8 December 2017
Tax Disputes in America
The fairness of the tax system, in regards to America’s social classes, has been an ongoing debate since 1913. This was the year in which the 16th Amendment was ratified, permanently legalizing income taxes. Indeed, the controversial debate between the republicans and democrats has been gaining more attention during the republicans’ proposal of tax reform. A good tax system should meet three basic conditions: adequacy, fairness, and administrative ease. The President’s administration claims the transition between both systems to be easy enough to fit on a small piece of paper. Some republicans support a flat tax to benefit businesses and lower taxes on the rich while others, like the Democrats, want to raise taxes on the wealthy to fund public spending and social programs. The question arises: which approach meets the high aims of the three conditions, while being yet is affordable for the country and fair for every American taxpayer?
The U.S. works on a progressive tax system. In federal, state, and local level the government collected about $2.4 trillion out of $4.7 trillion solely in income tax last year. According to Kelly Phillips “The top 1% of taxpayers have consistently paid more in federal income taxes than the bottom 90% since 2003” in her article called “Our Current Tax v. The Flat Tax v. The Fair Tax: What’s The Difference?”. These numbers illustrate the gap between the classes: a minority of Americans pay for the public amenities of more than three hundred million people. This creates a heavy reliance on a small number of top tax payers and, thus, higher instability within society in times of crisis.
This is the reason why Republicans, like Ted Cruz, prefer a flat tax: a system where everybody pays the same tax rate regardless of their income. This would include corporations that nowadays, after all the deductions, often end up paying zero taxes. A flat tax gets rid of the misuse of deductions, loopholes, credits and exemptions. This would make the whole filing process a lot simpler, as Senator Ted Cruz promised last year “I am campaigning on a flat tax that would allow every American to fill out his or her taxes on a postcard that allows us to abolish the I.R.S.”. It would make the reporting system easier to follow, eliminating the death tax, capital gains tax and double taxation of savings and dividends. Taxpayers would also save the financial cost of lawyers, accountants and other resources. The tax code would decrease substantially from 73,954 pages to an easier in complex system. The flat tax system meets all three basic conditions, including the assumption that flat taxes are fair, but what happens when digging deeper?
A lot of people seem to overlook that the baseline cost of living does not change. This makes a flat tax not fair to those with a lower income: the majority in the United States. A gallon of milk or gas will cost the same no matter what their income is. Introducing a tax that
is solely based on a percentage of income results in proportionally higher expenses for the lower and middle class and, therefore, seems unfair. Although many flat tax plans, such as Senator Rand Paul’s, want to exempt low income taxpayers by including deductions and exemptions, it moves the tax plan right back to being progressive. The flat tax system would be even more regressive than the current progressive income tax since lower and middle-income classes pay a larger share of their income than the upper class. As a result, a flat tax system on wages would not spur economic activities and it also would not eliminate the IRS: a key condition to a simpler tax system. Even if a pure flat tax is enacted – one that includes no deductions or credits – it would still hurt the lower and middle class as spending falls as a share of income rises, while the upper class gets a break. This not only parallels a divide in the class’, but also results in less tax contribution to the government.
The alternative is the progressive tax system which is anything but simple or transparent, but is it fair? In this system, the taxes rise with income. “As a taxpayer’s income enters a higher tax bracket, only the portion of income that falls into that bracket is taxed at the higher rate, with the remaining amount taxed according to the lower tax bracket(s) that it falls into.” Glen Nunes explains in the article “Pros and Cons for the U.S. of Flat vs. Progressive Taxes”. This allows the lower and middle class households to live comfortably while still giving government the chance to influence the economy by regulating the tax brackets to collect more revenue.
A common concern is that higher taxes eliminate monetary incentives for the upper class to increase their income level. This is not the case though because a high marginal tax rate will not stop the top 1% taxpayers (which is comprised of celebrities, athletes, successful entrepreneurs, and people with innate talents) from pursuing success in their life and business. The next Bill Gates or Lebron James, for example, will still want to do what they do. The idea to completely desensitize the value of work in someone’s life is unrealistic; a top tax bracket will not discourage people from succeeding in their jobs because success in the work place is a personal need.
I believe that the progressive tax system on income in the Unites States should remain because it reduces social and wealth inequality in society and results in more revenue for the government. It gives families basic and necessary spending power, potentially stimulating free market economies. Progressive taxes serve to correct the economic imbalance where households with a lower income have to sacrifice a larger portion to their cost of living than higher income households. People with higher revenues can afford, and some even want, to pay higher taxes than people with lower incomes. Although the present tax system in the United States does not meet all the five pillars, it is still far better than flat tax which creates more inequality and disproportion of the classes.