State Tax Reform - Essay Example

Tax Reform Yanjun Huang A47121448 Introduction Taxes are an essential wellspring of public income. Any tax can be characterized as an automatic payment by a citizen without including an immediate reimbursement of products and administrations consequently. At the end of the day, there are no immediate products or administrations given to a citizen for the tax paid. The citizen can, however, appreciate merchandise or administrations provided by the government like any other citizen with no inclination or prejudice (Ganghof, 2006). A new tax reform is proposed in North Carolina State in light of the sluggish economic development experienced. The essay will provide a brief description of the proposal and arguments against the proposal. A description of the tax reform proposal Due to the continuing sluggish economic development experienced in North Carolina, investments in education and infrastructure have escalated. In response to the continuously weak economic performance of North Carolina, a significant change to the tax system has been proposed. According to research conducted by Civitas Institute, chaired by Arthur Laffer, it is claimed that a reduction of tax rates for the wealthy and the elimination of corporate tax will revive North Carolina’s economic performance and induce the creation of numerous job opportunities (Johnson, 2013). The Civitas/Laffer proposal would profoundly change North Carolinas tax framework by abolishing the personal income tax, franchise tax and corporate tax, which in aggregate generate 65 percent of the states income, and to a great extent supplanting this income with a higher sales tax that would apply to more products and services. In particular, the proposal would: first, abolish the personal income tax. Second, abolish the tax on corporate income (Johnson, 2013). Third, abolish the tax imposed on franchise business. Franchise businesses are businesses that benefit from already established brands and models by another organization. In California, the franchise tax is proposed to apply only to those franchise businesses incorporated within the State. The franchise tax is significant to the government since it is a source of revenue. The tax generates $ 650 million, thus the source of its significance. However, it is not as important as a corporate tax since the latter generates more revenue to the State government – $ 1.1 billion. Personal tax is the most important since it generates the highest amount of revenue to the government - $ 10.3 billion based on the fiscal period 2011-2012 (Johnson, 2013). Fourth, increase the state sales tax from 4.75% to 6.53%. The proposed sales tax base would be expanded to include exempt goods. Services that are not currently taxed would also be taxed, which would generate additional of approximately $ 7.6 billion in terms of revenue. Fifth, introduce real estate transaction fee. Real estate transaction fee would be imposed a 1% tax on aggregate worth of the real estate and commercial transactions when they are transferred. The tax is the least important since it would raise the least amount of revenue ($ 390 million) as compared to sales tax ($ 7.6 billion) and a business license fee ($ 4 billion) (Johnson, 2013). Sixth, implement a business license fee. A business license fee taxes businesses on the basis of their size – as measured in terms of earnings, losses, and asset base. Meaning, larger businesses – that have higher earning capacity and stronger asset base- would pay more fees as compared to smaller businesses. But, the minimum fees would be $ 500. The tax would raise approximately $ 4 billion. The business license fee generates more revenue to the government ($ 4 billion) than the corporate tax ($ 1.1 billion), which is among the reason it is replacing the corporate tax. The removal of corporate tax does not seem to favor large corporations since the business license fee would require large corporations – with more earnings and stronger asset base- to pay more fee than smaller businesses (Johnson, 2013). Under the Civitas/Laffer proposal, the states wealthiest would see a considerable tax break while low and middle wage North Carolinians would experience an increase in their rates. Under the Civitas/Laffer plan, there would be a tax increase of $ 500 on individuals earning $ 24,000, representing 2.1% tax increase. On the other hand, there would be a tax decrease of $ 41,000 on individuals earning $ 1 million, representing a 4.5% tax cut. Therefore, under the plan, those who earn less pay additional tax but, those who earn more get a tax cut. Consequently, the tax burden is increased on the low and middle-income individuals. Due to the fact that middle and low-wage citizens have less disposable income, they spend a larger portion of their income on products and services than