Tax Avoidance refers to the act of using legitimate ways for reducing tax liability, instead of cheating to lower the tax. There are plenty of methods approved by the IRS or state tax code that can help in tax avoidance. Many people pay more state and federal income tax than necessary just because they misunderstand tax laws and don't keep records. Hence most common means of tax avoidance is accomplished by claiming all the permissible deductions, and credit example, contributing to pre-tax retirement fund lower's the current taxable income.
Tax Evasion is the use of illegal means to avoid paying tax which occurs when the taxpayers either evade assessment or evades payment. For example, one can elude charges by transferring assets to avoid evaluation or hiding the assets after a tax liability has become due and owing. The crimes come with critical penalties including fines or imprisonment, (Taylor 6-7) .
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In regards to the old tax law, many companies and farms tend to avoid or evade tax because of market economic systems run on self-prosperity or interest. Avoiding tax payment increases profit irrespective of the legitimacy and tax evasion is illegal thou considered a burden. The proportion of tax-avoiding farms in the society varies with the strength of informal institution; value, attitudes, perception, belief and norms and formal institution rule of law. The factors that influenced a farm to evade or avoid tax are; the margin gained from avoiding tax, the degree of severity of punishment on tax avoidance was less compared to the new tax law. The norms and values that either favored or dis-favored illegitimate earnings of the farm caused tax avoidance. In the old tax law tax evasion and tax avoidance was at a higher rate because of lack of trust in government, public sector corruption, religiosity, too low/high social expenditure, too high/low tax burden; a level of deprivation and inequality.
There are three main differences between the old tax law of 1986 and that of 2 nd December 2017. First, the centerpiece of today's bill is a cut in the corporate tax rate from 35% to 20% which seems comparable to the change in 1986 from 46% to 34%.The sweep in deduction raises an average tax on business and a notable investment incentive has sharply curtailed. Secondly, the old law was egalitarian and the reform slashed the top rate of personal income tax income in half, from 50% to 28%. The loss of deductions and the rise in overall business and capital gains taxes were countervailing forces, and the lower earners got income-tax cuts, too. Today's bill is sharply regressive, despite the fact that it barely touches the top rate of tax. The third difference between the laws is their cost. The reform of 1986 was revenue neutral while today’s effort will cost $1.4trn in forgone revenue by 2027 or $1trn once its effect on economic growth is taken into account, (Steven 170) .
Impact on the economy results in cumulative GDP increase of $961 billion is less than the deficit increase of $1,233 billion, including macroeconomic feedback effects. The gross domestic product increased by 0.7% on average each year 2017-2027 period while the Act would increase the total budget deficits (debt) by about $1 trillion over the ten years, improving the economy. Employment would grow by 0.6% during the period and personal consumption increase by 0.7%. Impact on the budget deficit and debts "static" score of the bill- the amount of projected debt added when economic growth has not factored in shows that the deficit would grow by about $1.5 trillion in the decade. As result businesses and foreign investments would receive a slew of benefits from the GOP tax bill- the biggest being a cut in the federal corporate tax rate to 21% from 35%.
The Tax Cuts and Jobs Act boost economic growth for most Americans through a combination of lower corporate taxes, a more streamlined tax codes and a renewed incentives for real business investment. The reform aims at slashing or reducing the statutory corporate tax rates, along with the elimination of various deductions and exemptions that build-up into tax codes over time. As companies and businesses gain greater confidence in the tax environment they are operating in; they may become more likely to take on long, long-run investment projects that capture economies of scale, improving efficiency and productivity. Hence the increased rise in earnings from corporate investment from 2017 gave a sharp increase of the stock market promising development and result in economic growth thou it could lead to inflation.
Tax reform implications with regards to the executive compensations foresee development from less incentive to defer compensation either as annual bonuses to a specified future date or retirement, further declines in executive benefits and perquisites. A regulatory reform with potential changes to Executive compensation rules of Dodd-Frank design put in place, (David and Amanda) . Hence, motivations to pay executive compensation to a company stock encourage company shareholders. As many companies emphasize executive share ownership guidelines and the alignment of executive pay with total shareholder returns, this makes payments in company stock attractive because share payments will ultimately result in capital gains taxation when the executive elects to dispose of share payouts. We expect that reduced capital gains rates will impact LTI plan design and managerial incentives on shareholder value.
Finally, the main reform elements include reducing tax rates for businesses and individuals; a personal tax simplification by increasing the standard deductions and family credits; limiting deductions for state and cutting the alternative minimum tax for individual and corporations.
REFERENCES
David, Morgan and Becker Amanda. Senate approves major tax cuts in victory for Trump. GOP Financial Report. America: New York Times, 2017.
Steven, Shepard. "48 Percent Approve of Trump's Tax Proposal." The Wall Street Journal (2017): 170.
Taylor. "Measuring Tax Gap." Journal of Economics and Management (2017): 6-7.
