Sin Tax Bill Essay

Sin Tax Bill Essay.

Summary

Sumptuary taxes are ostensibly used for reducing transactions involving something that society considers undesirable, and is thus a kind of sumptuary law. Sin tax is used for taxes on activities that are considered socially undesirable. Common targets of sumptuary taxes are alcohol and tobacco, gambling, and vehicles emitting excessive pollutants. Sumptuary tax on sugar and soft drinks has also been suggested.[1] Some jurisdictions have also levied taxes on illegal drugs such as cocaine and marijuana.[citation needed] The revenue generated by sin taxes is sometimes used for special projects, but might also be used in the ordinary budget.

American cities and countries have used them to pay for stadiums, while in Sweden the tax for gambling is used for helping people with gambling problems. Acceptance of sumptuary taxes may be greater than income tax or sales tax.

Opposition to sin tax

•Sin taxes have historically triggered rampant smuggling and black markets, especially when they create large price differences in neighboring jurisdictions.

[citation needed] •Critics of sin tax argue[who?] that it is a regressive tax in nature and discriminates against the lower classes, since taxation of a product such as alcohol or cigarettes does not account for ability to pay, therefore poor people pay a greater amount of their income as tax.[citation needed] •Sin taxes are not normally value added in nature meaning that expensive, high-quality products more likely to be purchased by the wealthy will have the tax comprise a much smaller proportion of its final purchase price, thus ensuring that the lower classes pay a much greater proportion of their lower income in tax.[citation needed]

•Sin taxes fail to affect consumers’ behaviors in the way that tax proponents suggest, for instance increasing smokers’ propensity to smoke high-tar, high-nicotine cigarettes when the per-pack price is raised[2] and increasing the rate of people mixing their own drinks rather than buying pre-mix alcoholic spirits.[3] •Critics[who?] also argue that the behavior affected by sin taxes are strictly personal and of no social consequence, and therefore should not be moderated by government.[citation needed]

Support for sin tax

•Some argue[who?] tobacco and alcohol consumption or the behaviors associated with consumption or both are immoral, or “sinful”, hence the label “sin tax”. By raising the cost for certain products (here called immoral), they aim to force change upon people’s behavior. •Tobacco and alcohol consumption has been linked to a variety of medical problems. In the United States alone, over 440,000 people die annually from smoking tobacco.[4] By making the cost of unhealthy behavior prohibitive, they hope to produce a healthier society.

•Following the medical argument, some argue[who?] that consumers of tobacco and alcohol cause a greater financial burden on society by forcing others to pay for medical treatment of conditions stemming from such consumption, especially in most first-world countries with government-funded healthcare, and should be taxed extra to pay for the costs of their treatment. Adam Smith supported the medical and moral arguments in The Wealth of Nations: “It has for some time been the policy of Great Britain to discourage the consumption of spirituous liquors, on account of their supposed tendency to ruin the health and corrupt the morals of the common people.”[5] The moral, medical and financial arguments are occasionally considered in contemporary news settings.[6]

Counter-arguments

•Not all research supports the idea that alcohol and tobacco consumers financially burden societies. One study used a mathematical model to compare estimated health costs of obese persons, tobacco smokers, and “healthy-living people”. Until age 56, obese persons had the highest estimated annual health expenditure. Tobacco smokers older than this had the highest estimated health costs of all groups, but since life expectancy is shorter for smokers and the obese, the “lifetime health expenditure was highest among healthy-living people.”

The model for this study used input parameters based on data from the Netherlands.[7] •To raise revenue for tight government budgets, legislators sometimes attempt to raise revenue by imposing unusually high excise taxes on cigarettes, liquor, gambling, and so on. This type of charge, often called a “sin tax,” appeals to voters who view it as a way of discouraging consumption of certain objectionable products. •Critics of sin taxes cite the following as reasons against imposing a sin tax:

•It reduces the income of the buyer.

•- It lowers profits for the seller, and leads to reduced investment, wages, and jobs. •- It is not likely to seriously discourage consumption habits when those habits are intensely desired. •- It may eventually decrease government revenue, especially as people move their business to the informal sector. •- It encourages people to turn to harder substances to feed their habits at the same price. •- It creates underground markets, which tend toward corruption and violence, and fosters disrespect for the law. •- It sets up a moral hazard for policy makers, who vacillate between wanting to discourage undesirable behavior and wanting to encourage it for revenue purposes. •The goods that sin taxes are imposed on vary by state, so local laws should be consulted. Typically, when sin taxes are imposed, they are imposed on items that are discouraged for health, moral, and other reasons, for example, cigarettes, gambling, soda pop, beer, wine, hard liquor, topless bars, snacks, and other items.

