Tax Reform in The United States

  The current tax policy in" rel="nofollow">in the United States is very confusin" rel="nofollow">ing and it is very costly for our government to admin" rel="nofollow">inister it. It is in" rel="nofollow">in the best in" rel="nofollow">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 tryin" rel="nofollow">ing to understand all the political terms used when discussin" rel="nofollow">ing tax reform. This paper is an attempt to help the taxpayers of our country to better understand the political termin" rel="nofollow">inology and gain" rel="nofollow">in knowledge about some of the proposals that have been explored. Like most taxpayers, many politicians also agree that tax reform is necessary in" rel="nofollow">in the United States, but that is where the agreement stops between the politicians. Michael Kin" rel="nofollow">insley states that “Reform is any change in" rel="nofollow">in the tax code that you favor” (1). Dependin" rel="nofollow">ing on each taxpayer’s personal in" rel="nofollow">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 tryin" rel="nofollow">ing to figure out what is the best approach to take, how to do it, and when to do it. Alvin" rel="nofollow">in C. Warren, Jr. explain" rel="nofollow">ins that there are three different options that could be used to reform our tax policy; improvin" rel="nofollow">ing an existin" rel="nofollow">ing tax base, in" rel="nofollow">introducin" rel="nofollow">ing a new tax, and rationalization of the relationships between taxes (2). In the U.S., tax reform generally has meant “refin" rel="nofollow">inement and improvement of the in" rel="nofollow">income tax” (Warren 2). Improvin" rel="nofollow">ing an existin" rel="nofollow">ing tax base should not be done in" rel="nofollow">in one big step but in" rel="nofollow">in in" rel="nofollow">incremental stages. “Years of gettin" rel="nofollow">ing nowhere taught conservatives the virtues of in" rel="nofollow">incrementalism” (Ponnuru 2). Another option that Warren explain" rel="nofollow">ined was in" rel="nofollow">introducin" rel="nofollow">ing a new tax. “The last time such a revolution occurred in" rel="nofollow">in the U.S. was the adoption of the Sixteenth Amendment to the Constitution in" rel="nofollow">in 1913, which authorized the enactment of the federal in" rel="nofollow">income tax.” There are those in" rel="nofollow">in public life who argue that the moment has now arrived for another such revolution to occur (Warren 4). The last option that Warren explain" rel="nofollow">ined was rationalization of the relationships between two tax bases such as in" rel="nofollow">income and social security taxes, state and federal taxes, and federal corporate and in" rel="nofollow">individual in" rel="nofollow">income taxes. “Integration of the corporate and in" rel="nofollow">individual in" rel="nofollow">income taxes has come to mean elimin" rel="nofollow">inatin" rel="nofollow">ing the double burden of the corporate and in" rel="nofollow">individual in" rel="nofollow">income taxes, where it exists, and substitutin" rel="nofollow">ing a system in" rel="nofollow">in which in" rel="nofollow">investor and corporate taxes are in" rel="nofollow">interrelated in" rel="nofollow">in a manner that elimin" rel="nofollow">inates or reduces the foregoin" rel="nofollow">ing distortions. The goal is to produce a uniform levy on capital in" rel="nofollow">income, whether earned through corporate enterprise or not” (Warren 9). One popular method of tax reform that some of the experts in" rel="nofollow">in this field thin" rel="nofollow">ink is worth considerin" rel="nofollow">ing is implementin" rel="nofollow">ing a flat tax also known as a consumption tax. J. D. Foster says that “any tax with a sin" rel="nofollow">ingle tax rate could be considered a flat tax.” An article from the website Tax Policy Center defin" rel="nofollow">ines consumption as bein" rel="nofollow">ing “in" rel="nofollow">income less savin" rel="nofollow">ings” (Gale). The major difference between an in" rel="nofollow">income tax and a consumption tax is the way savin" rel="nofollow">ings are taxed. With an in" rel="nofollow">income tax all in" rel="nofollow">income is taxed when it is earned and again" rel="nofollow">in when in" rel="nofollow">interest is earned on any savin" rel="nofollow">ings. Critics of an in" rel="nofollow">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 sin" rel="nofollow">ince it only taxes in" rel="nofollow">income once, either when it is origin" rel="nofollow">inally earned or when it is used for consumption. The flat tax rate proposed is 20 percent of all in" rel="nofollow">income remain" rel="nofollow">inin" rel="nofollow">ing after deductin" rel="nofollow">ing the standard and dependent deductions, if any (Foster 2). It seems simple but “The complications come in" rel="nofollow">in defin" rel="nofollow">inin" rel="nofollow">ing in" rel="nofollow">income and allowin" rel="nofollow">ing various deductions and exemptions from it” (Kin" rel="nofollow">insley 1). This still causes some concern that lower-in" rel="nofollow">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 gain" rel="nofollow">ins for high-in" rel="nofollow">income households, both because their margin" rel="nofollow">inal tax rate would fall and because they consume relatively less of their in" rel="nofollow">income than do low-in" rel="nofollow">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 spendin" rel="nofollow">ing.” He goes on to say that a national sales tax is unthin" rel="nofollow">inkable 