Alternatives to the Us Tax System

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Alternatives to the U.S. Tax System

Both the American people and members of the Federal Government have long griped about the current U.S. Personal Income Tax System. Bush’s Advisory Panel for Federal Tax Reform stated that, “the complexity of our tax code breeds a perception of unfairness and creates opportunities for manipulation of the rules to reduce tax”.[1] The Tax Foundation estimates that $338 billion of time, energy, money, and other resources, are spent annually completing tax returns.[2] Three main proposals, the Flat Tax, the VAT Tax, and the FairTax, are being hailed on the Hill today as the solution to our current onerous tax system. While all have benefits and draw backs, the FairTax is the best alternative to the U.S. Tax System in that it is the only tax that reduces the tax burden on Americans by taxing the underground economy, simplifies the tax system, and taxes consumption instead of savings. One of the simplest options proposed currently on the Hill is the Flat Tax, a system where both businesses and people are taxed a fix percent of their income. With the Flat Tax, just one simple post card would be needed for a family to file their personal income tax. Based on their labor income (found on the W-2) they would be taxed a flat rate on this amount, without taking into account any deductions.[3] Of the three proposals, the Flat Tax is the most similar to the current tax code, in that it continues to tax income, yet still varies in that it does not allow deductions. Some see the end of deductions as a drastic change in a country where many people make decisions based on the tax effect, but in the long run people would learn to adapt. For example, currently half of the money given to charity is not even claimed as a deduction. Furthermore, earlier tax cuts imposed by Reagan on the rich were met with a similar worry about making charitable deductions less tax beneficial, yet contributions were found to double.[4] The second argument given in favor of the Flat Tax, and seen in all three proposals, addresses the standard tax rate charged to any tax paying American. In the current system, the rich are often hit with either unfairly high taxes, or more commonly, they spend money in order to avoid paying their taxes, thereby keeping money from the Government .[5] The simplicity of the flat tax, however, would make it much harder for the rich to avoid their tax obligations. Finally, a central argument used in favor of all three proposals, over our current tax system, is that they promote savings and investment by not double taxing savings (capital gains).[6] One problem with the Flat Tax is its regressive nature. Wages are taxed with both payroll and income taxes, but dividends are taxed only once, so the rich, who receive the majority of dividend payments, benefit more than the poor.[7] Furthermore, a study done by the Treasury Department estimated that with a standard 21% Flat Tax assessed on all Americans, the tax burden would be placed more on lower income citizens than it is with the current tax code.[8] This same study developed a progressive Flat Tax with three brackets, 15%, 25%, and 35%.[9] A flat bracket tax such as this would maintain the benefits of the Flat Tax, while silencing critics, including Congress, who are unlikely to pass a tax where the rich are taxed on income at the same rate as the poor. This innovative option may be the best option for the U.S., yet is unfortunately not one of the main proposals seen on the Hill today. In summation, while the standard Flat Tax has many benefits over the current system, other alternatives, such as those that tax consumption, provide a more drastic, but in some ways superior option for the U.S. Congress to consider. One of the most popular taxation methods worldwide, especially in Europe, is the Value-Added Tax (VAT), a consumption tax that charges the tax burden to consumers at each stage during the production and sale of goods....
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