The current tax policy in the United States is very confusing and it is very costly for our government to administer it. It is in the best interest of our country and its citizens to revise or replace our current tax policy.
While most taxpayers agree that tax reform is necessary for our country the problem they encounter is the difficulty they experience when trying to understand all the political terms used when discussing tax reform. This paper is an attempt to help the taxpayers of our country to better understand the political terminology and gain knowledge about some of the proposals that have been explored.
Like most taxpayers, many politicians also agree that tax reform is necessary in the United States, but that is where the agreement stops between the politicians. Michael Kinsley states that “Reform is any change in the tax code that you favor” (1). Depending on each taxpayer’s personal income situation, what one person favors could be vastly different from what another favors, which is why tax reform is so complicated. Thus the problem comes with trying to figure out what is the best approach to take, how to do it, and when to do it.
Alvin C. Warren, Jr. explains that there are three different options that could be used to reform our tax policy; improving an existing tax base, introducing a new tax, and rationalization of the relationships between taxes (2). In the U.S., tax reform generally has meant “refinement and improvement of the income tax” (Warren 2). Improving an existing tax base should not be done in one big step but in incremental stages. “Years of getting nowhere taught conservatives the virtues of incrementalism” (Ponnuru 2). Another option that Warren explained was introducing a new tax. “The last time such a revolution occurred in the U.S. was the adoption of the Sixteenth Amendment to the Constitution in 1913, which authorized the enactment of the federal income tax.” There are those in public life who argue that the moment has now arrived for another such revolution to occur (Warren 4). The last option that Warren explained was rationalization of the relationships between two tax bases such as income and social security taxes, state and federal taxes, and federal corporate and individual income taxes. “Integration of the corporate and individual income taxes has come to mean eliminating the double burden of the corporate and individual income taxes, where it exists, and substituting a system in which investor and corporate taxes are interrelated in a manner that eliminates or reduces the foregoing distortions. The goal is to produce a uniform levy on capital income, whether earned through corporate enterprise or not” (Warren 9).
One popular method of tax reform that some of the experts in this field think is worth considering is implementing a flat tax also known as a consumption tax. J. D. Foster says that “any tax with a single tax rate could be considered a flat tax.” An article from the website Tax Policy Center defines consumption as being “income less savings” (Gale). The major difference between an income tax and a consumption tax is the way savings are taxed. With an income tax all income is taxed when it is earned and again when interest is earned on any savings. Critics of an income tax say that this is double taxation and is unfair to the taxpayers of the United States. They feel that a consumption tax would be more acceptable since it only taxes income once, either when it is originally earned or when it is used for consumption.
The flat tax rate proposed is 20 percent of all income remaining after deducting the standard and dependent deductions, if any (Foster 2). It seems simple but “The complications come in defining income and allowing various deductions and exemptions from it” (Kinsley 1).
This still causes some concern that lower-income households who pay no tax under the current tax policy would have a tax debt under a consumption tax policy. William G. Gale says that “A flat tax would provide huge gains for high-income households, both because their marginal tax rate would fall and because they consume relatively less of their income than do low-income households.”
Although the flat tax is the most talked about concept of tax reform it is not the only possibility. Another idea that has been reviewed is a national sales tax. “They say that 23 percent would be sufficient to fund the federal government” (Ponnuru 2). Ramesh Ponnuru believes that “Every time you bought a pack of gum, you would supposedly remember how much you hate out-of-control federal spending.” He goes on to say that a national sales tax is unthinkable and a flat tax is merely impossible (Ponnuru 2).
One of the biggest problems with our current tax policy is the cost to the taxpayers as well as the government to administer it. “The most striking feature of a flat tax is that it eliminates special deductions, phase-outs, and credits in the federal income, ensuring that most individuals could calculate their tax liability easily” (Foster 2). Foster also says that “Tax reform is a long and difficult process. Even the adoption of an ideal tax system creates transition costs for taxpayers, economic dislocation, and uncertainty.” Even though, tax reform done right could save our county millions of dollars.
