Reforming the US Tax Code (Essay Sample)

Reforming the US Tax Code
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Reforming the US Tax Code
A flat tax rate is defined as an income tax system in which every citizen pays the same amount in tax regardless of their level of income. Flat tax has already been implemented in a couple of States in the United States of America. In these States, the flat tax rate system has been agreed upon. It is however still a major debate and many other states.
Those who are for the flat tax on income system assert that this system is the fairest because everyone pays the same amount of tax. They also argue that it makes it much easier for the government to compute taxes because according to them, the complexity of the current tax systems, especially the pay as you earn tax system encourages loopholes and makes it harder to track tax evaders. In addition to this, they claim, flat tax rates eliminate bias by the government towards certain activities and behaviours because they eliminate most exemptions, tax credits and deductions.
As a result, compliance to tax payment and the regulation of compliance and payment is made much easier. In fact, those who seek to have the flat tax rate system implemented want the system so easy that all the citizens are charged with is filling their wages in a simple post card and multiplying it by a flat tax rate as opposed to filling the current complex for 1040.
The flat tax system has got a couple of pros that are considered developmental and that those who are for this system claim, make this system better than the rest. One of them is the fact that this system has a philosophy that states that only earned income can be taxed. This is contrary to the current taxation system whereby both earned income and profits or interests realized from investments are taxed. The flat tax system would not tax interest on savings, dividends and interest from increased asset value. This would encourage more investment and also simplify the taxation system.
The flat tax system according to its supporters is supposed to encourage more investment, and consequent economic growth (Aaron, 1996). This they claim, is likely to happen because this system does not penalize individuals for earning more money or being productive like the current system does. According to them, the current system can be demoralizing to hard workers and productive people causing people feel demotivated or not want to be very productive. The current system of progressive tax according to the flat tax system supporters penalizes entrepreneurship, risk taking and hard work. This is supposed to attract more investors and high income individuals. The flat tax system relieves the rich and high earners who pay much more through the progressive tax system. The flat tax system is also likely to increase government revenue by expanding the tax base. The progressive tax system may exempt some levels of income while the flat tax system includes all income levels. Seeing as the poor make up quite a sizeable chunk of the population, the taxes collected from them would be significant enough to give the country’s tax revenue a positive boost.
However, those that argue against the flat tax system claim that the flat tax is not felt as much by high income earners as it is by middle and lower income earners who are likely to end up paying more in taxes than they otherwise would under a progressive tax system. They claim that the burden of taxes under a flat tax system rests more heavily on the poor and not enough on the rich. This is unlike in the progressive tax system whereby the tax burden is felt more by high income earners and less by low income earners because the higher the income earned the more the taxes paid out.
Higher taxes for higher income earners and lower taxes for lower income earners is the system used in most states (Wallen, 1998). This system has been criticized as too complex and as the reason there are too many loopholes. Critics also claim that the government misses out on increased revenues due to too many exemptions, deduction and the potential tax returns they could earn from the lower income earners whose income levels have not reached the taxation level. This system also is claimed to discourage entrepreneurs and risk takers from being productive as it appears as if they get penalized for making more money.
A progressive tax system is more effective for the government if they wish to reduce federal tax deficits (Pechman, 1997). This is because under this system, the government can increase marginal rates and increase taxes paid on capital gains and dividends. In order to sustain reduced tax deficits, larger tax incomes are necessary in the future and it would be more sustainable to increase taxes for higher income earners than it would be to increase a flat tax rate that would adversely affect the poor and middle income earners who make up the majority of the population.
I am in favour of the progressive tax sys...