Tax Reform Essay Research Paper The issue

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 ma