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Income Tax

 

An income tax is a tax based on the income of an individual
or a business. In the United States, personal income tax accounts for approximately 45%
of the total tax revenue.i 

Income tax was first used as a temporary method of helping
finance the Civil War. Soon
 
after the Civil War, the income tax was repealed. Then, in
1913 the 16th amendment was
 
ratified to allow income taxation. At its simplest form
there are three main types of
 
income tax, a progressive tax, a regressive tax, and a
proportional tax. A progressive tax
 
means that taxpayers will be taxed at a higher percentage
rate the higher their incomes
 
are. A regressive tax collects a smaller percentage of
income the higher the income. 

Lastly, a proportional tax would collect at the same
percentage rate for all incomes or a
 
flat tax. At present, the American income tax system is,
quite frankly, a mess. In my
 
opinion, the current tax system is far too complex purely
because of present "fair" actions
 
to fix past abuses. Confusion, fairness and a lack of
simplicity have been the major
 
problems associated with the individual. Ex-President Jimmy
Carter once called the U.S. tax
 
code a disgrace to the human race.ii With tax reform on the
lips of many on Capital Hill,
 
many different tax reform proposals have floated to the
surface. Of the many proposals a
 
few standout. A Consumption Tax is one of the more favored
tax reforms being discussed by
 
politicians and economists alike. It entails paying tax
only on that part of your income
 
which was spent during the fiscal year. This tax, as
discussed in class, is a regressive
 
tax due to the fact that the poor spend 95-100% of their
income whereas the rich spend a
 
much smaller percentage of their income. A Retail Sales Tax
is another of the new tax
 
proposals being discussed. It consists of a national sales
tax of 6-8% coupled with no
 
exemptions or any deductions. This tax is also regressive
due to the same fact that the
 
poor spend the majority of their income while the rich do
not. Perhaps the most talked
 
about tax reform proposal is the flat tax proposal. The
proposed flat tax is being
 
spearheaded by Richard Armey the Republican Representative
from Texas. A flat tax consists
 
of many different aspects that would promise a new way
Americans would view taxes, good or
 
bad. The flat tax would consist of the following provisions:
 
Americans would be taxed at the flat tax rate of 20% for
the first three years that the tax
 
would be enacted. After the initial three years, the tax
would fall to 17%. The tax is
 
paid on gross revenue. Taxes would no longer be paid on
dividends, capital gains, or
 
interest. No deductions from gross income. Deductions for
mortgage interest, retirement
 
accounts, charitable contributions, moving expenses, and
child care would be eliminated.
 
Each adult taxpayer would get a personal exemption of
$13,100 and $5,300 for each child
 
dependent.iii 

There have been several different variations of the same
basic idea of a flat tax. In the
 
early 1990's, then-presidential candidate Jerry Brown had a
slightly different version that
 
version contained a flat tax that was lower and more
deductions were also included.iv 

Currently a Pennsylvania senator, Arlen Spector, is
proposing a flat tax reform that
 
resembles that of House of Majority Leader Dick Armey.v
Although there are many advocates
 
of the flat tax there are still hard line critics. They
believe that the tax is a
 
regressive one putting the rich and the middle class in the
same tax bracket while leaving
 
the poor behind. Critics also believe that the flat tax
reform being proposed would be to
 
"simplistic". Simplicity is, on the other hand, one of the
reasons that advocates of the
 
flat tax believe it would be so warmly accepted by the
American public. Found below is a
 
possible tax return that could be the size of a post card.
 
Possible Tax Return
 
1. Gross Income __________
 
2. Personal and Dependency Exemptions -__________
 
3. Taxable Income __________
 
4. Taxes Paid (multiply line 3 by 20%/17%) __________
 
Simplicity is only an ends to the means that Armey and
others feel will benefit the
 
American tax payers and the American government. Mainly, a
flat tax would cut down on the
 
cost of operating the Internal Revenue System (IRS) which
has been estimated as tens of
 
billions of dollars. The IRS still can't account for
approximately $120 billion in lost
 
tax revenue due to underreporting of income and overstating
of deductions or exemptions.vi
 
With a flat tax there is little leeway with deductions and
exemptions so the potential for
 
lost revenue is lower. In addition, because of the
simplicity of the filing process,
 
people who may not have filed in the past may be inspired
to fill out the easier form. A
 
flat tax, according to Christopher Farrel columnist for
Business Week, would "eliminate the
 
need for so many tax lawyers and accountants." This new
reform would also contain the
 
potential for downsizing the IRS. It would also eliminate
current spending on record
 
keeping IRS audits, and tax preparation fees paid by tax
payers.vii Many would argue that
 
this is a much lower tax rate for the rich in this country.
True indeed, but the idea
 
behind this according to Armey is that with the freed up
income, the rich will invest back
 
into out economy. There is no doubt according to Michael
ruby, Co-Editor of U.S. New &
 
World Report, that taxes would fall for almost all
households in the US. He is quick to
 
point out that those households earning more that $200,000
would pay significantly less
 
than before the flat tax. Ruby believes that The fairness
issue can be addressed by
 
creating a second tax bracket as mentioned above. By using
a two-bracket approach, the
 
fairness issue can be addressed without sacrificing the
simplicity to any great extent. To
 
build on this, under Armey's flat tax proposal, a family of
four can make over $29,000 and
 
still pay no taxes whereas now they may pay over $6,000 in
taxes.ix Another advantage of
 
the flat tax proposal is that people will have more money
to spend on health care. The
 
government may be able to lower spending with regards to
Medicare and other programs such
 
as Welfare and some child care programs. There is also
strong evidence suggesting that
 
reduced tax rates also have the advantages of increasing
the incentive to earn income,
 
while lowing the incentive for taxpayers to find loopholes.
Overall, the Flat Tax Proposal
 
is a very intriguing proposal. There seem to be a lot of
benefits that are coupled to it,
 
but with any proposal, at this point there are still some
loopholes associated with it. Of
 
the current tax proposals, no one proposal has spurred as
much discussion except perhaps a
 
national sales tax. Companies such as H&R Block,
accountants, and tax lawyers will be sure
 
to find on capital hill lobbying against this new easy tax
system. The outcome will be
 
interesting to see.
 
Bibliography
 
i Holcombe, Randall G. The New Grolier Multimedia
Encyclopedia, Grolier Electronic
 
Publishing Inc. 1993 See. 
Income Tax

ii Michael Ruby. Three Cheers for a Flat Tax, U.S. News & World Report. February 20, 1995 pp. 76 iii GOP Tax Proposals, INTERNET. Site-http://edf.www.media.mit.edu/taxintro.html SEE Dick Armey's Flat Tax Proposal iv Jeff A. Schnepper and Charles J. Santilli. Flat Tax Follies, USA Today. July 1992. pp. 27 v Malcolm S. Forbes Jr. Fact and Comment: Specter of the Flat Tax, Forbes. March 27, 1995. pp. 27 vi Christohper Farrell. A Jumble Only a Flat Tax Can Untangle, Business Week. January 9, 1995. pp. 39 vii Ibid. pp 39. viii Ruby, pp. 76 ix Department of the Treasury, Internal Revenue Service. 1040NR Forms and Instructions. 1995. pp.22

 



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