Changes In The United States System That Would Make The Society Better Off (Research Paper Sample)

Changes in the United States system that would make the society better off
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The need for tax reforms in the United States is important and clear. For last several years, economic growth has been sluggish; wages have stagnated, and there have been a reduction in the participation of the workforce in the economy due to the outdated tax policy. One of the major undoing of the current tax system is that it taxes a dollar of income up to four times. A dollar earned is taxed once earned as income tax when it is invested in business so as to bring profit; it is taxed as business income tax. When a dollar is invested in places like the stock exchange, tax on capital gains and the dividend is paid, and when it is given away as a gift, it is taxed as gift taxes. This calls for major changes in the tax system to make the citizens better off by eliminating double taxation to increase the competitiveness of United States as a business destination and spurring economic growth.
Broadening the tax base and lowering tax rate is a change that would make the society better off. The United States tax system has a lot of deductions and exclusions that reduce the tax base (Guner, 2014).The most important base broadening policy is ending the preferential tax treatment of capital income. Most of the high-earning individuals can minimize the tax liability of ordinary income tax by shifting ordinary income to capital gain income so as to pay fewer taxes during the Bush administration, preferential tax rates on dividends which were previously classified as ordinary income was created. Preferential tax rates on capital gains favor the few rich people in America who tops the income distribution with more that 70% of preferential tax benefits going to less that 1% of households ranked by income (Saez, 2014). Most of the highly compensated people have the ability to reclassify their ordinary labor earnings as capital income by using the carried interest loophole in the partnership profits which allows fund managers to be taxed at preferential capital gains rate instead of the ordinary income rate.
This gives people the loophole to shift their wealth into assets that are excluded from the taxable income bracket. Unlike dividends payments which are made annually, fillers have the authority of determining when to sell stock and realize a capital gain or loss which is accessed by the difference between sale price and purchase price. Therefore, families have a chance of avoiding capital gains taxation by never realizing capital gains until after the assets are bequeathed which minimizes the intergeneration tax liability of the family. The tax system also enables the households to escape paying taxes on capital gains accruals by transferring the assets to done as gifts (Wilson, 2009). Many recipients of such gifts are exempted from taxation, and so the accruals will never be subjected to any taxation.
The preferential tax rate on capital gains gives households the opportunity to shelter tax arbitrage opportunities. The difference between tax rates on capital gains and another income tax rates is a prime reason behind tax sheltering in the United States, and tax arbitraging decisions redirect investments to less productive uses (Saez, 2014). Hence broadening the tax base by amending step up basis and carryover basis of capital gains on gifts will make it easier in raising the capital gains tax rate and would maximize the revenue collected from capital gain taxes. Base broadening will minimize the opportunity to take advantage of the different tax rates which apply to a different legal classification of sources of income and hence it would be seen as complementary and not as a substitutable tax policy (Zucman, 2014). Taxing dividend payouts as ordinary income and increasing the capital gain tax rate would reduce the arbitrage which corporate takes advantage of in their payout strategies so as to avoid paying higher taxes on dividend payouts.
Another change in the United States tax system that makes society better off is the reduction in the income taxation and increasing consumption taxation. Thomas Hobbes once suggested that taxation should be done on consumption and not income (Guner, 2014). Income measures the contribution of a person in the production of goods and services through labor and capital while consumption measures the quantity of goods and services one consumes. Therefore, consumption is a measure of the benefits a person accrues as a member of the society hence a proper basis of taxation. Income tax discourages investment and saving which impacts on the economic growth and taxation of consumption allows the economy to realize the best allocation of resources over time. Income taxation, especially on savings, is undesirable, and its ripple effects on the economy are hazardous. It reduces accumulation of capital and labor productivity hence lowers real wages in the economy (Bargain, 2014). This reduces the standard of living of the citizens and even future generations.
Savings tax also complicates the tax system by making it necessary to measure depreciation on assets and to differentiate between interest and principal on loans. The system has more complexity as it tries to determine the income earned by each instead of taxing the total capital income generated by business operations at a flat rate (Guner, 2014) A well developed progressive consumption tax would achieve temporal neutrality (Saez, 2014). Tax is said to have achieved temporal neutrality if it doesn't alter the spending habits and patterns of individuals and affect the original allocation of resources. Reducing the income and increasing the consumption tax would promote a huge capital inflow in the United States. A reduction in the income tax would increase the global competitiveness of the United States as the leading investment destination for investors as it already has an advantage in the superior infrastructure compared to other countries in the world. The increased investments would decrease the unemployment in the country increasing the average income of the population.
The increased income will increase the purchasing power of the people hence increasing their consumption. The increase in consumption will increase the revenue collected from consumption tax (Saez, 2014). The citizens will benefit from the increase in income from the additional employment opportunities created while the government will eventually collect more taxes hence more revenue for its expenditure. Abolishing the current progressive income tax system and replacing it with a progressive consumption tax system such a sales tax would make it easier and to collect taxes. Unlike in the income tax system individuals would need to keep filling income tax returns and keeping tax records. Retailers would be submitting sales tax records to the IRS and to the state hence reducing the cost of collecting taxes.
Moving to the territorial international tax system and making rates competitive for business is another change in the current tax system that would improve the society welfare. The United States is one of the countries that taxes international corporations on a worldwide basis. This means that no matter where in the world a corporation from the United States makes income is liable to a tax rate of 35% when they repatriate the income back home (Zucman, 2014). This kind of treatment puts United States businesses at a competitive disadvantage compared to foreign companies when competing in foreign countries. For example, when a united states corporation competes with a German business in foreign countries, the United States faces additional taxation when the money is brought back home.
The ripple effect of this kind of taxation is that many corporations from the United States are shifting their...