What Can Be Done to the Tax System of the USA - Essay Example

Section/# The Flat Tax: The Best Approach and Tax Policy for the United s The current issue of great concern for stakeholders throughout American society is with respect to updating and ultimately improving the current tax code. Many suggestions have come to light over the past several decades for the ways in which this could take place. However, one of these suggestions that simply refuses to go away and has a great many positive and negative aspects is with regards to replacing the current income tax with a federal sales tax. Many nations around the world currently employ a federally mandated sales tax in lieu of deriving government revenue via other methods; namely import taxes, export tariffs, and/or other alternative methods. As might be expected, one of the reasons for why a value added tax/sales tax/”fair tax” has not caught on within the United States is due to the fact that a preponderance of negative trade-offs exist with regards to implementing this.1 As a function of seeking to understand this issue to a more full and complete degree, the following analysis will present the reader with an understanding of the way in which a federal sales tax represents both positive and negative externalities and could ultimately harm many at risk individuals within the current society. The current complex and ineffective tax system in the United States needs to be replaced with a flat tax system in order to avoid the country from falling further into an economic collapse.  Although the analysis will most certainly go into a greater level of death concerning each of the pros and cons of a potential federal sales tax, figure 1.0 below helps to sustain sleep illustrate some of the key points that will be under discussion within this brief analysis. Figure 1.0 Trade-offs of a nation-wide federal sales tax structure     Pros levels the playing field   aids investments     Business Benefit     stimulates saving     eliminates IRS and the headache of "filing taxes"     Cons     disproportionate impact upon the elderly   disproportionate impact upon the poor     lack of deductions for expenses     depends too much on spending increases potential for tax evasion     As can be seen, the main benefits that a federally mandated sales tax could incur would most certainly be with regards to levelling the playing field between all taxpayers within the system.2 The current system is one that places an undue level of stress upon certain individuals within society while others do not have any tax burden whatsoever. As such, a federally mandated sales tax would be a system that would invariably change this dynamic and ensure that each individual who participate in the economy would be a same rate. Another added benefit is with regards to the fact that a nationally mandated sales tax would in fact serve to increase investment. Due to the fact that investments themselves and savings would not be taxed, individuals would come to the realization that a heavy national sales tax burden would encourage them to save their money rather than spend it.3 By much the same token, a direct level of benefit would be with regards to businesses as they would no longer have the headache of engaging with the Internal Revenue Service and providing certain levels of withholdings. Furthermore, it can also be understood that eliminating a federal income tax would also have the added benefit of doing away with an incredibly costly and inefficient Internal Revenue Service; a branch of the government that is recently come under a great deal of scrutiny recently for its unjust, unethical, and illogical political torment of those that have alternative views to the current administration. Yet, there are many incentives for power-brokers within the government to maintain the current tax code. One of the largest of these has to do with the development of the system and the means through which moneyed corporations fill the coffers of politicians as a result of the fact that the current tax system ultimately benefits them and punishes other tax payers. For this very reason, the sales tax or “flat tax” will not be beneficial to such interests to the same degree or level that the current system appeals to their own self interests. Although this is a one dimensional way to look at the situation, it perfectly describes the overall level of hesitancy that so many companies and power-brokers within the current system view the “flat tax” and how it could ultimately benefit them. However, it must not be understood that simply eliminating the income tax is going to be a solution that invariably benefits each and every participant within the economy. For instance, the first and most salient concern is with regards to the fact that a trade-off of a nationwide federal sales tax structure is with respect to the fact that it has a disproportionate impact upon the poorest individuals within society.4 The underlying causation for this has to do with the fact that an individual makes a relatively small salary and finds it necessary to support their family upon the salary will invariably spend a larger percentage of their money upon subsistence and/or consumption. By much the same token, an individual who is relatively wealthy and earns a large salary does not spend such a high percentage of their income each and every month and/or year upon the process of survival. Instead, a relatively lower percentage is spent by an individual who is wealthier. As can directly be seen, this disproportionate level of impact upon individuals