Essay On The Slavery Of Income Tax
The Slavery of the Income Tax Have you ever wondered if there was a better system of taxation than the one we currently have in the United States? The current United States tax code is not fair, it is difficult to understand, and places a chokehold over the economy. Is there a better system of taxation that could be implemented? The United States should implement a consumption tax to encourage growth in the economy, properly place incentives, encourage compliance, remove heavy tax burdens, simplify the tax code, and create a more equitable system of taxation. What is a consumption tax? Simply put, a consumption tax is a tax on what a person consumes or spends rather than what they earn in income
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(Erhbar,1). A consumption tax operates a lot like a sales tax. The tax is built into what you purchase or consume; as a result, this system of taxation is more efficient in saving consumers and business owners time and money. Rather than hassle with determining tax liability from income thresholds, special deductions, or credits; on the contrary, the consumption tax allows you to determine your total tax liability with each purchase that you make. How could the implementation of the consumption tax impact the growth of the American economy? The erection of a consumption tax in place of an income taxation system would positively impact American business and corporations alike. One of the positive aspects of a consumption tax is that Capital Gains and Dividends are not taxed; consequently, this reduces the tax burden placed on businesses. There are two different taxes that apply to business, first is the capital gains tax, which mostly affects shareholders, secondly a corporate income tax. According to Curtis Dubay, research fellow of Tax and economic policy, “Once combined, the two sets of taxes cause the tax rate on business investment to exceed 50 percent. Such a high rate is a strong discouragement for businesses to invest and for investors to take risks.” (Dubay,1) Removing the tax on capital gains and dividends would conversely encourage business investment in the American economy. Any tax measure that encourages business investment, also has the potential to create jobs. When businesses receive more investment, they have more capital to expand operations, hire more employees, increase wages, or offer better benefit packages. Which can create growth in the economy at a macro-level. How does the current tax code place inappropriate incentives and how can a consumption tax encourage healthier incentives? Imagine a single mom who started out as a cashier at a Local hardware store, until being offered a promotion to manager. The promotion comes with added job duties and a wage increase. The young mom accepts the promotion and when she receives her first paycheck is slightly taken back by the fact that she is making the same amount that she was before the promotion because of income tax. The promotion moved her to a higher tax bracket which allowed more of her income to be taxed. The effect of her raise is eaten up by taxes. How does a tax policy like this shape incentives? This effect on income might cause people to not desire to move up the ladder because as they do the tax burden becomes greater. Al Ehrbar, President of EVA Institute, states, “the income tax creates a "tax wedge" between the value of a person's labor (what employers are willing to pay) and what the person receives (after-tax income). As a result, people work less (and choose more leisure) than they would in a world with no taxes.” (Ehrbar,1) In comparison, this situation would not occur with the implementation of a consumption tax. People would choose to work more because their extra yield would not be taken away by income taxes. Removing the income tax and implementing the consumption tax system might boost employee morale by allowing them to keep more of their earnings. Unlike the income tax, the consumption tax does not distort incentives poorly. The consumption tax is a neutral tax that encourages future consumption at the behest of present consumption (Erhbar,1). A nation’s overall economic health can be measured based on how much it spends and consumes; however, a nation’s economic health can also be measured by how much its citizens can save. The latter is probably a more accurate measurement of economic well-being. The more that citizens are able to save; subsequently, the more mobility and security they have in an ever-changing economy. A consumption tax removes many of the poor incentives placed by the current income taxation system and replaces them with healthy incentives that benefit people in the present and long run. Can the consumption tax simplify the tax code? Yes, because the consumption tax operates much like a sales tax there is an automatic tax effect for individuals. The consumption tax eliminates the hassle and headache at the end of the year. Individuals would no longer need to file returns, learn the complex tax laws, or keep important paperwork for tax time. A consumption tax would still require sole proprietorships, partnerships, and S or C corporations to file a return at the end of the year; however, the amount of paperwork required to file would be drastically reduced (Francis,9). Advancements in technology over the last decade have caused people to desire more automated and hassle-free systems. A consumption tax allows the taxation system to catch up with the technology of the current era where almost anything can be done with the swipe of a card or push of a button. This automation of the taxation system that occurs under a consumption tax would allow for a simpler and easy to understand system of taxing the populace. With all the complex rules of the Income taxing system it seems especially difficult to comply with all them; therefore, a consumption tax would encourage tax compliance.
