Converting to Zero Personal Income Tax (Essay Sample)

Converting to Zero Personal Income Tax
Institution
Date
Introduction
Economists have long debated the merits that would be incurred if U.S could shift to zero personal income tax. In fact, Keynesian literature has largely indicated disincentives to economic growth that resulted from income taxation. This is because; taxation is only one of the factors affecting work incentive in U.S. This issue makes it extremely challenging to relate available statistical evidence with the responses from interviews by the taxpayers.
There is every reason to believe that zero personal income tax will increase returns for individuals, families, firms as well as to the federal states hence great savings from risks and investments.
Theoretical Review
Despite U.S government spending $3.6 trillion per year to fund social security, education, transport, and Medicare among many other projects, the federal government loses both individual and corporate income revenue from the shifting of profits and income. The revenue losses from the high tax avoidance especially from some of its trading partners are suggested to be around $100 billion per year. The tax avoidance concept has emerged from wealthy individual investors in most of these countries as well as from multinational corporations. Since U.S is not exceptional in the operation of world largest corporations, shift from taxation of personal income to zero taxation means that the country will be in a better position to trade as well as instill alternative of reverting the revenues that would be generated from tax avoidance (Hoffman, 2013) .
It was evidenced that a multinational firm would prefer to constructs factories in a low-tax jurisdiction rather than in the United States in order to take advantages of the low foreign corporate tax rates. If these factories were established in America, they would increase job opportunities as well as increasing the country’s GDP as well as the net per capita income. Moreover, the federal government is aware that most of its citizens participate in economy growth of the foreign countries such as Caribbean, Kuwait and Saudi Arabia by creating secret bank account in their respective banks. This evasion from the federal government from withholding tax on many types of passive incomes paid to foreign entities besides of losing own investors to foreign countries.
Some economists have criticized zero tax income policy, indicating variations in the features used to characterize tax havens. Some of the restrictive definition created by these critics limits tax havens to those countries having zero income tax, to have other traits such as lack of transparency, inadequate information sharing, bank secrecy and requiring little or no economic activity to obtain legal status. However, these allegations are far from the truth (Hoffman, 2013).
Taking an example of Qatar, her government has utilized the zero income concepts to transform the country into the international hub for tourism, fiancé and education. Surprisingly, U.S companies interested in international opportunities would consider current trends and future trends in Qatar than executing and implementing such projects in their own soil. Moreover, the country’s economic growth is stunning. For instance, her economy grew by 8.8% in 2007 and 9.7 in 2012, and per capita GDP is currently at $30,000; one of the highest in the world. The Qatari government has utilized the zero personal income tax to generate more wealth to the country by diversifying her economic base beyond hydrocarbons. Such economic reform has made the country attractive for trade and investment (Welch, 2009). The strategy attracts highly skilled population all over the world, which is deployed in her mining industries. The Qatari government obtains extra revenues from working with Americans as well as buying U.S products and services. These business relations substitute the revenues that would be obtained from income taxation. Moreover, there are well-capitalized financial institutions in Qatar, most notably Qatar National Bank. The country also allows up to 100% of foreign ownership in agriculture, manufacturing, health, education and power projects to her investor, hence expanding country’s economy.
Similarly, Saudi Arabia also adopted zero personal income to her citizens. However, a tax rate of 20% is applied to non-Saudi in order to help the country generate extra revenues. Low-tax guide is employed to dividends, interest, payment o technical and consulting services, air tickets, shipping and insurance at a rate of 5%. This rate is much lower compared to United States and other European countries. The Saudis and nationals of other Gulf Cooperation Council (GCC) states who are residents in Saudi Arabia are not subjects to income tax in Saudi Arabia. The GCC states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Non-Saudi and non-resident GCC nationals and entities with a permanent establishment in Saudi Arabia are subjects to income tax on their business income in Saudi Arabia. Actually, payments to non-residents are subjects to withholding tax (Welch, 2009).
Methods that U.S would use to Substitute Revenues
Debt Allocations and Stripping of Earnings
In this strategy, the federal government would consider borrowing more in high-tax jurisdiction and less in the low-tax one. This shifting of debts can be achieved without altering the entire debt exposure of the firm. A more specific practice is known as earning stripping, where either debt is associated with related firms or unrelated debt is not subject to tax by the recipient. The allocation of U.S parent’s interest would mean that the zero personal income tax would limit on the foreign tax credit. This system would target firms with excess foreign tax credits. According to J.K, Lasser Tax Institute. (2015), alloc...