A personal income tax could be understood as the deductions imposed on an individual. The amount to be deducted depends on the respective income of an individual. Taxes are one of the sources from which a considerable number of governments derive revenue. The revenue derived from taxes, among other sources, assists the governments with their expenditure. Government expenditures refer to the purchases made on goods and services that are inclusive of public investment, public consumption, and transfer payments such as capital and income transfers. These expenditures are used for enhancing the country’s defense, the health of the residents, infrastructure development, and welfare benefits, among other provisions (Oxford Business Group, 2016). Even though most of the governments obtain funding for their expenditures from taxes, some countries have zero income tax rates but still provide the identified services to the residents. This realization brings into question whether the US government can convert to a zero personal income tax to provide some of these services.
In the light of this questioning, there are countries with zero income tax rates. Ehud Menipaz and Amit Menipaz (2011) identify one of those nations as the United Arab Emirates (UAE). Even though the UAE does not have an income tax, it is economically stable. According to the Oxford Business Group (2016), the citizens are only required to contribute 5% of their salaries to a given pension scheme. Other charges that the citizens might incur include municipal charges that are levied on people living and working in the region. These charges are only applicable at the federal level (Oxford Business Group, 2016). The light-touch taxation has not created difficulties in ensuring social and infrastructural development from the need for taxation income. The country depends on its earning power from the oil and gas industry to drive its development strategy, which is one of the elements that could be identified as a key pillar that informed the decision of zero personal taxation. In spite of the depressed oil prices, the financial assets possessed by the country can assist the government to provide goods and services for the people in several decades.
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It would be difficult for the United States to adopt the UAE taxation model without reducing its total amount of revenue, given that the US generates revenue through the collection of income taxes from individuals and businesses. To determine that it would be difficult for the US to adopt this taxation model, the foundation would involve a comparison of the available natural resources. The UAE derives most of its revenue from the state-energy sector, with the narrow band of businesses contributing insignificantly to the nation’s revenue (Oxford Business Group, 2016). The US primarily depends on taxes to fund government expenditure. On the other hand, the population in the UAE is significantly lower than the population in America. In addition to providing services to more people than the UAE, the population in the US dictates that the government’s budget has to be higher. On the other hand, the US GDP is also higher than UAE’s GDP (Oxford Business Group, 2016), which is an indication that it is better off using the model in place rather than adopting the taxation model used in the UAE.
One of the advantages of adopting the zero income tax model relates to the idea that the model can aid economic growth. In this light, when the country applies zero personal income tax rates, the move is likely to increase the disposable incomes of the households in the country. The effect of an increase in disposable income includes the provision that more households are likely to spend on consumer goods and services, thereby leading to the increase in revenue collected from corporations. For this reason, the government will benefit from the increased revenue that it would use to improve service delivery. The other benefit could be realized through the expansion of businesses. As provided for by the Oxford Business Group (2016), zero personal income tax rates in the UAE has made it possible for domestic businesses to expand their operations quickly. For this reason, the move could see the growth of domestic businesses in the US market.
One of the disadvantages of implementing the zero personal income tax rates includes the idea that other taxes will be negatively affected in the sense that they will be increased. For instance, zero personal sales tax rates might increase sales and property taxes, which might affect businesses. The government will have to increase the tax rates of these other taxes in the quest to find other sources of revenue, resulting to a shift in the tax burden to the country’s citizens, thereby placing unfair burdens on poor individuals. On the other hand, the government might realize shortfalls in the collection of targeted revenue from the personal income taxes, which means that the quality of services that it will provide to the citizens will also be affected (Blecher, 2015).
As identified in the preceding section, the government can experience shortfalls in the collection of the targeted revenue from the personal income taxes, which means that it should come up with a suitable way to make up for the shortfall. One of the primary ways through which the government can make up for the shortfall includes increasing the tax rate on selected items that include alcoholic drinks, tobacco products, and other sugar-sweetened drinks. Evan Blecher (2015) identifies such taxes as sin taxes, which could effectively be used to reduce the use and abuse of the products. The fundamental reason for considering the implementation of such taxes emanates from the idea that they are linked with health issues that could also be costly to the government.
According to Blecher (2015), treasury, through IRS, can adhere to fiscal as well as monetary policies by aggregating the total annual budget and dividing the projections depending on the revenue sources. Typically, the government divides its budget among different strata of the economy. On the other hand, Treasury could use the IRS to put in place quarterly targets consequently revising the targets when they have not been achieved. It would be possible to consider the model as a fair one based on the idea that there will be equity related to the taxes charged. The biases of the tax charged is a derivative of the currently applied tax brackets for individuals with high incomes pays higher taxes than those receiving a low income. For this reason, the implementation of the considered tax obligation is one of the ways of realizing suitable tax obligations.
References
Blecher, E. (2015). Taxes on tobacco, alcohol and sugar-sweetened beverages: Linkages and lessons learned. Social Science & Medicine , 136-137 , 175-179. doi: 10.1016/j.socscimed.2015.05.022
Menipaz, E., & Menipaz, A. (2011). International Business . London: SAGE Publications, Inc.
Oxford Business Group. (2016). The report: Economy, energy, trade & investment, industry, real estate, education, banking, transport, tourism & culture, IFS, sports, interviews . London: Oxford Business Group.
