Tax Reform Essay, Research Paper
The issue of tax reform is not a new one. It has been debated since the founding of the very first modern government. At the heart of the debate is what the role of government should be in its citizen?s lives. In the United States the controversy over taxes has been central since the nation?s founding in 1776. To analyze the issue of tax reform one must first look at taxes and what they represent to the United States. According to the encyclopedia Britannica almost all of the Untied States government?s revenue comes from taxes. The most important of all the levied taxes is the personal income tax, which brings in by far the most revenue for the government. This tax was first developed during the civil war, with a rate of approximately 3%. As time progressed, the rate increased, and in 1913 the ratification of the 16th amendment established the basis for our current tax code. The rates became increasingly graduated until shortly after World War II, when the minimum rate was 23% and the maximum 94%. Graduated rates, meaning the rate increases as income increases, have become a world standard for tax policy. The progressive income tax has come to be viewed not only as a vital source of revenue for the government, but also as a vehicle of social reform, helping to redistribute wealth. The problem with the current tax system arises in the fact that income taxes are mandatory, and are not paid in exchange for some specific thing. And while they are supposed to be collected for the benefit of the taxpayers as a whole, the obligation of the individual citizen to pay the tax is independent of any benefit received. Even taxes on wages, called payroll taxes, commonly used for retirement funds and medical payments, have a very weak connection to the benefits received by the individual. Also, any taxpayer knows the time and effort required to file their taxes due to the complexity of the personal income tax is enormous. This is why there is opposition to the current tax system, and why major reforms are being proposed. Tax cuts and changes to tax policy are in fact key programs of the two presidential candidates, Al Gore and George W. Bush. Three main views exist about tax reform. The two major proposals at this time are a flat-rate income tax without deductions or exemptions, and a national sales or value-added tax. In addition to these new approaches, some factions suggest that an overhaul of the tax code is not necessary, but that small reforms are required. The reform that would be most beneficial to the Untied States as a whole would be to revamp the personal income tax system that we have now and replace it with a national sales tax.
The first proposal for tax reform, the flat-rate income tax, would supposedly make the tax code simpler by eliminating the graduated rate of our current system. It would also eliminate all deductions and exemptions. The graduated income tax code that is our current system, which has rates that increase as income rises, would be leveled to a single rate for all income levels. An article in ?Nation?s Business? states that ?These high individual tax rates apply to the income of many small businesses, including sole proprietorships, partnerships, corporations, and limited-liability companies. High marginal tax rates create a disincentive for small business owners to earn additional income since they know a greater percent of their incomes will go to the federal government.? In light of this statement, the graduated rates of the modern tax code hurt many businesses by taxing them at higher rates as they earn more profit. The principle of all business endeavors is to earn a profit, and the flat-rate income tax would provide an incentive to American businesses. Economic growth would therefore be spurred if the path to greater income was not hindered by high tax rates. Also as part of the flat-rate income tax plan, the tax rate is the same for both individuals and businesses. So, the ultimate goal of the flat rate income tax would be to increase incentives to earn higher incomes. However, the economist Neil Buchanan, in his article ?A user?s guide to proposals to replace the U.S. tax system and strangle fiscal policy,? examines the plan further and writes, ?To pay for those deductions, a revenue-neutral plan must offer a combination of lower basic exemptions and/or a higher fiat rate on all taxable income. Revenue neutrality requires the tax rate to be roughly 21 percent, although most politicians claim that the rate will be in the mid-teens.? Here we see that the flat rate would be raised for all taxpayers to make up for the loss of revenue due to eliminated deductions. Buchanan later writes, ?One of the most dishonest features of the flat tax is the name itself. By drawing attention to the single tax rate that is part of most such proposals, the public is led to believe that the complexity of the current tax code is caused by its graduated rates. This is patently absurd.? The whole idea of the flat tax is to reduce complexity of the tax code and boost the economy. However, the flat rate would not accomplish this goal. Buchanan sums up his opinion of the tax as he states, ?calling this the Flat Tax exposes the true agenda behind this proposal: shift the tax burden downward?the country would be moving to a system in which a person with a million dollars in annual income would find their next dollar of labor income taxed at a maximum of, say, 17 percent instead of the current 39.6%.? The flat-rate income tax is obviously riddled with holes and would create an unfair and unjust system.
