|
|
As if just having to pay taxes wasn't bad enough. Every year it seems to get more complicated.
Tax codes have a tendency to become bloated with exclusions and loopholes for special interest groups. Politicians use the tax code to gain political allies and to advance their own social and economic goals. As a result, the system becomes ever more complex and the average taxpayer finds it impossible to comprehend.
In the U.S., it is not uncommon for individuals and small businesses to pay less in taxes than they pay in tax preparation. And even the professionals they hire can't get it right. In one recent Money magazine study, 45 different professional tax preparers came up with 45 different tax amounts for the same fictional family.
The U.S. government itself spends large amounts of money every year paying companies like CCH, Inc. to provide up-to-date plain English annotations of their tax code.
However, momentum for change does seem to be building.
We may not be able to abolish taxes altogether, but radical tax reform is being seriously discussed in Washington. Specific policy proposals are being debated.
Which proposal, if any, should free-marketeers support? More meddling with the current system? ... a flat tax? ... a national sales tax? ... a value-added tax?
Led by The Heritage Foundation, Dick Armey, and Steve Forbes, many free-market conservatives are backing a flat tax. These proposals do not call for a truly "flat tax," but rather a flat rate tax. In other words, people would pay the same percentage of their income, as opposed to the same flat amount. Rates in the various proposals range from 10 to 25 percent or more.
A variant of the flat tax is a proposal by U.S. Congressman Dick Gephardt that would merely expand the lowest tax bracket to cover 75 percent of the population. It would still have increasing marginal rates.
Most of the flat tax proposals call for generous personal exemptions, usually over $30,000 for a family of four. Some of the proposals would tax interest and dividends, but most would exclude them from taxation. Some still have mandatory payroll deduction of taxes, while others would depend on citizens to file monthly or quarterly tax payments based on completing a tax return.
As a practical way to implement the flat tax, Sen. Spencer Abraham and Rep. Vince Snowbarger have introduced "tax choice" plans. Under these proposals, Americans would be able to decide whether to use the simplified new system, or continue to pay their taxes under the current system of exemptions and deductions.
Critics of the flat tax point out that the Internal Revenue Service would still exist. Although most of the flat tax plans specifically limit IRS powers, taxpayers would still be at the mercy of their collection efforts.
Many of these critics, including the Cato Institute, advocate a national sales tax. A sales tax, they argue, would eliminate the need for the IRS and would encourage economic growth by moving the tax burden from production, savings, and investment to consumption.
Some national sales tax plans call for taxation of all items, others would exclude "necessities" like food and clothing. Some proposals call for a high tax rate, but balance it with monthly rebates to lower income families. (Advocates argue that these rebates could be administered by a much smaller agency with less authority than the IRS.) Generally, the collectors of the tax -- retail businesses -- are allowed to keep a portion to cover the cost of collection and submission.
Valued-added taxes (VATs) are common around the world, but the idea hasn't become popular in the United States. A VAT is paid by businesses, based on the added value of their materials and products. For example, if a business purchases raw materials for $100 and sells a finished product for $150, the taxable value added is $50. Tax rates are generally low since one company's finished product becomes another company's raw material. VATs are burdensome on businesses, which must track all of this information, and they usually require extensive governmental oversight.
An idea from Australia is the debit tax. This tax would be based on banking debits, so that your income is only taxed as you spend or withdraw it from the bank. Under one proposal, debits would be taxed at 0.33 percent (33 cents for every $100).
Of course, nothing prevents the same monkey business with the tax code under any of these proposals. Items can be excluded and additional rebates can be authorized to promote political or social goals. But are they improvements over the current system?
To learn more about the various proposals, browse through the links provided below. Whatever flavor of reform you prefer, you will find lots of information here.
In his Media Spotlight, J.D. Tuccille takes a look at the media's perception of tax reform proposals that are being debated. And when you decide you want to voice your own opinions, click over to the Tax Policy Forum being co-sponsored by Reason magazine. There has been some lively debate going on there.
Free-Market.Net Partners
Cato has been advocating a national sales tax for several years now. They have released a number of comprehensive studies defending such a system.
Laurence J. Kotlikoff authored The Economic Impact of Replacing Federal Income Taxes With a Sales Tax, in which he discusses the benefits on economic growth, personal savings, and the standard of living.
How a National Sales Tax Would Work presents a comprehensive vision of the system, including details on proposed annual rebates to households, and reimbursement of costs to the businesses that collect the tax.
Tufts professor of economics Gilbert Metcalf addresses the supposed regressivity of a sales tax in The National Sales Tax: Who Bears the Burden?
Cato's fiscal policy director, Stephen Moore, has hit the road promoting the national sales tax. He testified before the House Ways and Means Committee on Replacing the Federal Income Tax and spoke before a Hoover conference on Tax Reform.
Additional information can be found in the Taxes chapter of the Cato Handbook for the 105th Congress.
Reason created an issue Web page called Code Blues: Can Congress Scrap the Tax Code? to discuss tax reform issues.
Highlights from recent issues of Reason magazine include Rewriting the Code, a roundtable on tax reform featuring Ed Crane of Cato, Grover Norquist of NTU and others.
Daniel Mitchell ponders whether reform of the system can happen with the squabbling between flat tax and national sales tax proponents in Taxing Times.
Flat-Tax Societies shows the economic benefit of a flat-rate tax system using comparative statistics of countries that have similar systems.
Mackinac Center for Public Policy
Michigan's Mackinac Center has released several Viewpoints on tax reform:
Tax Reform, Pro & Con is an excellent set of references to information from both perspectives in the tax reform debate.
Laissez Faire carries a number of books on taxation. Highlights include Hall and Rabushka's The Flat Tax and Why We Must Abolish the Income Tax by Nelson Hultberg.
In December 2004 this page was modified significantly from its original form for archiving purposes.
Free-Market.Net, founded in 1995, is now a part of ISIL.
 |