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.

The VAT Tax is charged as a percentage of the sale price each time a good is “sold” during production and distribution, but the purchaser (who pays the tax) may subtract the amount already paid by previous purchasers of the goods. [10] The VAT Tax touches every stage of the transaction, and the final price is still raised by the percent of the VAT Tax, but distribution is hidden throughout the process, making it easy to implement.

Furthermore, the Congressional Research Service has estimated an additional $50 billion of revenue for every 1% of VAT Tax levied, causing the head of the Senate Budget Committee to state it has “got to be on the table. ” [11] Another main advantage of the VAT Tax is that it distributes the tax burden on different members of the production process. The method of subtracting previous taxes paid also creates an automatic deterrence to attempting to avoid the tax, as the next purchaser will realize your error. Opponents of the Tax say the hidden taxation makes it too easy to implement and later raise the rate, which will disadvantage the U.

S. , as citizens look elsewhere to purchase goods. Others say it unfairly taxes the poor, who will be paying a larger percent of their income on the Tax, as they spend a larger percent of their income on purchasing goods . [12] While successful in Europe, the regressive nature of the VAT Tax will likely not make up for its revenue raising potential in the eyes of Congress. Arguably the most talked about tax reform proposal on the Hill today is the FairTax, a proposal that ends personal income taxes in favor of a tax levied at the time of purchase.

The Tax would be levied at a rate of 23%, mostly by state sales tax authorities, ending the IRS, with plans to eventually repeal the 16th amendment. [13] The Tax has many of the same benefits as the Flat Tax and the VAT Tax, such as the lack of double taxation and lower compliance costs. It can even be argued to be simpler than the Flat Tax, as not even a post card would have to be mailed annually to the IRS. [14] Another benefit of the Tax is the ability to change the rate depending on the economy, making it an additional fiscal tool that could be implemented by the Federal Reserve. 15] The FairTax also proves superior to the Flat Tax in that it includes the trillion dollar underground economy, which currently goes untaxed and would continue to do so under the Flat Tax. [16] Furthermore, it does this to a greater extent than the VAT Tax, which puts much of the burden on U. S. producers, and would not raise taxes for the underground economy. While some argue that the FairTax would not raise enough money, the addition of foreigners and illegal immigrants who would be paying into the American tax system, through purchases made in the U.

S,. would provide an additional boost to tax earnings. This version of the consumption tax may also cause a short-term spending spree by the wealthy before it goes into effect, due to worries about high future prices, giving the economy a needed surge of spending. [17] Lastly, the FairTax can be argued to be more progressive than the Flat or VAT Tax, through a monthly pre-bate sent to cover consumption up to the poverty level, meaning those in poverty would be virtually untaxed. 18] Many opponents of the Tax cite issues that proponents of the Tax speak of as its selling points. For example, the fact that only personal consumption is taxed creates the complexity of distinguishing business purchases from personal consumption, an area where tax evasion may arise. [19] Others site the elimination of the IRS as impossible, as even a national sales tax would have to be collected by some federal agency. [20] Nevertheless, the cost of funding the IRS will largely decrease due to the Tax.

Similarly, the repeal of the 16th amendment would be difficult to attain (needing three quarters of the states to ratify) , yet the benefits of the Tax remain even if Congress has the power to revert back to a personal income tax at a later date. [21] Another downfall to the Tax is that some speculate consumption will decrease due to the Tax, or consumers may look abroad, an issue, which would also be true of the VAT Tax. However, this seems unlikely as without income taxes, consumers will have much more disposable income and should be willing to spend, even with higher prices.

As one can see, while slightly severe in nature, especially asking for the repeal of the 16th amendment, the main tenants of the FairTax provide an innovative alternative to our current tax system. If Congress does decide to rebuild the U. S. personal tax code, the change will be drastic regardless, and thus the best long run alternative should be chosen. The regressive nature of the Flat and VAT Tax, in their pure form, make them difficult to implement in the U. S. , where the political climate mandates less taxation for the poor.

The pre-bate included in the FairTax, as well as the general lower amount of taxation due to the inclusion of the underground economy, makes the FairTax an advantageous alternative to all citizens who fall under the U. S. tax code. There is still much to be debated, however, as to if the U. S. is in need of a full-blown tax overhaul, especially in an economic climate full of uncertainty, but if so, out of the main options currently being discussed, the FairTax is the best option.


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