The next view on tax reform does not deal with the legislation that would completely overhaul the current system. Instead, the other side to the issue comes from factions that believe that large-scale tax reform is not necessary. It certainly seems that tax reform is currently important to America and its citizens. Both presidential candidates have focused large portions of their campaigns on changes in the tax code, the media covers the topic thoroughly, and the debates between politicians are often over taxes. But there are some that argue tax reform is not as important to Americans as it seems. Ruy Teixeira writes in The Tax Cut Nobody Wants, ?The public is remarkably uninterested in tax cuts and, if anything, is becoming less interested by the day.? In support of his statement he cites that, ?According to a FOX News poll in March of last year, the public prefers funding Medicare over tax cuts by a 65 percent to 25 percent margin. And the sentiment on Social Security versus tax cuts is even more lopsided: A CNN/Time poll last July found 74 percent wanting to use the budget surplus to stabilize Social Security, compared to just 21 percent who preferred a tax cut.? This evidence seems to contradict the entire theory of tax reform and what it means to the United States. The polls cited suggest little support for the attention being paid to tax reform and tax cuts. Instead, they suggest that most Americans prefer to increase government spending and focus on improving programs rather than change the tax code. This view completely opposes the call for large-scale tax reform. However, the focus of the people is not always on the correct issues. The opinions of the majority are not always correct and they can often have great errs in judgement. This is why our government was set up in the way that it was. The founders wanted us to have representation. They did not, on the other hand, want the popular vote to decide the focus of our government. That is why we have a Congress of specialized legislators that represent us, but do not always have to side with the majority on issues. If the majority of the public decided what our government policies would be, we never would have passed laws such as the thirteenth amendment that freed the slaves, and the civil rights acts of the 1960s. These issues were certainly not in the public favor at the time, but our representatives knew that they were vital to the survival of the country. The same idea applies to taxes and any other issue for that matter. The argument in ?The Tax cut nobody wants? is therefore a weak one that hinges on the popular vote determining the focus of our government, which it does not.
The third take on tax reform is the national sales tax. The tax would only be levied if an individual or business purchased a good or service. No tax would be collected on income of businesses or individuals. Republican Alan Keyes, which has developed his own national sales tax plan, has an interesting view on the abolition of the income tax, ?We should make clear at every opportunity that the income tax is a slave tax – inherently incompatible with freedom. Abolishing it is therefore not just economically feasible, it is a moral imperative if we are to meet our obligation to bequeath liberty to future generations.? Keyes goes on to explain his national sales tax, ?Now, in order to make sure that you will have the leeway to control the level of taxation, what you do is structure the system so that there’s a market basket of goods and services not subject to the federal tax. And that means that anyone who wants to give themselves a tax cut, all they have to do is confine themselves to those goods and services not subject to the tax, covering every area of basic need in this society? Poor people, people on fixed incomes, they won’t be subject to taxes if they confine their purchases to these non-taxed goods. But, other working people, any working person would be able to get out from under the federal tax wouldn’t have to go to an accountant, don’t need H & R Block, no fancy lawyers, the whole marketplace will reorganize itself in order to help you save on your taxes. That will put within the reach of every American what is now only within the reach of the wealthy. And that will rectify what I think are the fundamental inequities of the so-called progressive income tax where they try to lie to us and say that they’re taxing the wealthy with progressive rates, and then behind our backs they set up a structure that allows the wealthy to control the incidence of taxation and get away with paying next to nothing.? Therefore, the flat-rate sales tax is a beneficial position not only from an economic standpoint but also from a moral view as well. It would give disadvantaged households an easy way to avoid taxes rather than the complicated exemptions that do not help them in the current system. The large gap between wealthy and poor currently plaguing the United States would be bridged with a simple tax that is easily avoidable and helps to boost saving. Milton Friedman states that the national sales tax, ?would eliminate double taxation from the corporate tax and the individual tax?level the playing field for income from diverse sources, reduce the disincentive of high marginal rates to innovation and enterprise, eliminate the marriage tax, and reduce the bias against saving.? It is easy to see how the sales tax would be an incentive to save because both individuals and businesses would not pay taxes on their income and would therefore be able to save more. In Taxes, Saving, and Macroeconomics, Neil Buchanan writes, ?The general idea is that we should replace the current income tax-based system with?a national sales tax?intended to raise the U. S. economy?s long-term growth rate through encouragement of saving. Saving?leads to higher investment, productivity, international competitiveness, and long-term economic growth.? The economy would receive a boost from the increased saving, while the elimination of the marriage tax would strengthen the incentive for couples to marry. Also, no marriage tax would help eliminate the double taxation of individuals under the current system.
The three major sides currently heading controversy over tax reform: the flat-rate income tax, the national sales tax, and the idea that government should focus on reform in other areas are complicated and very difficult to assess. It is easy to see however that the flat rate income tax would not accomplish its goal of increasing savings and simplifying the tax code, and that those who say that tax reform is not necessary are in error. The tax system has many flaws and does not help to further the economy. It certainly has not helped to bridge the gap between rich and poor, even in this time of economic boom. It is certain that the national sales tax is the best plan for our country and would benefit all taxpayers now subject to the unfair personal income tax. It will shape the argument over tax reforms in the following years and, if enacted, will have a great liberating effect on the United States. Americans can be assured that if the national sales tax is replaces the current tax system, it will have a profound effect on the future of our economy and our nation.