Taxation, a Governmental Instrument in Order to Re-Launch World Economy Study Case

9th Global Conference on Business & EconomicsISBN : 978-0-9742114-2-7

ABSTRACT

One of the biggest and unexpected financial and economic crises affect the world. After a period of welfare, economies of the world are quiet close to the collapse . Governments have tried to find solutions in these insecure conditions. Many governments decided to invest in important companies that was close to the bankruptcy in order to avoid the collapse of the main sectors of economy. Coherent and strong policies applied at national and international level are necessary in order to re-launch global economy. Taxation is one of the main governmental instruments for fighting against crises. That is the reason for tax cuts and additional deduction implemented by the world governments.

Taxation, a governmental instrument in order to re-launch world economy –Study case

Author : CATALINA MIKLO(BUDA)

Title : EC. PH Student

Institution: WEST UNIVERSITY OF TIMISOARA, ROMANIA

ECONOMY AND BUSINESS ADMINISTRATION

Address : Simfoniei street, nr. 3, Ap 5, Romania - ARAD

Email:

Tel. 0040/728.040.060

Author : MONICA MOLCUTA( TUDOR)

Title : EC. PH Student

Institution: WEST UNIVERSITY OF TIMISOARA, ROMANIA

ECONOMY AND BUSINESS ADMINISTRATION

Email:

Tel. 0040/ 727395916

Taxation, a governmental instrument in order to re-launch world economy –Study case

Abstract

Actual financial and economic crises looks to have the biggest impact in the last 50 years. Economic downturn expanded to USA, Europe and Japan and seems to be deeper than the crises from 1981-1982. A big uncertainty level from consumers and business environment produce spending and investment decrease. Governments from USA and European countries bought stocks from companies closed to the bankruptcies in order to avoid the collapse. In this period the states are important players for fighting against crises. The deepest reason for financial crises was the big level of liquid resources due of main central banks policies also by the fight of companies that export gas and oil to keep a low level of exchange rate for their currency. As a consequence, interest rate and volatility decreased. Both of them influence economic environment to buy expense assets. Reduced volatility of the market conduct to underestimated risk investments. At microeconomic level, failure at rating agencies, rational outsourcing from private point of view but unefficiency for social reasons, decentralized policies trends was few items that affect economic situation. Low interest rates combined with rapid product innovation in structured credit marks increased credit lending and in leverage. In these conditions the risk of credit investors was excessive. Failure of household to pay the loans conduct to a less liquidity . Banks started to refinance their activity . In these conditions interest rate become higher. Governments from USA and European countries fight for improving liquidity, assured governmental guarantees for loans, invested in financial institutions, big interconnected companies in order to avoid the collapse, bought stocks from banks, reduced interest rates. Despite of these actions, financial crises grow and affect all the economies.

Governments should take in considerations actual conditions described by wealth decrease, credit constraints, interest increase, unemployment risk which lead consumers to cut consumption. Few actions like target tax cuts, the greater provision of unemployment benefits, increases in earned income tax credits could re-launch the consumer.

Taxation

Tax is referred as the involuntary financial charge imposed on the individuals or groups or businesses or on any legal entity by any level of the government in order to finance govt. activities. Taxes are generally levied upon property, personal assets, upon income and upon sale or purchase of goods. These taxes are levied by the state or any functional equivalent of the state with definite aim. The aim is to cover government spending, to promote stable economic growth and to lessen the inequality of income and wealth distribution. In every country several types of tax exist with different rules and regulations associated with it..

In economic terms, taxation transfers wealth from households or businesses to the government of a nation. The side-effects of taxation and theories about how best to tax are an important subject in microeconomics. Taxation is almost never a simple transfer of wealth. Economic theories of taxation approach the question of how to minimize the loss of economic welfare through taxation and also discuss how a nation can perform redistribution of wealth in the most efficient manner.

The origin of taxation

The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC . Records from the time document that the pharaoh would conduct a biennial tour of the kingdom, collecting tax revenues from the people.

Even in the Bible, In Genesis (chapter 47, verse 24 - the New International Version) we find proves about earlier taxation. Joseph told to the Egyptian people to give to the Pharaoh a fifh( 20%) from their crop : "But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children."

In India, Islamic rulers imposed jizya starting in the 11th century. It was abolished by Akbar.

Greece:In times of war the Athenians imposed a tax referred to as eisphora. No one was exempt from the tax which was used to pay for special wartime expenditures. Also, the Greeks imposed a monthly poll tax on people who did not have both an Athenian Mother and Father, of one drachma for men and a half drachma for women. The tax was known as metoikion.Roman

Empire The earliest taxes in Rome were customs duties on imports and exports called portoria. Caesar Augustus was consider by many to be the most brilliant tax strategist of the Roman Empire.

Direct and indirect taxation

The economists established many criteria for taxes classification but the most frequently one is the way how taxes are collected. Based on this criteria taxes are split in two main categories : direct and indirect.

