A Radical Proposal for the Reworking of the US Taxing system
Eric Hodge
In all modern societies, taxation is required to construct infrastructure, enforce a legal system and provide for people who are struggling, and ensure security among other things. It is often said that the only two things you can be sure of in life are taxes and death. Every country around the world raises funds through taxation in different ways depending on the demands of the economy, the government’s needs and the government’s perception of equality. Even in the US, taxation on the state level is widely varied. For example, Pennsylvania uses a value added sales tax on many goods besides food and clothing, whereas neighboring Delaware does not. To perform the unfavorable task of taxation on the federal level, the US government relies on a complex system that levies mostly individual’s and business’s income.
As one can see from the chart, after the Second World War, the US receives the largest portion of its funding from individual income taxes, followed by payroll taxes, then corporate income taxes. At the most basic level, the tax system requires the each person or entity to record all income throughout the year, submit this information and subsequently pay the correct amount of tax based on how much money they made. Although this may sound simple in theory, different types of income are taxed in different amounts for different individuals, and different rebates and tax deductions are available for different situations. One of the more basic complexities is the progressive nature of the US tax system. This means that the more money you make in a given year, the higher the rate of tax you have to pay. Why are complexities such as this added to the tax code one may ask? In the United States, Congress is responsible for generating the tax code which is enforced by the Internal Revenue Service (IRS). Congress adds new code to appeal to the current political atmosphere which is driven by social, economic, military, and political stimuli. For example, the US government promotes homeownership by offering tax refunds on mortgage interest on your home. One of the essential tenets of macroeconomics is that people tend to respond to economic choices in a manner that favors their own economic standing. This being said, the government is able to use this principle in order to influence economic and consequently social choices of its citizens by making complexities in tax code. Another driving force that shapes current US tax code is the idea of fairness.
As one can see from the Gallup poll, Americans predominately believe that wealth should be redistributed through heavy taxation of the rich. Consequently, this is reflected by the progressive nature of the tax schedule. This means that the rich pay a greater tax rate than the poor, besides paying more tax per capita. In fact, the richest two percent of Americans pay almost half of all income tax. This is significant because it shows how the US tax system has developed to appeal to certain groups of people and consequently gains complexity and dimension. Although the complexity of current US tax system has some justification, it incurs undue hardship to all involved in the system. To quantify the extent to which changes are made, and subsequently how complex the tax code has become, one can look to the report made by the IRS in September 2010. The report states that there have been 4,400 individual changes to the tax code since the beginning of the millennium. These changes have resulted in the increase of tax code word count from 1.4 million to 3.8 million during the same time frame. This being said, the code has become cumbersome and unwieldy to tax payers, preparers and administrators.
The current federal tax system is ripe for reform. Tax claims a portion of a taxpayers’ wealth and this is inevitable. Besides the inherent inconvenience of taxation, the complication of the current system creates undue costs to taxpayers and impedance on the economy. Besides the actual cost of tax, US tax payers are served economic resistance by the filing process. In fact, between filing time, purchasing of filing software and professional assistance, and IRS administrative costs, the current tax system costs $431 billion on top of the actual tax owed. This money represents taxpayers’ effort to simply comply with tax law. One can imagine this figure as friction induced by the tax system as taxpayers attempt to push their funds towards the government. Although some said friction is inevitable, as tax systems gain complexity from modification through the years, the representative frictions increases. As seen in “Figure 1”, both gross collections and operating costs have increased significantly over the past three decades (the log scale makes the chart look even less steep than reality). This for one shows the growing inefficiencies of collecting taxes. The liability of tax for the populous is steadily increasing past the raw tax burden. Besides the increasing administration cost, the Joint Committee on Taxation cites three other significant drawbacks to the complex tax system of the US: “Decreased levels of voluntary compliance, increased cost to taxpayers, and reduced perception of fairness” (laffer) The latter in actuality is more than just perception as tests have been done to consider the actual equity of the tax system. One such study was completed in the mid 1990’s when the tax system was even simpler than the modern code.
The current system for taxation in the US
How does the current system work?
What is unfair/ inefficient about the current system?
When and why did the last major reform occur? (Reagan)
What was the most recent minor reform?
Why is now the time to change again?
What is the proposed reform?
What are advantages of taxing consumption?
How would this be practically instated?
What are possible negative implications of such a plan?
The most recent major tax reform occurred during the Reagan administration and was titled the Tax Reform Act of 1986.