Question

A major part of U.S. Fiscal Policy is taxation. Taxation is the main source of revenue for the government. The tax code has been modified and grown more complex over the years. Proposed changes to the tax code continue to be debated as the country struggles with the effects of large budget deficits.

What changes would you recommend to the tax system and why? Address the following in your response:

Attributes of a good tax

Pros and cons of overall tax increases

Pros and cons of progressive taxes (taxing the rich)

Income tax vs sales taxes

Pros and cons of the Estate tax (death tax)

Answer 1

Changes to the tax system which might benefit are:

i> Move to a territorial tax system - where the business is taxed only where the business has earned.

ii> Eliminate double tax on savings-there still remains double tax where you pay the tax twice and it happen whens lets say we buy assets such as bonds or stocks and in future the price of the bonds or stocks increases so when theres a gain the current tax code requires a second tax. This mainly discourage an individual to save.

iii> Annul the estate tax- Even having a high rate of tax it raise little revenue to the federal govt. because of the increasing exemptions,so it results in small number number of estates to pay the tax. So it should be annulled to have a neutral system.

Attributes of a good tax -

a>A good tax should be efficient, like spending less time to pay and collect the taxes which means the taxation method is efficient and fast.

b>should be simple- means the law should be easily understandable by everyone and should not need any additional knowledge to understand the tax

c>equity-should be fair to every tax payer which means that no person pays too much or to little in taxes. So, thatswhy equity plays a role and is a good attribute when it comes to tax .

d>certainty- certainty is a feature or characteristics by which every taxpayer must be certain about the tax he/she owns , when it is due and how the tax payment is made.

Pros and cons of overall tax increases -

PROS-

i) Government are able to more things and borrow less.

ii) More development can be achieved.

CONS-

i) The higher taxes are, the more effort people will put into trying to avoid the tax .which is an unproductive effort which can be in better use.

ii) People will tend to save more and purchase less products because of the increase in tax.

iii) It might cause recession.

Pros and cons of progressive tax -

PROS-

i) Tends to shift the tax burden who are more able to pay and bear it.

ii) People having greater influence in the society pay more than others.

iii)helps the taxpayer during hard times(so if u earn less you will pay less in taxes and if you earn more you pay more in taxes)

CONS-

i) Inflation tends to push a tax payer into a higher bracket, while there has been no increase in your income after adjusting for inflation.

ii) May discourage business owners to invest or expand their business because additional profit will have higher rates.

iii) This type of tax does not treat everyone equally so it is unconstitutional, because of no equity.

Income tax vs sales taxes-

1>income tax is a direct tax which the individual pay on their income. Sales tax on the other hand is the tax which the individual needs to pay if a sale occurs.

2>All individual who is generating income needs to deal with income tax. Only people who sell certain services or only product sellers have to deal with sales tax.

3> The percentage of the income which is paid to the government for funding of infrastructure development, for paying salaries of the employees which get employed by a state or central government etc. is called Income tax Sales tax is an indirect consumption tax paid to the governing body for the sale of goods and services at retail, which is charged at a certain percentage of the value of the product from the consumer, collected by the retailer and passed on to the government. Sales tax is an additional amount of money which is paid on the purchase of goods and services.

Pros and cons of the Estate tax (death tax)

PROS-

i) The tax which is charged is same to everyone.

ii) The number of people who will face this type of tax is rather small.

iii) Mainly no businesses pays taxes upon transfer.

CONS-

i) Death taxes often affects the lower class than the upper class.

ii) Death tax is charged on the current value of the property and not when it was purchased.

III) Death tax taxes assets at the same rate it taxes liquid assets.