Implementation Of The Fair Tax In The United States - Essay Example

The Fair Tax should be implemented in the United s Introduction 1.0 Fair Tax Explanation 2.0 Disadvantages of the Fair Tax Act 3.0 Advantages of the Fair Tax Act 4.0 Effects of Fair Tax Act on Corporations, Tax Evasion, the AMT, Estate and Gift taxes 5.0 Norms for tax justice system 6.0 Conclusion 7.0 1.0 Introduction Investments and personal savings are discouraged under the current income tax system in the US. This is as a result of taxation on the interest that is earned, capital gains and the returns to the shareholders. The regressive payroll tax burden makes people who earn wage in the society and those who own businesses to struggle. (Legislative Branch, 2011, p20190) The essay aims at discussing main points regarding the implementation of fair tax in the United States. NSBA was the first small business organization to give a pass to fair tax to apply to all consumers’ goods and services at the consumption final point at 23 percent which is single rate and a retail sales tax that is national. The fair tax enhances the fact that there is the same rate of tax without exemptions and exclusion on every taxpayer. There will be a total tax exemption to those who share on the cost of the government. The tax rate is determined and affected by the rate of purchase. To promote reutilization, the used items will not be subject to tax. In goods and services production, the purchase from business to another business will not be taxable. This fair tax will thus act as a replacement on the federal income tax on individuals, tax on capital gains, tax on self employment, and taxation on gifts and the estates. (Kotlikoff and Laurence, 2005). According to congressional report p 20190, the fair tax of 2003 was introduced to promote fairness, freedom, and economic opportunity by repealing the income tax and other taxes, abolish the revenue services that are interest, and enacting a sales tax nationally. In another term, the fair tax can commonly be called national sales tax. It is an essential tax reform item and that was unjust to replace it with a tax system that is simple and fairness. 2.0 Explanation of Fair Tax Act The fair tax Act of 2003 would repeal taxation on individual income, taxation on corporations, taxes on capital gains, payroll taxes, taxation on self employment, gifts and Estate taxes in lieu of 23 percent tax on all goods and services final sales. These taxes eradication will bring about simplicity and equality within the US system of taxation. The bill also provides transactions on business to business tax relief. The transactions are not subject t tax on sales including transactions on products and this helps in abrogating double taxation that may arise. Under the bill of fair tax, Medicare benefits and social security would not be touched. To either one of the vital programs, there would be no financial reduction. The trust fund revenue source for the two programs would be replaced by sales tax revenue instead of payroll tax revenue. (United State Congress et al, 2007 p 225) According to Tomlinson Shelly-Ann, (2007), the fair tax act proposed that American would receive a check on money rebate that is equal to spending up to the federal poverty level according to the Department of health and Human guidelines. After the purchase of necessity, the rebate would ensure no American pays taxes. The fair tax act will create fairness and a simpler taxation system and allows all Americans the freedom to determine their own priories and opportunities. The amounts of rebate calculations are adjusted to the inflation account. In order for household to become eligible for the rebate, they would register only once in every year with the authority that administers sales tax. The name together with the social security number is submitted by the member of the household. The funds are either a submitted by check via US Email, Electronic fund transfer, or a smartcard which is used like a credit card of a bank by administration of the social security. (Clark Jonathan, 2008) Fair tax broadens the tax base and the tax burden simultaneously shifts to those who do not pay tax currently. Fair tax applies in 300illion Americans and also would apply to many foreign tourists and the fair tax doubles the present US tax base. A claim by the fair tax act in the US states that tax imposed at 23 percent on spending would raise amounts of federal funds. In comparison with current system, pay the retailers and government of the state fees from collection and pay the rebate that is universal. Collection of taxes from the consumers would be done by retail businesses and then sent to the taxation authority. There will be a receipt of collection fee to the businesses that are collection agent by their actions. 