Oswald is beginning his first tax course and does not really have a solid understanding of the role that taxes play in various decisions. Please describe for Oswald the various types of decisions that taxes may influence.

Question

What will be an ideal response?

Answer 1

Taxes are a part of everyday life and have a financial effect on many of the major personal decisions that individuals face (e.g., investment decisions, evaluating alternative job offers, saving for education expenses, gift or estate planning, etc.). Taxes play an equally important role in fundamental business decisions such as the following:

• What organizational form should a business use? Where should the business locate?
• How should business acquisitions be structured?
• How should employees be compensated? What is the appropriate mix of debt and equity for the business?
• Should the business rent or own equipment and property?
• How should the business distribute profits to its owners?

Savvy business decisions require consideration of all costs and benefits in order to evaluate the merits of a transaction. Although taxes do not necessarily dominate these decisions, they do represent large transaction costs that should be factored into the financial decision-making process.
Taxes also play a major part in the political process. U.S. presidential candidates often distinguish themselves from their opponents based upon their tax rhetoric. Indeed, the major political parties generally have very diverse views of the appropriate way to tax the public. Voters must have a basic understanding of taxes to evaluate the merits of alternative tax proposals.