within society that would shoulder the lion’s share of this particular tax burden within this structure is one of the negative trade-offs that has thus far proved detrimental to engagement and adaptation of this model of taxation.5 By much the same level of comparison, the reader can and should also consider the fact that a “fair tax” necessarily disproportionately harms elderly individuals within society. What is meant by this is with regards to the fact that elderly individuals, or those nearing or experiencing retirement already, would be unduly penalized due to the fact that they would in fact be taxed twice.6 Ultimately, these individuals would not only have had withholding taxes taken from their income throughout the many decades that they had worked, they would also be taxed a disproportionately higher rate with regards to the purchases that they would make once they entered retirement. This difficulty is profound due to the fact that individuals that have been preparing for retirement had done so under the expectation that the money they saved was theirs; not something which could further be taxed and therefore fundamentally alter the retirement plans that they had thus far engaged. Another unique economic drawback of this particular model is with regards to the fact that compared to the current structure it does not allow for any level of production. As such, small businesses in firms that would seek to lessen their tax burden by deducting key expenses would ultimately be facing the tax structure that was not friendly to small business or interested in promoting its development. They further economic drawback has to do with the fact that this particular tax structure relies too heavily upon spending. The broad reaching impacts of the economic slowdown of 2007/2008 helps to reveal to the reader the fact that sudden and dramatic drops in consumer spending can take place within a relatively short period of time. Whereas it is true that unemployment increased precipitously during the period in question, unemployment came nowhere close to increasing by the same percentage points that consumer spending dropped. As such, a governmental system that is predicated upon raising revenue by suspending necessarily finds itself within a very dangerous engagement; one that fundamentally relies upon the strength and purchasing power parity of the United States consumer as a means of funding its continued existence. Further, another cogent point that should be engaged with is the fact that reliance upon such a tax structure necessarily increases the risk of tax evasion. Although it is estimated by the Internal Revenue Service and other financial entities within the United States that untold billions of dollars are already going on tax and being evaded, the structure in question would ultimately create a system in which the development of a black market, one that was not responsible for reporting any of its sales for remitting any of the money from them to the government with drive.7 Whereas it is true that this black market already exist within the United States and elsewhere throughout the world for that matter, the level and extent to which it would grow in a situation in which national sales tax would necessarily exceed 20% would be astronomical. From the information that is thus far been presented, it can definitively be noted that although a fair tax, national sales tax, or value added tax as a means of replacing an income tax is attractive and offers many increased levels of fairness, it does engender key shortcomings. The current tax code drains efficiency from the economic system of the United States in that it somewhat discourages saving and investment. However, with a flat tax/national sales tax, the amount of financial security that could be represented within the system would be an order of magnitude higher. Notwithstanding the drawbacks of the flat tax, the overall economic gain that could be experienced is sufficient to warrant the analyst to realize that this particular approach is far superior to the system of taxation that currently exists within the United States. Bibliography BATURO, ALEXANDER, and JULIA GRAY. 2009. "Flatliners: Ideology and rational learning in the adoption of the flat tax." European Journal Of Political Research 48, no. 1: 130-159. Academic Search Complete, EBSCOhost (accessed May 11, 2014). Bird, Richard M., and Eric M. Zolt. 2011. "Dual Income Taxation: A Promising Path to Tax Reform for Developing Countries." World Development 39, no. 10: 1691-1703. Academic Search Complete, EBSCOhost (accessed May 11, 2014). HAGOPIAN, KIP. 2011. "The Inequity of the Progressive Income Tax." Policy Review no. 166: 3-17. Academic Search Complete, EBSCOhost (accessed May 11, 2014). McNulty, John K. 2000. "Flat Tax, Consumption Tax, Consumption-Type Income Tax Proposals in the United States: A Tax Policy Discussion of Fundamental Tax Reform." California Law Review 88, no. 6: 2095. Academic Search Complete, EBSCOhost(accessed May 11, 2014). Paulus, Alari, and Andreas Peichl. 2009. "Effects of flat tax reforms in Western Europe." Journal Of Policy Modeling 31, no. 5: 620-636. Academic Search Complete, EBSCOhost (accessed May 11, 2014). Thompson, Brennan. 2012. "Flat rate taxes and relative poverty measurement." Social Choice & Welfare 38, no. 3: 543-551.Academic Search Complete, EBSCOhost (accessed May 11, 2014). Tischler, Rachel J. 2012. "The Power to Tax Involves the Power to Destroy." Brooklyn Law Review 77, no. 4: 1665-1705. Academic Search Complete, EBSCOhost (accessed May 11, 2014). Read More