Assignment 2: There Are Taxes to Be Paid
The concept of tax has been used since the old ages and its progress has gone up to modern society. There are tax policies which are effected in different nations and such policies are supposed to safeguard the welfare of a society. Taxes are usually got from individuals, and organizations as a means of assist the government in financing public goods. Taxes are the easiest way for the USA government to get funds which it uses in providing social services among its citizens so that their quality of life is improved. Normally taxes conducted behind some defined principles universally whereby there is need to ensure that they are non- discriminatory and also they promote equity Watkin (2007). This paper has been prepared to help discuss the tax reforms that are being advocated for in the USA at these economic hard times.
A summary of the Sixteenth Amendment overall
The sixteenth amendment in the USA provides the congress with the mandate of collecting income which is not generally shared with other states. Through the amendment the direct taxes on income have been omitted and the focus rather shifts towards taxing people on the basis of consumption. According to Hall & Rabushka (2007), the amendment also was oriented towards bringing income from investment under the scope of the general income tax. However, it was not able to change the character of the tax law and this made it investment income taxable.
The salient points in the Amendment regarding taxation
Income taxes were not considered as direct taxes under the amendment which means that from the nature they belong they were once again to be classified as indirect taxes. In connection to the Tariff Act of 1913 which was introduced due the case of Brushaber v. Union Pacific Railroad Co, it was construed in the amendment that income tax is indirect Hall & Rabushka (2007).
The Sixteenth Amendment was basically concerned with the prevention of apportioning any tax termed as direct by the congress. This was meant to enable the congress maximize the taxes they got form all the comers where income flowingHall & Rabushka (2007). For instance dividends and rent were termed under property tax and they were then supposed to be distinguished between direct and indirect taxes to avoid double taxing problems.
This amendment was meant to ensure that taxes were sourced from all people. In fact through the specification of the various categories of taxes meant that there was optimality achieved in the collection of revenues. In case one was not taxed from some property, there could be other taxes which were difficult to avoid as per the law governing taxes.
Comparison and contrast of the key tenets of the current tax system with those of the proposed Fair Tax Plan.
The current tax system in the USA is very complex and hugely influenced by law. A lot of income is taxed from assets and therefore makes it very difficult for low income earners to enjoy their wealth. According to Watkins (2007), where a state relies on income from property for tax, there is always reduction in production capacity. This is because firms cannot produce optimallysince there is low demand to their product which is associated with high cost of goods in the market. Normally, firms concentrate more on retaining their current revenues so that whenever they are taxed, they can always maintain a large pool of wealth as security for survival.
There has been a proposal from several states to eliminate income and businesses taxes. The opposite of this is to make sure that taxes are only sourced from the consumers’ purchases. This means that the fair tax proposal is likely to be effected if states agree to corporate in the hope that low income earners will not suffer from the heavy tax burden they experience today. Therefore this tax system is meant to promote economic growth through enhancement of consumption efforts. It aims at promoting fairness in the tax system so that the principle of equity can become more effective.
In case the fair tax system is going to be adopted, there will a huge loss of revenue from various income sectors unlike with the current tax system. USA has various social services such as hospitals and schools which the government fund through revenue. Actually, through the fair tax system, there will be huge tax rates imposed on consumer goods and services yet there is now way it can work sufficiently especially because it’s difficult to forecast consumer behavior in the market Jensen (2005).
It is also likely that the fair tax system would also fail to boost the economy well. This is because some goods are considered more valuable than others which means that huge taxes will be imposed from them. Suppose individuals decide not to consume such goods? This could be an indication of insufficient revenues raised from the consumer income. In the economy there are illegal and black market goods which are sold making it difficult to impose taxes on them. McCaffery (2002) suggest that where there is a shortage on goods available in the market they are expensive and consumersopt to buy goods through the black market and therefore this fair tax system will not effective.
Currently the tax system is long- term oriented since on a daily basis there are revenues collected from income. Also after a company’s financial years, through auditing it has to ensure that there is compliance with the tax laws. This therefore makes this system reliable. On the other extreme, the fair tax system can be termed as short term. This is because revenues to be gathered depend on the level of consumption on a daily basis. In fact, McCaffery(2002) notes that at times consumers will opt to save when they realize that there are high interest earnings from income and therefore, less portions of goods and services will be consumed. Finally, the propensity to spend under fair tax system would mostly be for middle income earners meaning that there is no promotion of equity for all. The current tax system has no room for exempting any one from being taxed regardless of the property s/he owns.
Effects of the Fair Tax Plan in relation to national debt, social security, unemployment, military spending, etc. Provide a rationale for the response.
The impact of the fair tax plan is likely to be huge on the national debt. The government will have to request for a high percentage of income inform of treasury bonds from the public. This because there is a likelihood of slow growth in revenues, yet the government has the mandate to incur expenditure on public goods which it cannot without adequate finances. Therefore, the government will rather use the accumulated fund in repaying the public debt rather than managing its activities since it has to ensure there is a balance in the flow of income within the economy.
As for the social security, there should be prohibited spending. This is because they are funds belonging to various categories of citizens which are meant to cater for their needs due to one reason or another. For instance, the retired need to be given benefits which they can use to survive once they get off from workplace. If the fair tax plan will not be sufficient in provision of revenues to the state government, then it means that there will be use of socialfunds. In fact this will lead to a state of disarray especially where citizens who depend on this fund will have less to spend and the fair tax approach will be rendered obsolete.
According to Watkins (2007), the level of employment has a lot of influence on the level of consumption from the circular flow of income view. Consumer spending is influenced by the income earned. Therefore the fair tax plan might not be effective where unemployment is likely to be experienced because, people will have low income to spend. As for firms, they will adjust their production capacity so that they are able to make sure that the level of production match the consumer demand.
The US government has been known for formulating budgets whereby the military among other departments is allocated a lot of revenue. From the perspective of individuals employed in the military, this system can work since they have to use the income they earn to provide for their families. Additionally, there various equipment that will be needed in military camps and such goods will only be purchased from manufacturers within the country. Therefore, the fair tax system will be workable when acquired goods will be taxed since they are procured in large volumes.
The US is a country whose economy is robust and guides other countries towards achieving development. The use of fair tax plan could hinder consistent economic growth which has been achieved for decades in this country. There is a high probability that tax evasion could be present through this system which means that the policies will only be targeting a few and especially the middle income earners. It also difficult to estimate the actual consumption levels that people will achieve each so as to calculate specific tax levels.
Currently, the existing tax system is focused towards seeing that there is equity in the taxation process. Regardlesswhether one is a foreigner or domestic investor, this systems makes sure that it maximizes the revenues so that the government can determine the basis through which to use the money in reaching the public. Additionally, it does, not rely of the consumption levels of goods and service which means that there are always guaranteed sources of revenues for use by the government.
Hall, R. & Rabushka, A. (2007). The flat tax. Stanford, Calif: Hoover Institution Press.
Jensen, E. (2005). The taxing power a reference guide to the United States Constitution. Westport, Conn: Praeger.
McCaffery, E. (2002). Fair not flat how to make the tax system better and simpler. Chicago: University of Chicago Press.
Watkins, E. (2007). The estrogen elixir a history of hormone replacement therapy in America. Baltimore: Johns Hopkins University Press.
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