•The Department of Finance (DoF)-backed reform on the so-called sin taxes would raise the ratio of excise tax to retail prices of tobacco and alcohol to international levels, as recommended by the World Bank. •Finance Undersecretary Jeremiah N. Paul Jr. said Thursday in a statement that affected companies’ claims on the effects of the proposed law are “exaggerated” and “taken out of context.” •Earlier this week, PMFTC president Chris Nelson told reporters the bill would encourage illicit trade while “ravaging” legitimate business, noting that the DoF itself expects a 50-percent drop in industry revenues if the proposal becomes law. •House Bill No. 5727 calls for the pegging of retail prices to inflation and implementing a unified tax rate as opposed to the current multitier regime.

•Citing a World Bank report titled “Sustaining Growth in Uncertain Times,” a quarterly update on the Philippines issued in December, Paul said Philippine excise taxes are far lower than those in other countries. •The bank’s 46-page report finds that “in a comparison of 15 countries, the Philippines’ rates appear in the lower half when comparing taxes as a share of retail prices (RSP).” •The World Bank attributes “the very low revenue yield from tobacco products” to low excise tax rates, which are not indexed to inflation, and the use of 1996 prices as bases for taxation of older products and current prices for newer products.

•As of 2009, data provided in the study showed excise tax as a percentage of RSP of tobacco at 32.9 percent for the cheapest brands and 37.5 percent for both the most sold and premium brands. •In comparison, Thailand has 51.1 percent, 58.4 percent, and 61.6 percent, respectively, while Mexico has 48.6 percent across the board and Turkey has 64.1 percent, 58 percent, and 58 percent. •For liquor, the report also showed a relatively low excise tax-RSP ratio for the Philippines with 26.1 percent for beer, 5.5 percent for wine and 35.8 percent for distilled spirits.

Sin Tax Bill Essay

Role of Income Tax Essay

Role of Income Tax Essay.

The contribution of income tax is playing a pivotal role in the economic development of Bangladesh Development of Bangladesh has taken various measures to modernize the tax system. “Tax is an expense which is payable by an individual on the basic of his or her level of income” In general tax is imposed earning capacity. In 1984 an industrial enterprise established prescribed within prescribed time limit in the prescribed area shall be exempted from tax for certain period.

The main objective of this scheme is to ensure economic development of Bangladesh.

On the other hand Investment allowance is given on the investment new machineries. Depreciation allowance is allowed on the new machine it rise used in various industries at a specified rate. Tax incentives are allowed on income and profit of cottage industries to encourage investment in cottage industries which can contribute to the economic significantly. It also encourages savings.

The investment also encourage saving providing tax credit facilities certain types of investment and expenditures such as DPS, Insurance premium, provident fund.

Sometimes tax also contributes to social welfare. Such as some fund. Tax also encourages the foreign investors like tax holiday remittance technical assistance etc. A significant number of Bangladesh people work abroad and encourage them remittance through the banking channel has been declared tax exempted.

We find that major constraints on Bangladesh’s economic growth include: low levels of human capital; poor infrastructure; market failures in specific sectors; low levels of trade, Corruption and cumbersome regulation. Of these, designing appropriate policy responses to raise human capital, curb corruption, or alleviate sector specific market failures will require much further research. In conclusion, it can be said that income tax plays a significant role in the economic development of Bangladesh. Above mentioned strategies encourage not only foreign investors but also local investors.

Role of Income Tax Essay

Discuss About the Duty of Paying Taxes Essay

Discuss About the Duty of Paying Taxes Essay.

Paying taxes has become a compulsory obligation of each citizen for a long time but in recent years, there have some heated debates with many people believing that paying taxes is a work expressing adequately their responsibilities with society. While others clam that it is not enough to become a good citizen.

First and foremost, paying taxes is very essential with society. Firstly, taxes is a major source of government income used to set up several socio-economic policies. There are a range of projects using budget to build road, hospital, school,…which show the duty with society of people who pay taxes.

