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Economic Effects of X-Tax - Book Report/Review Example

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Economic effects of X-Tax The current paper posits that the X-tax is the best replacement for the current corporate and personal system of taxation. In arriving at this conclusion, the Retail Sales Tax (RST), the Value Added Tax (VAT), the flat tax as well as the X-tax have been evaluated for suitability on the criterion of simplicity and enforceability, the distributional consequences and their economic impact…
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Download file to see previous pages This problem cascades with an increase in the rate of tax. The six countries that have implement RST at over 10 percent have all shifted to VAT. Implementation of VAT with multiple rates of tax would make the structure very complex and would increase the administrative and collection costs considerably. The Hall-Rabushka flat tax boasts of a single rate and a clean base. However, with a flat rate people with higher levels of income stand to gain at the expense of those who are at the lower rung. The X-tax, or a ‘graduated flat tax’ is an improved version of the flat tax and is therefore any day superior to it. The X-tax retains the efficiency and simplification advantages of the flat tax and at the same time raises revenue in a progressive way. Thus unlike the other consumption tax alternatives discussed so far, the X-tax takes into account the income level of the individuals and taxes them accordingly. WHAT IS X-TAX The X-tax, put forth by David Bradford of Princeton University, entails the filing of returns by businesses as well as individuals. Under the X-tax, the businesses would be allowed to deduct payments of wages and salaries to employees from their tax base. The capital expenditure would also be deducted immediately from the taxable income unlike the present system of gradual deductions based on depreciation. The system would however not allow financial outflows like interest payments to be deducted. Likewise, financial inflows like interest receipts would not be subject to tax. Finally, contributions by employers towards social security, health insurance and other non pension benefits would not be deductable. Individuals, on the other hand, would file simple returns that would list two kinds of payment; wages, salaries and pension receipts. Analysts opine that the tax base so obtained would be clean. The X-tax would levy different rate of tax for individuals; 15 percent, 25 percent and 35 percent. Thus it would have an inherent mechanism to alter individual tax liabilities on the basis of ability to pay. The businesses would be taxed at the rate of 35 percent under this tax regimen. How the X-tax fares on different parameters. It is noteworthy to mention here that if the X-tax is to replace the existing tax system, it should levy a rate of tax, referred to as revenue neutral rate, which will at least be able to garner the same amount of money that the present system does. The President’s Advisory Panel on Federal tax Reform had presented a comprehensive X-tax plan which would be able to replicate the distributional and revenue effects of the 2006 federal income tax system. The panel proposed a rate of 15 percent tax for taxable income up to $80,000 for a married couple. The rate would be increased to 25 percent for income between $80,000 and $1, 15,000 and 35 percent on income above $1, 15,000. Under the X-tax, all income groups as well as generations gain on average, with the welfare gains ranging from 1 to 2 percent for future generations. The biggest advantage of the X-tax in terms of its economic effects is that it accords the largest gains to the low-income people. The X-tax regime is also likely to push up the per-capita income by 6.4 percent in the long run. CONCLUSION No country has adopted the X-tax as yet. Implementing it may be analogous to inventing the wheel ...Download file to see next pages Read More
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