Another aspect being looked at is eliminating or reducing the alternative minimum tax which was introduced to make sure that everyone paid taxes, no matter how many tax loopholes they find. Ponnuru says “Though originally intended to snare rich people, the AMT catches more and more middleclass families in its net each year. The AMT does not allow most of the deductions and exemptions that the regular tax code does, and is consequently very punishing to savers and large families.” Since this would generate lost revenue, the government would look for other ways to replace the lost revenue. One possibility is to abolish the tax-free status of employer-provided health care and another is to eliminate the deduction for state and local taxes (Ponnuru 4). The tax-free health care advantage is a very important issue and benefit to the citizens of our country.
A big selling point for any tax reform concept would be the economic benefits that would be gained. A big advantage to the taxpayer is that “Dividends, capital gains, interest payments, and other form of capital income received by individuals would not be taxed, because they had already been taxed before” (Foster 4). Foster goes on to say that the purpose of encouraging saving and investment is to promote faster non-inflationary economic growth, boost real wages, and raise the nation’s standard of living (4). All of these things should benefit the average taxpayer. “The simplicity of the flat tax would eventually benefit the business sector by reducing both compliance costs and the uncertainty that a complex tax code imposes on business decisions.” But ultimately the tax burden on the business sector would increase by approximately 19 percent (Foster 7).
With our nation facing so many other problems such as serious economic problems, including Social Security and Medicare systems racing towards bankruptcy, a costly private healthcare system, and high regulatory burdens, many people question whether tax reform should be in the forefront for our country (Foster 9). There is a possibility that tax reform could promote economic growth which would help in finding solutions for these problems as well.
The massive government policy called income tax is too complicated and should be reformed. This policy that has served our country for the last 98 years has served its purpose. Our country has taken on major changes during this time and we need to update our tax policies in accordance. The scope of total tax reform is too large to enact in one large movement and should be done in increments beginning with the issues that would impact our government and society the least.
A flat tax would be the best choice for several reasons. Loopholes that cost the government large amounts of revenue every year would be eliminated. Double taxation on savings would be eliminated which would encourage more taxpayers to invest and save. As a result the economy of our country will grow and the future of the citizens of the United States of American will have better financial security.
Although the best option for tax reform would be a flat tax, the national sales tax has many positive aspects. With over 60,000 pages in the current tax code, most people have no idea what is in it. This is where the problem of loopholes comes in. Higher income taxpayers are able to hire accountants to find these loopholes which will cut the amount of income that is taxed, while most of the lower-income taxpayers are not able to hire accountants to find these loop holes. Not all loopholes are illegal and it is the legal deductions that the lower-income taxpayers sometimes lose out on, basically because they are not aware of them. This problem occurs because of the complicated tax code that is in effect in our country. With a national sales tax it is easy to make sure that everyone pays the same rate on the things they buy. Another advantage of a national sales tax is that the tax on investments would be eliminated. This could be a big boost for the stock market. It would also encourage venture capital to invest in entrepreneurs to help fuel the American dream. Many jobs could be created with this new source of capital.
Works Cited
Foster, J.D. “Even Money.” Policy Review Summer 1995: 24+. Alt-Press Watch. Web. 28 Mar. 2011.
Gale, William G. “Flat Tax.” Tax Policy Center. Urban Institute and Brookings Institute, 1 Oct. 1999. Web. 3 Apr. 2011. .
Kinsley, Michael. “Tax Reform in Plain English. Honest!” Time 9 Dec. 2002: 58. Academic OneFile. Web. 31 Mar. 2011.
Ponnuru, Ramesh. “The Perils of Tax Reform: Frankly, Tiny and Timid is Better Than Big and Bold.” National Review 13 Dec. 2004: 32. Academic OneFile. Web. 31 Mar. 2011.
Warren, Alvin C., Jr. “Three Versions of Tax Reform.” William and Mary Law Review 39.1 (1997): 157-75. Academic OneFile. Web. 31 Mar. 2011.