In addition, there are some taxes depending on individual income, businesses,…which create an awareness of that paying taxes is an impartial approach to redistribute income. Thence, it is understandable why a lot of people think that paying taxes is enough to contribute to the society.

Nonetheless, the more life is modern, the more a citizen contribute to the society. Not only does paying taxes show the responsibilities with society but also it is required that people should contribute to charity funds, NGOs and protect environment. The society has plenty of problem thus the foundation of charity funds is virtual.it is directly solved this problem which can’t be settled only by their money. Additionally, several NGOs also set up to resolve it especial in human duty such as disabled children, person suffered orange victim. Furthermore, people should conscious of the important of their environment. Thus, they need improve their sense of environment conservation.

In conclusion, paying taxes is a best method to contribute to the society but it is not at all. Society need more than this. Hence, all people need to raise their duty with society as highest as posible, which make the merits for themself, for others and for the world not only for the present but also for the future.

Discuss About the Duty of Paying Taxes Essay

Zimbabwe Taxation Essay

Zimbabwe Taxation Essay.

The tax system currently enforced in Zimbabwe under the authority of the Income tax Act Chap 23. 06 with Acts like the Capital Gains Act Chap 23. 01, Finance Act Chap 23. 04 and the Excise duties Act as complimentary. The system evolved from traditional ideologies perpetuated from pre pre-colonial era up to now. The incidence of tax from a traditional perspective occurred from as far as the Rozvi State who was allowed to maintain their power and control by the Portuguese Traders which resulted in the development of the tributary system.

In which tribute was to be paid in form of farm produce, animal skins, fish and various goods. Every person under the protection of the kingdom and within the chief’s jurisdiction was to pay tribute from their occupational activity. This tributary system was mainly instigated by military control and any person revoking this tradition was punished. This traditional view is reflected in the modern tax system as there are some synonymous traits which have of course been duly developed over time.

The presence of the British settlers saw the tax system being inclined towards politics and social classes or race in other words. In 1894 Hut Tax was introduced and was set at 10 shillings per hut and this tax was imposed on each adult male. The tax was paid to the British South Africa company which was the agent of the colonial government in the area even though it was initially authorised by the Colonial Office in London. Hut Tax was paid in the form of money, labour, grain or livestock and the colonial Authorities in this case the British were the beneficiaries.

This tax benefited the white minority as they raised money, enhanced their economy’s liquidity (cash wise, thus supporting the currency), facilitating further development of the white minority. The whole purpose of a tax system to benefit the people at large through the services provided by the government was rather defeated as the greater proportion of tax was paid by the black majority for the benefit of the white minority. Poll tax was also another type of tax introduced by the colonial authorities again aimed at the male adult. It was set at 1 pound per male adult; 10 shilling tax on each excess wife was also introduced.

Administering of tax policies was mainly set to compel the African to surrender his labour power to the settler economy so as to depend on them for the money with which they could meet their tax obligation. Initially Blacks owned the most cattle, sheep, had a bigger population thus consumed more meaning more sales tax was expected to be paid. Under the bid to frustrate black expectations of prospering and to reduce the chance of them gaining economic advantage over the whites a host of other taxes were recommended by the Southern Rhodesia Native Affairs Committee (these were later approved).

The recommendations were made up of a plot to: * Introduce Dog tax * Implementing the taxation of all cattle * The continuation of poll tax * Progressive taxation of polygamous wives * A marriage fee of 5 pounds was to be set to be paid by the husband with an allowable remittance of 5 shillings for every month worked for a European Employer. (African Heritage,pg 65) At face value without any need for a comprehensive analysis it is quite evident that accumulating more of anything from cattle, increase in consumption, children and even another wife meant more tax due to be paid to the colonial authorities.

Cattle tax was to be paid on the cattle owned by the people and dog tax likewise had to be paid for every dog kept. Penalties were applied through acts of confistication of cattle on most cases. The Southern Rhodesian Tax Ordinance of 1918 was not very different from the tax policies which were implemented in South Africa and the United Kingdom, though the income tax rates were not very high. Deductions were allowable for the contributions that were made to the pension funds and also generous primary abatements for dependants and as well as the secondary abatements for dependants.

