Introduction
The tax system in use by the federal government shows a level of complexity so huge that calls to reform it result in bipartisan support stronger than most other issues facing contemporary policy makers (Federal Reserve, 2010). Uncertainties regarding regulation as well as the stubbornly high rates of unemployment have overwhelmed record federal spending rates that have left Americans with an ever-growing budget deficit and a waxing national debt in the middle of an extended period of economic stagnation (Teller, 2010). There exists a relief mechanism for both the government and the taxpayers. However, the issue of reparation for taxpayers seems never to find a permanent solution. For example, whether a progressive tax or a flat tax rate attains equality or equity is still a heated debate (Teller, 2010). A majority of Americans have feelings that the tax system used unfair, but just how unfair is the progressive tax system on the taxpayers?
While attempting to answer such a question, this work will explore the concepts of progressive and flat taxation systems. Additionally, to put the problem into the context of the American citizenry, the paper will review how the progressive tax system is used in the US and establish the basis of such concerns. Lastly, the paper concludes by giving an opinion of the researcher about the appropriateness of progressive tax system and what might be done to ensure both equity and equality.
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Progressive Tax System v. Flat tax System
Uniform or progressive taxation? This is one of the dilemmas occupying increasingly more of economists’ imaginations. A flat tax system is a representative format of dealing with the system of taxation in comparable percentage rates (Mitu, 2015). A flat tax can also be defined as a consistent rate of tax applicable to all brackets of tax collection (Philips, 2015). Essentially, what this implies is that each person is required to pay the same tax regardless of what they earn. Such a rate of tax is imposed only incomes and excludes capital gains or on investments (Philips, 2015). Proponents of a flat tax system consider that such a system is fair to each because each of the citizens pays the same tax. An additional consideration is that a flat tax system is simple, which means that tax collectors are less concerned with pushing the taxpayers into remitting them. Another further reason why a flat tax system would be preferred is the fact that it only taxes incomes. Therefore, business people who earn dividends, capital gains as well as other forms of income not related to income will not be taxed.
However, a flat taxation system might be undesirable for the fact that it affects the taxpayers disproportionately even while such a system is proportionate (Philips, 2015). In this system, the impact of the tax rests more on the low-income earners because they pay the cost of living remains fixed despite the differences in domestic incomes.
On the contrary, a progressive tax system is one that taxes individuals according to their levels of income. People with higher rates of income are taxed more than those with lower rates of income (Mitu, 2015). Such a system of taxation is desirable to proponents because it attains fairness through taxation (Mitu, 2015). It means that individuals are not overburdened with their tax obligations. However, most of the people who object its usage think that progressive taxation does not attain fairness regarding the payment of tax; some people pay more than others even when they live in the same geographical regions (Philips, 2015).
Taxation in the US and Why it Bothers Taxpayers
The US has a progressive tax system (Dorothy, 2012). Many would suppose that by the country having such a tax system, the citizens are satisfied with their tax returns because of the equality and equity aspects likely to be enjoyed. However, complications within the tax system of the US are the cause of most of the debate surrounding it (Teller, 2010). As opposed to the fact that those with higher incomes pay more than those with lower incomes, there are many discrepancies in the payment of tax in the US. Several examples are available to support such a statement. One of such examples dates back to 2011 when it was realized that the first family (Barrack and Mitchell Obama) had an effective tax rate of 20.5 percent adjusted for a net gross income of 789,674 USD (Dorothy, 2012). However, comparatively, the president’s secretary on only 95,000 USD had a higher tax rate than the president did (Dorothy, 2012). Another example relates to the Ann and Mitt Romney household with a projected tax rate of 15 percent in the same year but on gross domestic income approximately 21 million USD. Comparing the three cases, it follows that the Romney family would have paid more in taxes than the President’s secretary.
Experiences such as the ones highlighted in the examples above create a form of disillusion among most Americans about the existence of a progressive tax system (Philips, 2015). Not all incomes have the same tax rate. It is noteworthy that even though income tax in the US has used progressive tax rates, a lower rate of tax has been applied to non-income earnings, which is a direct result of President Bush’s tax cuts (Dorothy, 2012). Therefore, why Mitt Romney and his family pays lower taxes is because most of the income results from ownership of stock. Dividends on stock and gains on investment have a flat rate of taxation of 15 per cent and are exempted from the progressive taxation used on incomes.
Unequal taxation on earnings could not be a problem, for example, if all Americans owned stock. However, less than one for every five Americans own stock in ways that qualify them for the 15 per cent flat rate of taxation used. In addition, for the same minority, only a few of them benefit in such an enormous way like the heavy stockowners. An IRS statistics indicated in 2011 that up to 200000 USD for households, less than 5 percent of their income meets the eligibility standards for the 15 percent tax rate (Dorothy, 2012). When all those households are combined, they make up more than 90 percent of US households (Dorothy, 2012).
