An income tax is a tax based on the income of an individual or a business. In
, 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 Soon after the Civil War, the income tax was repealed.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 . 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.
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