Many opponents of the consumption tax have long thought that the implementation of a consumption tax would allow businesses and individuals to evade paying their total tax liability (Francis,1). Under the current income tax system there are so many rules to comply with that many tax professionals misestimate total tax liability. In the 1996 a study was done by Money Magazine that asked 45 different tax professionals to calculate a single family’s tax liability that had self-employment and retirement income. The 45 different tax professionals estimated 45 different tax liabilities that ranged from 36,000 to 96,000 (Laffer,9-10). So if the actual tax liability of the family was for example, 45,000 then any estimate that is below that amount would not be complying with the tax code. If the complexity of the income tax system already causes problems with tax compliance, then simplifying the tax code with a consumption tax should increase tax compliance. When everyone understands the rules, they are much easier to abide
by. The Consumption tax can save taxpayers money by removing the heavy tax burden placed on U.S. citizens by allowing taxes to be paid directly to the Treasury; consequently, this could allow for the elimination of the Internal Revenue Service (Erb Phillips, 1). The Internal Revenue Service Administration Staff requires 12.4 Billion in tax dollars to maintain operations (Laffer,2). Eliminating the standard income tax system and replacing it with the consumption tax allows for an instant savings of 12.4 billion with the removal of the Internal Revenue Service, but it also allows for taxpayers to save money in other ways too. For example, Taxpayers are estimated to pay 31.5 billion on hiring tax professionals and obtaining special tax software (Laffer,2). Most of these costs to individual taxpayers are eliminated with the implementation of the consumption tax. Taxpayers also spend 377.9 billion in time value costs to pay their taxes(Laffer,2). The implementation of a consumption tax also removes these time costs to taxpayers. In total the implementation of a consumption tax has the possibility to eliminate at least 431.1 billion dollars that it costs to comply with the current income tax system (Laffer,2). Currently, “the costs taxpayers actually incur are far greater than the net sums the government collects” (Laffer,1). As the costs to taxpayers are reduced by the implementation of a consumption tax, then taxpayers will begin to receive more value out of their tax dollars. For example, the 12.4 billion currently spent on the administrative staff of the Internal Revenue Service could be spent on government sponsored health insurance or to provide further assistance to Veteran’s across the U.S. The consumption tax creates a more efficient allocation of tax payer dollars by removing tax burdens for institutions that do not add value to the economy and allocating it to institutions that do add value to the American Economy. A consumption tax leads to a more equitable taxing system for many reasons. First, the consumption tax is controlled at will (Erb Phillips, 1). People can control how much taxes they pay with the choices that they make about consumption. When individuals choose to consume more goods and services, than they will likewise be taxed more. A more equitable and voluntary system of taxation arises when the determination of total tax liability is in the hands of the tax payer as opposed to the current income tax system that determines total tax liabilities by a complex set of rules that is neither equitable or voluntary. The issues with the complexity of the income tax system of the United States will persist until the implementation of a more simplistic system is implemented. The consumption tax is a great way to simplify the tax code, reduce costs to taxpayers, remove tax burdens, improve the business environment, properly place incentives, and encourage growth in the economy. The consumption tax is the taxation system of the future that will make April 17th feel like a nice spring day rather than a dreaded deadline.
(Erhbar,1). A consumption tax operates a lot like a sales tax. The tax is built into what you purchase or consume; as a result, this system of taxation is more efficient in saving consumers and business owners time and money. Rather than hassle with determining tax liability from income thresholds, special deductions, or credits; on the contrary, the consumption tax allows you to determine your total tax liability with each purchase that you make. How could the implementation of the consumption tax impact the growth of the American economy? The erection of a consumption tax in place of an income taxation system would positively impact American business and corporations alike. One of the positive aspects of a consumption tax is that Capital Gains and Dividends are not taxed; consequently, this reduces the tax burden placed on businesses. There are two different taxes that apply to business, first is the capital gains tax, which mostly affects shareholders, secondly a corporate income tax. According to Curtis Dubay, research fellow of Tax and economic policy, “Once combined, the two sets of taxes cause the tax rate on business investment to exceed 50 percent. Such a high rate is a strong discouragement for businesses to invest and for investors to take risks.” (Dubay,1) Removing the tax on capital gains and dividends would conversely encourage business investment in the American economy. Any tax measure that encourages business investment, also has the potential to create jobs. When businesses receive more investment, they have more capital to expand operations, hire more employees, increase wages, or offer better benefit packages. Which can create growth in the economy at a macro-level. How does the current tax code place inappropriate incentives and how can a consumption tax encourage healthier incentives? Imagine a single mom who started out as a cashier at a Local hardware store, until being offered a promotion to manager. The promotion comes with added job duties and a wage increase. The young mom accepts the promotion and when she receives her first paycheck is slightly taken back by the fact that she is making the same amount that she was before the promotion because of income tax. The promotion moved her to a higher tax bracket which allowed more of her income to be taxed. The effect of her raise is eaten up by taxes. How does a tax policy like this shape incentives? This effect on income might cause people to not desire to move up the ladder because as they do the tax burden becomes greater. Al Ehrbar, President of EVA Institute, states, “the