There are a number of taxation rate structures in use in various countries in th
ID: 2723006 • Letter: T
Question
There are a number of taxation rate structures in use in various countries in the world. For citizens residing in the United States, a progressive tax rate structure is applicable presently. In addition, there are many adjustments in the form of deductions and exemptions that affect an individual’s income tax owed for a given period. Further, there are a number of sales and property taxes applied to certain purchased goods and real estate in the United States; primarily, these are levied by states. However, periodically the case for instituting a flat-rate tax is argued in Congress. Write a report comparing the advantages and disadvantages of both the present progressive tax structure in the United States and the potential adoption of a flat-rate tax structure. Under which structure would more constituents be likely to evade taxes? Support your assertions with three reputable academic resources.
Explanation / Answer
Flat Tax Definition
At first glance, the flat tax idea seems simple enough: one tax rate, which applies to everyone, regardless of income. No deductions, loopholes or tax shelters - you multiply your income times the tax rate, and your taxes are done. Nothing could be easier!
In reality, it's not quite that simple. What constitutes income, for example? In the US, long-term capital gains are taxed at a lower rate than regular income, in part to encourage long-term investment. Should this continue under a flat tax plan?
Business income also complicates things, and not only for large corporations. If you have income from a small part-time business, for example, you currently deduct your expenses to determine the taxable amount. How would that work on a tax form that has no place to enter deductions? Clearly, business income requires additional rules.
Modified Flat Tax
A flat tax, applied across the board, would also increase the tax burden on those with lower incomes, many of whom currently pay little or no income tax. For all of these reasons, most current flat tax proposals are actually modified flat tax proposals. These modified plans usually include some variation of these elements:
Some "flat tax" plans also have a small number of tax brackets. Technically, this makes them progressive tax plans, although they are far "flatter" than our current system.
Flat Tax Pros and Cons
Progressive Tax Definition
A progressive tax is one in which the tax rate increases as income increases. In the US, this is done using tax brackets, in which income is divided into ranges, with each range taxed at a higher rate than the range below.
As a taxpayer's income enters a higher tax bracket, only the portion of income that falls into that bracket is taxed at the higher rate, with the remaining amount taxed according to the lower tax bracket(s) that it falls into. Otherwise, it would be theoretically possible for a person to earn more money but actually end up with less, due to the entire amount being taxed at the higher rate.
Progressive tax systems often allow for a number of adjustments to taxable income, such as exemptions, deductions, and tax credits. These can be used to provide additional relief to low-income citizens, or to encourage certain types of behavior, such as business investment or higher education.
Progressive Tax Pros and Cons
Would Flat Tax Work in the US?
There are advantages to both philosophies, and neither should be dismissed out of hand. However, the flat tax is not the answer for the US.
First, there's no way of knowing how much of the economic growth seen in flat tax success stories are actually due to the flat tax. Because of political changes and other economic reforms, many of these nations would have seen growth under almost any tax plan.
In addition, Its not sure that a flat tax in the US could provide the same amount of revenue as the current tax system without increasing the tax burden on the middle class. Nor do It can be believed than anyone can predict the effects on the US economy of switching to a flat tax.
Pros Cons easy to understand and comply with, thereby reducing errors and tax fraud may shift tax burden away from the rich, to the middle and lower class professional tax preparers and advisors no longer needed, saving money for taxpayer elimination of deductions may have negative impact on taxpayers with lower income lawmakers can no longer create tax loopholes in exchange for campaign contributions or other personal favors government cannot use the tax code to encourage desirable activities, such as giving tax credits for making a home more energy-efficient businesses can make decisions designed to better serve the marketplace and their stockholders, instead of trying to beat the tax code thousands of government employees and tax professionals would lose their jobs, or suffer a large decrease in business may encourage investment and expansion, as additional profit is not taxed at a higher rate effects on government revenue of converting to a flat tax are difficult to predict accuratelyRelated Questions
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