Small business taxation Essay Example | Topics and Well Written Essays - 2750 words

Small business taxation - Essay Example Similarly, some activities of the incorporated may be economically similar to those of the unincorporated small businesses. These activities may be similar in economic terms but they are different legally and in terms of rights and obligations. Crawford and Freedman suggest that these different types of entities could be treated in the same way for tax purposes, but it may not be achievable to do so in a straight forward manner because differences in legal forms between such entities have significant practical implications on taxation. Some of the treatments of taxation of employees and self-employed people may be based on receipts and tax rates. Providing the same tax treatment in relation to receipts may not be possible because receipts vary in nature (Crawford & Freedman, 2008). Business receipts cannot be equated to employees’ receipts. Business receipts need to be treated under rules that may derive profit figure. Furthermore, receipts of companies still require to be deducted for the payment of salaries or shareholders’ dividends. In terms of similar tax rate across the small business spectrum, aligning tax rates to on different levels of income across the incorporated and unincorporated small businesse s requires the analysis of tax charged at both corporate and personal level. This is structurally difficult. The second reason why it is not possible to treat the two types of entities similarly in terms of tax rates and receipts for taxation purposes is because there is a trend in which labour is taxed differently from capital. Higher taxes are often levied on labour than on capital. This causes differentials in tax treatment for different small businesses. Due to this differential in tax rates, there is an incentive of reduced taxes for converting labour income into capital income if possible (Crawford & Freedman, 2008). Incorporation of a small or big business leads to higher scope of conversion of labour income such