Tax Reform

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Justin Norman

ECON 201: Short Paper

12/05/2012

Tax Reform

There is effect when you talk about taxing a country as a whole and founding out that it actually helps or sometimes the functionality of the country to reform taxes as they weather away as time goes on. It was the unfair and demanding taxes the British put on the colonies in the 1700, as the American colonies were finding their identity and still under British rule, in which it lead to a Revolution. Nowadays, there is simply let’s talk it out and reform old taxes and replace with new ones so that we can function more effectively and demand little on the country as a whole. There are taxes on everything, not as much on the let’s tax sugar and tea, and have a revolution, but the effect of a revenue-neutral tax reform has been an important issue in public finance and macroeconomics over the past three decades.

When it comes down to reform the first is the ‘Revenue-neutral’ tax reform, which involves a switch from a decrease in the income tax rate to an increase in the consumption tax rate. This is to ensure a balanced budget and, hence, tax revenue neutrality. There have been models that have been extensively used to study the effects of tax reform on capital accumulation, economic growth and social welfare. In general, there can be dramatic results in efficiency gains, because of this sort of consumption; there will be taxes that involve less distortion than income tax and consumption. The reform of taxes will eliminate the bias against investment and savings inherent in the income tax system, thereby encouraging capital accumulation and improving future life standards.

Within this volume of the International Journal of Business and Management, volume 7, there was a published work that has been drawn out to say that the United States is suffering from the worst economic crisis since the Great Depression. Politicians and the like are clamoring for actions by the government to create jobs and get the economy moving again. Some believe in the traditional cut government spending and cut taxes to get the economy moving again. Others are advocating raising taxes and increasing or at the very least holding the line on spending. Cutting spending means a reduction in income to those who make the products and services that the government buys. The loss of income for these units will result in lost jobs. This goes against the goal of job creation. Cutting taxes means a loss in government revenues and the government will either have to cut spending and increase unemployment or borrow more money and increase the ballooning deficit. Increasing taxes assumes that the goods and services provided by the government are essential enough to warrant a replacement of private consumption/investment with public (i.e. government) expenditure. There is little doubt that the United States government is spending too much, and when you are spending too much, you have three possible lines of action: cut spending, increase revenue or some combination of both.

When looking towards a possible solution to this matter there comes to the understand of a flat tax rate, and as The United States dependence on income taxes for revenue makes it a rarity among high-income countries and the world at large. Most of the world relies on value-added or some form of consumption tax for revenue generation (Hines Jr., 2007). According to Hines Jr. “reliance on income taxation imposes higher tax burden on capital income than would be the case if the government instead made more extensive use of consumption taxes” ( page 50). It is estimated that the federal government loses as much as $130 billion per year from the shifting of both individual income and corporate profits into low-tax countries (Gravelle, 2009).

The replacement of corporate income tax with a flat rate consumption tax will not impose more tax burden on consumers than they are already paying. A flat tax on consumption...
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