the wealthiest citizens. In this way, increased sales tax would mean a significant contribution from the non-rich. Based on the proposal, individuals earning $24,000 would experience a tax increase by $500, or by 2.1 percent of its salary while an individual gaining $1 million would experience a $41,000 tax break (4.5 percent of the wage) (Johnson, 2013). Argument against the tax reform proposal First, one of the major reasons for taxation is to achieve a fair distribution of income. In any nation, a few individuals will be rich, and others will be poor because of constrained open doors and various obstructions to getting to be wealthy. Taxes can be imposed with the goal to accomplish equality in the circulation of national salary. The rich are saddled at a higher rate, and the sums got are spent on expanding the welfare of poor people. That way, taxation achieves a reasonable distribution of income in a nation. Based on Civitas/Laffer proposal, the rich are to experience a tax break while the low and middle-income individuals are to experience an increased tax burden. Therefore, the proposal, if implemented without amendments, would not deliver a fair distribution of income, which is one of the major reasons for taxation in the first place. As a result, the Civitas/Laffer proposal should not be implemented (Johnson, 2013). Second, it is noted that the low and middle-income individuals in North Carolina are still in the process of recovering from the damages caused by the great recession. That means they are still weak financially. An introduction of another burden in the form of increased tax would further weaken their financial status, while the wealthy, who are stronger financially, would continue benefiting economically. Therefore, the Civitas/Laffer proposal appears to favor the rich. It is a plan that demonstrates partiality and should be rejected (Johnson, 2013). Third, another reason for taxation is to improve the social welfare of the citizens. If the Civitas/Laffer proposal is implemented, the low and middle-income individuals will spend a larger portion of their income to pay taxes. Middle and low-income are a social class characterized by inadequate disposable income. In economics, disposable income is the portion of income retained for consumption and saving purposes after the payment of tax. The proposal would make it difficult for the middle and low-income individuals to meet other needs such as hospital bills, among others. Consequently, the Civitas/Laffer proposal would indirectly worsen the social welfare of the low and middle-income individuals (Johnson, 2013). Fourth, the over-dependence on what the lower-income individuals in North Carolina contribute additionally makes it difficult to raise sufficient income for the long haul. Since low and middle-income individuals have experienced fluctuating and stagnating wages and income in the past few years (devastating experience during an economic downturn). On the other hand, the income of the wealthy individuals is insignificantly affected. Long-term economic stability is achieved easily when the source of revenue is also stable. The state of North Carolina will depend on an unstable source when the Civitas/Laffer proposal is enacted. The achievement of economic stability will only be a dream (Johnson, 2013). Fifth, the tax plan would lead a substantial revenue loss. As explained above, personal income tax, corporate tax, and business franchise tax will be eliminated. When the plan is implemented, the state will lose approximately (10.3 + 1.1 + 0.65) = $ 12.05 billion. State sales tax, real estate transaction fee and business license fee will generate ($ 7.6 + 0.39 + 4) = $ 11.99 billion. Based on the figures, the new tax plan will not generate enough revenue to make up for the loss. California State government will lose approximately (12.05 -11.99) = $ 0.06 billion. The effect is undesirable since there will be insufficient funds to support economic activities and infrastructural development (Johnson, 2013). In conclusion, I am against the proposed tax reforms for the following reasons: first, it makes the achievement of economic stability unfeasible. Second, it worsens the social welfare of the middle and low-income individuals. Third, it demonstrates favoritism since it moves tax burden away from the wealthy to the low and middle-income individuals. Fourth, it neither delivers fair income distribution nor equality. Last, it leads to revenue loss. References Ganghof, S. (2006). The politics of income taxation: A comparative analysis. Colchester: ECPR Press. Johnson, C. (2013). A “laffable” Plan for Tax Reform: The Civitas/Laffer/Senate Plan for North Carolina Shifts Load to the Poor, Middle –class. Retrieved from http://ncjustice.org/sites/default/files/BTC%20Reports%20-%20Civitas%20Laffer%20Tax%20Plan.pdf Read More