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 admin" rel="nofollow">inister it. “The most strikin" rel="nofollow">ing feature of a flat tax is that it elimin" rel="nofollow">inates special deductions, phase-outs, and credits in" rel="nofollow">in the federal in" rel="nofollow">income, ensurin" rel="nofollow">ing that most in" rel="nofollow">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 uncertain" rel="nofollow">inty.” Even though, tax reform done right could save our county millions of dollars. Another aspect bein" rel="nofollow">ing looked at is elimin" rel="nofollow">inatin" rel="nofollow">ing or reducin" rel="nofollow">ing the alternative min" rel="nofollow">inimum tax which was in" rel="nofollow">introduced to make sure that everyone paid taxes, no matter how many tax loopholes they fin" rel="nofollow">ind. Ponnuru says “Though origin" rel="nofollow">inally in" rel="nofollow">intended to snare rich people, the AMT catches more and more middleclass families in" rel="nofollow">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 punishin" rel="nofollow">ing to savers and large families.” Sin" rel="nofollow">ince 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 elimin" rel="nofollow">inate 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 sellin" rel="nofollow">ing poin" rel="nofollow">int for any tax reform concept would be the economic benefits that would be gain" rel="nofollow">ined. A big advantage to the taxpayer is that “Dividends, capital gain" rel="nofollow">ins, in" rel="nofollow">interest payments, and other form of capital in" rel="nofollow">income received by in" rel="nofollow">individuals would not be taxed, because they had already been taxed before” (Foster 4). Foster goes on to say that the purpose of encouragin" rel="nofollow">ing savin" rel="nofollow">ing and in" rel="nofollow">investment is to promote faster non-in" rel="nofollow">inflationary economic growth, boost real wages, and raise the nation’s standard of livin" rel="nofollow">ing (4). All of these thin" rel="nofollow">ings should benefit the average taxpayer. “The simplicity of the flat tax would eventually benefit the busin" rel="nofollow">iness sector by reducin" rel="nofollow">ing both compliance costs and the uncertain" rel="nofollow">inty that a complex tax code imposes on busin" rel="nofollow">iness decisions.” But ultimately the tax burden on the busin" rel="nofollow">iness sector would in" rel="nofollow">increase by approximately 19 percent (Foster 7). With our nation facin" rel="nofollow">ing so many other problems such as serious economic problems, in" rel="nofollow">includin" rel="nofollow">ing Social Security and Medicare systems racin" rel="nofollow">ing towards bankruptcy, a costly private healthcare system, and high regulatory burdens, many people question whether tax reform should be in" rel="nofollow">in the forefront for our country (Foster 9). There is a possibility that tax reform could promote economic growth which would help in" rel="nofollow">in fin" rel="nofollow">indin" rel="nofollow">ing solutions for these problems as well. The massive government policy called in" rel="nofollow">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 durin" rel="nofollow">ing this time and we need to update our tax policies in" rel="nofollow">in accordance. The scope of total tax reform is too large to enact in" rel="nofollow">in one large movement and should be done in" rel="nofollow">in in" rel="nofollow">increments begin" rel="nofollow">innin" rel="nofollow">ing 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 elimin" rel="nofollow">inated. Double taxation on savin" rel="nofollow">ings would be elimin" rel="nofollow">inated which would encourage more taxpayers to in" rel="nofollow">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 fin" rel="nofollow">inancial 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" rel="nofollow">in the current tax code, most people have no idea what is in" rel="nofollow">in it. This is where the problem of loopholes comes in" rel="nofollow">in. Higher in" rel="nofollow">income taxpayers are able to hire accountants to fin" rel="nofollow">ind these loopholes which will cut the amount of in" rel="nofollow">income that is taxed, while most of the lower-in" rel="nofollow">income taxpayers are not able to hire accountants to fin" rel="nofollow">ind these loop holes. Not all loopholes are illegal and it is the legal deductions that the lower-in" rel="nofollow">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" rel="nofollow">in effect in" rel="nofollow">in our country. With a national sales tax it is easy to make sure that everyone pays the same rate on the thin" rel="nofollow">ings they buy. Another advantage of a national sales tax is that the tax on in" rel="nofollow">investments would be elimin" rel="nofollow">inated. This could be a big boost for the stock market. It would also encourage venture capital to in" rel="nofollow">invest in" rel="nofollow">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 Brookin" rel="nofollow">ings Institute, 1 Oct. 1999. Web. 3 Apr. 2011. . Kin" rel="nofollow">insley, Michael. “Tax Reform in" rel="nofollow">in Plain" rel="nofollow">in English. Honest!” Time 9 Dec. 2002: 58. Academic OneFile. Web. 31 Mar. 2011. Ponnuru, Ramesh. “The Perils of Tax Reform: Frankly, Tin" rel="nofollow">iny and Timid is Better Than Big and Bold.” National Review 13 Dec. 2004: 32. Academic OneFile. Web. 31 Mar. 2011. Warren, Alvin" rel="nofollow">in C., Jr. “Three Versions of Tax Reform.” William and Mary Law Review 39.1 (1997): 157-75. Academic OneFile. Web. 31 Mar. 2011.