3.0 Disadvantages of Fair Tax The fair tax act will have some disadvantages. There are some people who are reluctant to change despite a high enthusiasm level by the taxation of national retail on sales supporters. Those who do not support fair tax act claim that there will be no enough money raised by the national sales tax. Individuals claim that there is a creation of an opportunity to fuel a black market because they have invented ways of tax evasion. They claim that there will be taxation to consumers on basic needs such as expenses on health care, apartment rent and commodities like milk. 4.0 Advantages of Fair Tax There are several advantages arising as a result of fair tax act. It has the advantage of expected economic growth and also that of international locality of business since there will be an attraction to produce by businesses in the US. This is as a result of favourable regime of taxation and since US will have a production cost decrease, it will furthermore, have international competitiveness expectation. What the fair tax act can do is of more individual interest as to whether the American society, the consumption tax will be advantageous. 5.0 Effects of Fair Tax Act on Corporations, Tax Evasion, the AMT, Estate and Gift taxes There is a proposal on the abolition of corporation tax imposition by the fair tax act. This imposition of corporation tax by the fair tax act makes the poorer class cost of living to be higher. When a tax is imposed, the corporations shift the burden of taxation to other sectors of the economy. The corporations may pass the burden on to the workers by paying the fewer wage or shift the burden to suppliers who obtain lower raw materials prices. It can also shift to the shareholders who may get lower dividends that is lower earnings on the investment made by them. A taxation waive on corporations will occur as a result of fair tax act. This waive occurs to the corporations that do reinvestment, building of factories, and new technologies development and innovations. Fair tax system eliminates a tax system which will offend the vertical equity principle and thus a tax will not be replaced on corporations. (Forbe Steve, 2006) Double taxation of income to the corporations completely offends the horizontal equity principle because there will be a twice taxation to the taxpayer. A good tax system will ensure that this principle is followed and fair tax system ensures that there is presence of fairness. According to Burnham (2003), vertical equity states that two tax payers can be in different circumstances but the system of taxation can be set up in a way so as to tax each tax payer fairly. The burden of the system should be distributed to the society’s members in a fair and equitable manner making the tax progressive is a way used by the federal income tax to address vertical equity issues. Tax burden increases when the income also goes up. By implementing a system where there is rebate on the individuals up to the l of poverty, the federal income tax is made progressive by the fair tax act. Fair tax proposes to address these problems by abolishing the taxation on the corporations. Avoidance of the tax is the reduction by the required tax conditions prevention. Tax evasion on the other hand, is a criminal activity equivalent to the tax fraud. Tax avoidance is legal and involves acts that minimize the tax liability of individuals. Tax mitigation is an effective legal behaviour in tax liability decrease. Purchasing of tax free items for the business purposes doesn’t attract a tax on consumption under Fair Tax Act. The business has to have the certificate of a registered seller issued by the state authority of sales tax and also has to be a registered seller. The intention to eliminate Alternative Minimum Tax of the Fair tax is another objective. Alternative Minimum Tax imposes on a wider base, a decrease in the rate of tax. Alternative Minimum Tax was introduced to ensure that the people who earn higher incomes do not become exempted fully from paying tax but the majority that is the middle income earners who are subjected in this tax. Tax payers who have tax preference items are usually affected by Alternative Minimum Tax. The Alternative Minimum Tax is applied by corporations so as to pull away little or no tax and they are forbidden to tax preference items application,. Corporations are prohibited from taking tax preference to items as they would under a regular tax by applying a minimum tax. Corporations make to calculations which are regular taxable income and minimum tax liability which is tentative. Under the sub title of the internal revenue code which includes, generation skipping transfers of wealth tax, tax on estates and tax on gifts, the fair tax act proposes the gift tax and estate tax repeal. US have often been in conflict on what constitutes a gift. Fair tax proposes solution of the problem of the unfairness of gift and estate tax whereby individuals are forced to sell their property prior to their death in order to escape these taxes. The solution to this problem is elimination of provisions in the code that to avoid estate tax, individuals have to sell their estates. Since these gifts tax is repealed, courts will not struggle anymore concerning the question of what constitutes a gift. The fair tax is adjustable to the boarder automatically. This means there is exportation of the products made in the US. The tax is lowered on the boarder for global competitiveness. The products that are made in the US are exported with the corporation taxes but the foreign products and services imported do not have corporate taxes and this result to major problem to the manufacturers. During business oversees concept, there is the competitiveness of foreign corporations by far. Since the exported goods are not exported in the US, the exported goods do not attract the fair taxes. The goods that attract fair tax are the imported goods because they are US consumed. It is an advantage to the society of America since the countries often put in place strategies which raises their competitiveness. 