Direct taxation – is the taxation the effect of which is intended to be borne by the person or organization that pays it. Economists distinguish between direct taxation and indirect taxation. The former is best illustrated by income tax, in which the person who receives the income pays the tax and his income is thereby reduced. The latter is illustrated by VAT, in which the tax is paid by traders but the effects are borne by the consumers who buy the trader's goods. In practice these distinctions are rarely clear-cut. Corporation tax is a direct tax but there is evidence that its incidence can be shifted to consumers by higher prices or to employees by lower wages. Inheritance tax could also be thought of as a direct tax on the deceased, although its incidence falls on the heirs of the estate.

Direct Taxes include Property Tax, Income tax, Estate Tax, Inheritance Tax, Taxes on Net Worth.

The indirect taxation is characterized by the fact that it exclusively refers to the consumption of goods and services, determining a distribution of the fiscal obligations.The indirect taxes are those sources of budgetary incomes that are achieved, mainly, by means of the taxation on the consumption, being collected for goods sale, for the performance of certain services,

respectively of some works.

They are borne by the final consumer, namely by the one that acquires and/or uses for himself the good or the service within the price of which the tax is included the tax

Indirect Taxes include Sales Tax, Excise Tax and Value-added Tax.

Tax Rates around the world

Tax laws in most countries are extremely complex, and tax burden falls differently on different groups in each country and sub-national unit. The lists below give an indication by rank of some raw indicators.

(Table1.- Tax rates around the world)

TAXATION MEASURES IMPLEMENTED IN U.S.A., GERMANY AND JAPAN

Taxation in United States

Taxation in the United States is a complex system that include payment to at least four different levels of government and many methods of taxation.

Individual Income Tax: The U.S. individual income tax rates for 2009 are 10%-35%. However if under the AMT, Alternative Minimum Tax, method the tax payable exceeds the tax payable under the regular income tax method, the AMT calculation is effective. The AMT method is based on the gross income with reduced tax deductions and credits.

In general, the U.S. income tax is progressive, at least with respect to individuals that earn wage income.

Also, de deduction are higher for a person which has bigger income . For this person it is allowed to deduct expense as payments to doctors, premiums for medical insurance, prescription drugs and insulin expenses, state taxes paid, property taxes, and charitable contributions. (Table 2. - Single taxpayers)

(Table 3. - Married individuals filing joint and surviving spouses)

(Table 4. - Married individuals filing separate)

(Table 5. - Heads of households in U.S.)

The U.S. federal corporate tax rates for 2009 are 15%-35%, depending on the annual taxable income.

(Table 6. - US federal corporate tax rates for 2009)

Corporations may be taxed under certain conditions with the 20% AMT method

Personal Service Corporations in U.S is imposed to a flat tax of 35%.

Personal Holding Company in U.S.

Personal holding companies are subject to an additional tax on any undistributed personal holding company income.

(Table 7. - Personal holding companies)

Accumulated Earnings Tax

In addition to the regular tax, if a company has accumulated taxable income over $250,000 ($150,000 for personal service corporations), will pay additional Earnings Tax.

(Table 8. - Accumulated Earnings Tax)

Capital Gains

For individuals long term capital gain(property more than 12 months), the tax rate is generally 15%. Short term capital gain is added to ordinary income and is taxed at regular tax rate.

Withholding Tax

The withholding tax from the following payments from non-residents:

Dividend- 30%.

Interest- 30%.

Royalties- 30%.

Existing treaty for avoiding double taxation with the country of nonresident will reduce the applied tax .

Social Security

Social Security includes OASDI, Old Age, Survivor Disability Insurance, and Medicare.

Measures implemented in 2009 in order to stimulate the economy

United Statesimplemented a series of measures to stimulate economy[1] beginning with 2009 as following:

Corporate tax

•it was extended the carryback period for netoperating losses for small businesses with gross annual receipts of USD 15 million or less from twoyears to three, four or five years.

• also allows to business taxpayers to electto defer cancellation-of-debt (COD) income whenthe taxpayer or a party related to the taxpayer repurchases a debt instrument issued by the taxpayer. The deferral period is five years for a reacquisition of a debt in 2009 and four years forthose in 2010.

• government extend with additional year the special provision allowing corporationsto accelerate their use of a portion of theircarryforward alternative minimum tax (AMT) and research credits in lieu of claiming 50% bonusdepreciation.

• it was modify the New Markets Tax Credit by increasing to USD 5 billion (from USD 3.5billion) the total amount of credit allocation awarded for years 2008 and 2009.

• the percentage exemption for gain on the sale orexchange of qualified small business stock held was increased from 50% to 75% for stockissued after the date of enactment and before 1 January 2011.

