that committed tax fraud is Panama Papers. In short, compromising information was leaked. It revealed that Mossack Fonseca had various shell companies engaged in illegal activities such as tax evasion.
2. Do aggressive tax strategies damage the the quality of a company through the eyes of an investor?
Corporations that use aggressive tax strategies in hopes of seeking greater financial benefit may actually be incurring a greater financial burden to the company instead. The goal of using an aggressive tax strategy is to reduce the amount of taxes the company pays to ultimately make the company more profitable after taxes. However, the use of these types of strategies can also give rise to unintended negative impacts to the company.
One negative consequence brought about by aggressive tax strategies is the confusion it causes among investors and financial analysts. For companies with unusually low tax liabilities, their analysts have a harder time predicting and forecasting their pre-tax income. In fact, analysts are 25% more likely to make a mistake in forecasting the earning’s of a company that partakes in aggressive tax strategies.
Furthermore, tax aggressiveness can also reduce a company’s transparency in the eyes of investors. These strategies increase the complexity of a company’s financials. This can make it very hard for investors to get a clear picture of the overall success of a company.
To combat this issue, companies that use these aggressive strategies have started to provide more detailed annual reports in an effort to give investors more clarity. While this can help them with investors, it can also come back to hurt them down the road with the tax authorities.
Do the benefits of aggressive tax strategies outweigh the disadvantages? Or should company’s stay away from them all together?