6.0 Norms for tax justice system There are four norms for tax justice system and they hold views that are different to the government and the citizens’ relationship. Firstly, the principle of equal sacrifice states that people are taxed in equal amounts. This is because of the benefits from the government hence equal tax imposed. Secondly, the benefit principle states that the individuals pay tax proportionate to the varying government’s benefits they receive. The standard of living is the third tax justice norm. The evidence of the standard of living is the consumption level. Huge amount of tax is paid largely by the consumers. The consumers are not taxed on what they are saving. (Tomlinson Shelly-Ann, 2007) The fourth and the last principle of tax justice is the ability to pay principle. In order to provide funds which are used for operations of the government, individuals are supposed to sacrifice their wealth as well as currently acquired income. Individuals are not taxed on what they are spending. Consumption tax yields much revenue as tax from income that has a base that is narrow. The fair tax has some exclusive provisions such as education, services and travel from financial intermediation and tax housing. 7.0 Conclusion In conclusion, an ideal tax system is a component of Stability, fostering economical growth, equity and fairness, neutrality and lastly efficiency. In comparison to fair tax system, the fair tax is calculated by applying the tax rate of 23percent and this makes it to be simple. The horizontal equity principle is not violated by the fair tax system and thus it becomes fair. Considering the individual rebate, the tax is made progressive. There is no interference with the economic choices of businesses, corporations and individuals as a result of the needed revenue to enhance government support thus the system is neutral. (Burnham, William, 2003 p627) An honest accounting concerning the cost of the government will be made available and this fair tax act becomes visible. It is usually simple and more so it is easy to apply and the provisions needing changes are very unlikely. The proposed tax system is stable and has the element of certainty. Lastly, the fairness question of fairness is has many opinions. Who to bear the burden of tax, whether low or high seems to be a political issue. The tax act is much far fairest, most efficient and most of it all, progressive. It is a tax system that is neutral and for the reasons deeply discussed in details as above, it is believed that for the United States of America, the Fair Tax Act is the best. Work Cited: Burnham, William. Introductions to the Law and Legal Systems of the United States. 3rd Edition. p627. (2003). Retrieved 17th May 2011. http://www.wisconsinfairtax.org/webfiles/fnitools/documents/nsba_endorsement Burns, Scott. Single Flat Sales Tax is fair, and it solves Some Problems. (2006) Retrieved 17th May 2011 http://www.fairtax.org/site/PageServer?pagename=news_feature_101806 Clark Jonathan The Viability of The Fair Tax (2008) Retrieved 17th May 2011 From http://digitalcommons.liberty.edu/cgi/viewcontent.cgi?article=1074&context=honors&sei- redir=1#search="The+Fair+Tax+should+be+Implemented+in+the+United+States" Forbe Steve. Flat Tax Revolution. (2006). Retrieved 17th May 2011. http://www.fairtax.org/PDF/Forbes-Rebuttal_of_Flat_Tax_Revolution_2-9- 06.pdf Griffin, Jason, R. “The Individual Alternative Minimum Tax: Is it Touching People that it Shouldn’t Be?” 4 Hous. Bus. & Tax. L.J. 259, 265 (2004). Kotlikoff, Laurence J. The Case for the Fair Tax. (2005). Retrieved 17th May 2011 http://www.fairtax.org/PDF/TheCasefortheFairTaxKotlikoff030705.pdf Legislative Branch. Congressional Record. Government Printing Office. p20190. (2011). Regnier, Pat. Just how fair is the FairTax ? The Push to Scrap Income Taxes—and the IRS—is Gaining Fans. But the Plan has a Lot of Holes. Money Magazine. (2005) Retrieved 17th may, 2011 http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/. Tomlinson Shelly-Ann. A Consumption Tax versus Federal Income Tax in the United States. (2007). Retrieved 17th May 2011. http://www.fairtax.org/site/DocServer/A_Consumption_Tax_versus_a_Federal.pd f?docID=6641 United States Congress, et al. The Congressional Globe. Harvard University. (2007). p225. Other sources: Arduin, Laffer & Moore Econometrics A macroeconomic analysis of the FairTax proposal. (2006). Retrieved17th May 2011, from http://www.fairtax.org/PDF/MacroeconomicAnalysisofFairTax.pdf. Bachman, P., Tuerck, D., & Sanchez-Penalver, A. Tax administration and collection costs: The Fair Tax vs. the existing federal tax system. (2007). The Beacon Hill Institute, Retrieved17th May 2011, from http://www.fairtax.org/PDF/TaxAdminCollectionCosts071025.pdf. Read More