Individual income tax

• thegovernment will provide about USD 116billion in tax relief over the next two years. Thecredit is equal to the lesser of USD 400 for individuals and USD 800 for couples or equal to6.2% the taxpayer’s earned income, and isrefundable even if the taxpayer otherwise has noincome tax liability.

• The Act provides another temporary patch to the

individual AMT at a cost of nearly USD 70 billion.

For families, the AMT patch will eliminate a

potentially substantial tax increase by raising 2009

exemption amounts to USD 46,700 for individuals

and USD 70,950 for joint filers.

• the deduction for state salestax and excise tax on purchase of certain motorvehicles

exempts from tax up to USD2,400 of unemployment benefits for 2009

Taxation in Germany

The German tax system was changed to ease the actual rate of tax for individuals and companies.

Individual income tax

An individual permanent resident will pay tax based on income obtained in Germany and from overseas.

A non- resident who is employed in Germany pays tax only on income earned in Germany.

To be considered a German citizen, a test must be met of either a life centered in Germany or a continuous stay of 6 months in Germany during two tax years.

A self-employed person must prepay income tax that will be offset on filing an annual return.

Germany individual income tax rates 2009

(Table 9. - Germany individual income tax rates 2009)

Corporate tax

The standard rate of Germany corporate tax in 2009 is 15%. There is a reduced rate for part of a corporation's income.

An additional tax, solidarity tax, 5.5% of the normal rate payable, is levied on individuals and companies in the conditions established by law.

An additional tax has been imposed to help the merger of the two Germanys. This is "solidarity tax" which is 5.5% of the normal rate payable. The tax is levied on corporations and individuals, subject to the conditions specified in the law. A "business tax", payable to the municipality, is added to the standard tax.In 2009 the effective corporate tax rate, including trade tax and solidarity tax is about 30%-33%.

Capital Gains

It is exempt from tax the profit obtained by individual from real estate sold and owned more than 10 years. Also the profit from securities sold and owned more than 12 months.

Sale of a shares held less than one year when the percentage of the investment is less than 1% is subject to a flat 25% tax. On the other hand, when the percentage of the holding is in excess of 1%, tax is payable on 60% of the profit.

Social Security contributions cover pensions, unemployment and nursing insurance and are payd by employees and employer.

Withholding Tax

The withholding tax from the following payments from non-residents:

Dividend - 26.375% (including solidarity tax).

Royalties - 15.825% (including solidarity tax).

Interest - 0%.

Existing treaty for avoiding double taxation with the country of nonresident will reduce the applied tax .

Taxation facilities implemented in 2009[2]

-introduction of declining balance depreciation at a rate of25% for movable fixed assets for a two-year period

- increase in the amount established for defining SMEs which can apply a special type of depreciation

-for individual, increase in the tax-free amount, a slight drop in the entry-level tax rate from 15% to 14% and further rate adjustments to compensate for inflation-related tax progression

Taxation in Japan

Individual income tax

Taxation of an individual's income in Japan is progressive.

In other words, the higher the income, the higher the rate of tax payable.

The tax rate for an individual in 2009 is between 5% - 40% There are reduced rates of tax for certain income earners.

Japan corporate tax in 2009 is currently fixed at 30% and, again, there is a reduced rate of tax for certain corporations it is important to point out that the effective tax, for individuals and corporations, is higher as a result of the other local taxes that exist in Japan.

Tax Individual Income

For a resident an individual pays tax on the income obtained in Japan and abroad.

A foreign resident who is employed in Japan pays tax only on income earned in Japan.

(Table 10. - Japan individual income tax rates)

Japan's individual income tax rates including local taxes are among the highest tax rates in the world. The effective top marginal tax rate is around 50%.Non residents pay for salary income in Japan 20%.

Capital Gains

The rate of tax imposed on capital gains is identical to the tax on regular income. Only 50% of the net capital gain is taxable when the asset ( real estate) sold was owned more than 5 years. The tax rate for listed shares in Japan is 10% (7%-income tax, 3%-local tax).The tax rate for sale of other shares is generally 20%.

Japan Corporate Tax

In 2009Japan corporate tax is 30%.Corporate tax on income below 8 million yen is 22% on condition that the total equity is less than 100 million yen.

In addition to corporate tax (a national tax) there are two local taxes paid by the corporation Inhabitant Tax and Enterprise Tax, that conduct to increased corporate tax rate that reach 41%.

A dividend received from a resident company and the first company owned at least 25% from the second company is imposed with a regular tax, but only 50% of the income .

Social Security

The social security covers matters such as health insurance, pension insurance, unemployment insurance and more. The rates are as follows:

Employer - 12.9%

Employee - 12.0%

Withholding Tax

The withholding tax from the following payments from non-residents:

Dividend20%

Royalties20%

Interest 20%

Facilities in 2009[3]

Corporate income tax changes

• Japan is re-instating the net operating loss Carry back for one year for small and medium-size enterprises (capital of JPY 100 million or less) for accounting periods ended on or after 1 February2009.