income tax creates a "tax wedge" between the value of a person's labor (what employers are willing to pay) and what the person receives (after-tax income). As a result, people work less (and choose more leisure) than they would in a world with no taxes.” (Ehrbar,1) In comparison, this situation would not occur with the implementation of a consumption tax. People would choose to work more because their extra yield would not be taken away by income taxes. Removing the income tax and implementing the consumption tax system might boost employee morale by allowing them to keep more of their earnings. Unlike the income tax, the consumption tax does not distort incentives poorly. The consumption tax is a neutral tax that encourages future consumption at the behest of present consumption (Erhbar,1). A nation’s overall economic health can be measured based on how much it spends and consumes; however, a nation’s economic health can also be measured by how much its citizens can save. The latter is probably a more accurate measurement of economic well-being. The more that citizens are able to save; subsequently, the more mobility and security they have in an ever-changing economy. A consumption tax removes many of the poor incentives placed by the current income taxation system and replaces them with healthy incentives that benefit people in the present and long run. Can the consumption tax simplify the tax code? Yes, because the consumption tax operates much like a sales tax there is an automatic tax effect for individuals. The consumption tax eliminates the hassle and headache at the end of the year. Individuals would no longer need to file returns, learn the complex tax laws, or keep important paperwork for tax time. A consumption tax would still require sole proprietorships, partnerships, and S or C corporations to file a return at the end of the year; however, the amount of paperwork required to file would be drastically reduced (Francis,9). Advancements in technology over the last decade have caused people to desire more automated and hassle-free systems. A consumption tax allows the taxation system to catch up with the technology of the current era where almost anything can be done with the swipe of a card or push of a button. This automation of the taxation system that occurs under a consumption tax would allow for a simpler and easy to understand system of taxing the populace. With all the complex rules of the Income taxing system it seems especially difficult to comply with all them; therefore, a consumption tax would encourage tax compliance.
Many opponents of the consumption tax have long thought that the implementation of a consumption tax would allow businesses and individuals to evade paying their total tax liability (Francis,1). Under the current income tax system there are so many rules to comply with that many tax professionals misestimate total tax liability. In the 1996 a study was done by Money Magazine that asked 45 different tax professionals to calculate a single family’s tax liability that had self-employment and retirement income. The 45 different tax professionals estimated 45 different tax liabilities that ranged from 36,000 to 96,000 (Laffer,9-10). So if the actual tax liability of the family was for example, 45,000 then any estimate that is below that amount would not be complying with the tax code. If the complexity of the income tax system already causes problems with tax compliance, then simplifying the tax code with a consumption tax should increase tax compliance. When everyone understands the rules, they are much easier to abide
by. The Consumption tax can save taxpayers money by removing the heavy tax burden placed on U.S. citizens by allowing taxes to be paid directly to the Treasury; consequently, this could allow for the elimination of the Internal Revenue Service (Erb Phillips, 1). The Internal Revenue Service Administration Staff requires 12.4 Billion in tax dollars to maintain operations (Laffer,2). Eliminating the standard income tax system and replacing it with the consumption tax allows for an instant savings of 12.4 billion with the removal of the Internal Revenue Service, but it also allows for taxpayers to save money in other ways too. For example, Taxpayers are estimated to pay 31.5 billion on hiring tax professionals and obtaining special tax software (Laffer,2). Most of these costs to individual taxpayers are eliminated with the implementation of the consumption tax. Taxpayers also spend 377.9 billion in time value costs to pay their taxes(Laffer,2). The implementation of a consumption tax also removes these time costs to taxpayers. In total the implementation of a consumption tax has the possibility to eliminate at least 431.1 billion dollars that it costs to comply with the current income tax system (Laffer,2). Currently, “the costs taxpayers actually incur are far greater than the net sums the government collects” (Laffer,1). As the costs to taxpayers are reduced by the implementation of a consumption tax, then taxpayers will begin to receive more value out of their tax dollars. For example, the 12.4 billion currently spent on the administrative staff of the Internal Revenue Service could be spent on government sponsored health insurance or to provide further assistance to Veteran’s across the U.S. The consumption tax creates a more efficient allocation of tax payer dollars by removing tax burdens for institutions that do not add value to the economy and allocating it to institutions that do add value to the American Economy. A consumption tax leads to a more equitable taxing system for many reasons. First, the consumption tax is controlled at will (Erb Phillips, 1). People can control how much taxes they pay with the choices that they make about consumption. When individuals choose to consume more goods and services, than they will likewise be taxed more. A more equitable and voluntary system of taxation arises when the determination of total tax liability is in the hands of the tax payer as opposed to the current income tax system that determines total tax liabilities by a complex set of rules that is neither equitable or voluntary. The issues with the complexity of the income tax system of the United States will persist until the implementation of a more simplistic system is implemented. The consumption tax is a great way to simplify the tax code, reduce costs to taxpayers, remove tax burdens, improve the business environment, properly place incentives, and encourage growth in the economy. The consumption tax is the taxation system of the future that will make April 17th feel like a nice spring day rather than a dreaded deadline.