From this argument, therefore, it is evident that the system of taxation of the US could be one of the fuels for the ever-growing gap income distribution between the poor and the rich. While the rich are always out struggling to save money by paying fewer taxes, the poor are being exploited regarding what they pay as tax. With the growing difficulties in the performance of the economy, problems of unemployment and others, the cost of living is almost becoming too high for most lower class Americans to bear. It could be from this perspective, therefore, that some of the people have been disillusioned with the system of taxation and why debates on taxation attract much attention (Dorothy, 2012).
Equality and Equity in the Tax System
Taxing taxpayers using proportional rates is an expression of the manifestation of the equality principle of tax (Mitchell, 2006). The reason for this statement is the fact that it maintains a uniform ratio between tax and income. However, it should be understood that a move like this is a breach of the equity principle of taxation (Mitu, 2015). The reason for this later statement is the fact that proportional taxation fails to consider that the contributory power of citizens rises as their incomes increase. Conceptually, tax equity relates to the social justice aspect of taxation (US Dep't of the Treasury, 1984). When an individual decides to explore the principle of justice in the distribution of the burden of tax, then they are required to make distinctions between the ideas of equality to tax and equality by way of tax (US Dep't of the Treasury, 1984).
Equality to tax refers to tax being collected at the same rate for all individuals and legal entities regardless of their geographic location or the economic activities in which they are involved. On the other hand, equality through tax needs a differential treatment between the burden of tax from one person to the next (Mitu, 2015). Such differentiation might be by several social and economic criteria such as the absolute taxable matter size, the origin, and nature of the income and individual situation of the subject of taxation (Matei et al., 2013). Essentially, in practical terms, the fulfillment of tax equity requires that several conditions are fulfilled. First, there is a need to set a minimum non-taxable income, which could apply to direct taxes so that there would be a strict fulfillment of living needs of individuals (US Dep't of the Treasury, 1984). The second of the conditions is making a differentiation on the tax deed so that it considers the contributory power of each of the tax contributors. Such an aspect should include the income dimensions the property on which tax is meant to be paid. Another condition is ensuring that there exists compatibility in the tax burden among persons of a similar social group and having similar contributory power. Lastly, there is a need to make the tax system general, which implies that it ought to encompass each social group getting their incomes from a given source or those that have a given property type, but excluding those falling below the minimum taxable bracket (US Dep't of the Treasury, 1984).
My point of view
Based on the argument developed in this work, it is evident that most Americans feel that their taxation system does not achieve equality through taxes. Much as there could be a progressive tax set in place and a minimum income taxable, it remains that some individuals from the lower income brackets have a greater tax burden than those in the upper bracket. Therefore, the researcher opines that reforms need to be made to the current system of taxation in any of the following ways:
If the federal government resorts to sticking to the current progressive system of taxation, then it needs to address the main loopholes, some of which are quite transparent to the citizenry. There is a need either to raise the flat rate on the incomes earned away from employment or to include such earnings to the regular taxable incomes. If the federal government adopted any of the two proposals, then the tax revenue generated in any period is likely to rise. After that, such money could then be spent within the economy to boost its performance rather than it being locked up in domestic and foreign accounts. In addition, the rest of the citizens who are currently overburdened by the tax will start to feel a sense of social justice.
On the other hand, the policy makers might want to shift the system of taxation to one that openly guarantees fairness; a fair tax system. Unlike the current system or the flat rate system, a fair taxation system will not tax people on accounts of their incomes, but on the value of their expenditure on commodities, both household and commercial. A system like this one would be a replacement for all other forms of taxation that make the citizens feel that they are being deducted more regarding taxes because it will be based on their spending power. It is easy to agree that the power of expenditure of individuals is directly proportional to their incomes. The rich and high-income earners are likely to spend more than the poor and the low-income earners. Whether a progressive system is still adopted for this system of taxation or a flat rate system is picked, it will be easier for the tax-collecting agencies to communicate their fairness in the collection of such taxes to the people. The federal government will also find it more convenient to collect tax using this format because it will cut down on the costs of its collection.
Conclusion
This work has argued on the need to make changes to the current progressive system of taxation in use in the US. Specifically, it has noted the causes of debates about unfairness regarding tax burden. Currently, the tax burden on taxpayers is even; the low-income earners pay more than the high-income earners (not in real tax collected, but regarding the tax burden). The reason, as noted in this work, relates to the loopholes in the system of collection of tax. While most high-income generate their extra incomes away from salaries and revenues, such gains are not taxed proportionately. In the opinion of the author, the federal government needs to address this issue by addressing the loopholes. For instance, tax agencies should include the extra earnings to the taxable income, raise the current flat rate of 15 per cent on such incomes, or adopt a fair tax system that does not rely on revenues, but on expenditures.
References
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