Insurance premiums and medical expenses were also allowed as a deduction The Pay as You Earn (P. A. Y. E) system of collecting Tax income was also adopted and it mainly operated with reference to an employed person. The definition of person in this regard mainly focuses on the natural person as it is the natural person and not the Juristic (for example Companies) that earn the employment income on which P. A. Y. E will be charged. Companies were also taxed in their own capacity and were required to pay a standard rate of 7s. 3d. n the ?. Special incentives for investment and exports were also given to benefit international trade and encourage investments in the companies established in the Zimbabwean Economy.

Personal tax obligations were payable by individuals on a sliding scale ranging from £2 per annum to £12 per annum, this range was dependant on the income Death duties were relatively low by world standards, and were payable on a sliding scale rising to a maximum of 2s. 6d. in the pound currency, which is reached on a taxable amount of approximately £42,000. Stamp duties were set on numerous documents recording transactions between persons and on services provided at various registries. These included a transfer duty at the rate of £1 per cent, for the first £4,000 of the value of property transferred and £2 per cent, on the excess over £4,000. Customs duties were imposed in a single column tariff on the bulk of the goods that were imported into Rhodesia. The customs duties covered protective duties for Rhodesian industries and revenue duties over a wide range of consumer goods.

Almost all raw materials for industry had a 0 % duty (that is they were free of duty), as were the variety of capital goods. Excise duties were imposed on all wines, spirits, beer, cigarettes, manufactured tobacco, and motor spirit produced in Rhodesia. The consumption based sales tax, was mainly levied at the retail stage, and was the buying and selling actually occurred. The tax rate charged was 8d. Some goods were exempted from tax and thus immune to tax, these include basic food stuff, raw materials for production and capital goods for use by the industry

Motor vehicle tax ranged from £12 per annum for ordinary passenger vehicles to £72 per annum for the heaviest public service vehicle with a charge of £144 for diesel-powered vehicles. The Motor Vehicle tax could be paid in three instalments at the beginning of each licensing term of four months. Tax was also imposed on minor duties like trading activities, betting, and television and wireless receivers. The local government of the colonial authority attested that the tax will be confined to the field rates on the property.

The accumulation of the tax payable by blacks on everything and every income that accrued to them led to an uprising (among other causative factors) resulting in the Chimurenga war which ended in 1980 the year in which Rhodesia became Zimbabwe. The tax system applied by the new regime and government was not very different from the one administered in the colonial era except that it was altered to shift the benefit to the black majority at large. Taxation cannot be divorced from economic conditions and indicators and to some extent politics.

The post independence period was highly characterised with many developmental projects implemented by the Zimbabwean government through provision of social services, drought reliefs, subsidies for companies owned by the government. However this government expenditure engineered a budget deficit which had a negative impact on the tax as higher taxes were now required to meet the expenditures. Tax rates in the 1980s additions The tax system evolved gradually being influenced by economic conditions that occurred like the hyper inflationary era in 2007, 2008.

The evolvement of Zimbabwe’s Tax system has seen the emergence of the Department of Taxes and the Department of Customs and Excise to form the Zimbabwe Revenue Authority (ZIMRA) in Jan 2001 but which started operating in September 2001. ZIMRA was established to enhance revenue collection and trade facilitation. (FORE 2006, pg 3) Currently, the Ministry of Finance is directly responsible for the fiscal management and thus have a direct impact on the tax system. In reference to the Constitution of Zimbabwe (Sec 102 and 201) all fees and other public revenues are paid to the Consolidated Reserve fund.

The proceeds from this fund enable the government to meet its expenditure, provide services to the people. The legal framework, the administration of tax policies and the collection of taxes has been placed under the Zimbabwe Revenue Authority (ZIMRA) in the authority of the Commissioner General. The tax system under the provisions of the Income tax Act stipulates that tax is not levied on profits as in some countries but it is levied on taxable income. Zimbabwean Tax system use a source based approach in which tax is levied from income whose source is deemed to be from Zimbabwe.

Not every income of every person is taxable; income from Local Authorities or institutions like POSB, Reserve Bank of Zimbabwe (RBZ) is exempt from tax this is according to sec14 of the Income Tax Act. Dividends from a company incorporated in Zimbabwe are also exempt from tax. The government has implemented reactive approaches towards taxation rather than a proactive one this is seen y the Fiscalisation of cash registers in order to reduce the losses in Value added tax (VAT) Collection as VAT is the major contributor of tax revenue mainly because it is consumption based, and orrowing from principles of micro economics it can be proven that people consume whether they have income or not from the marginal propensity to consume concept .

The fiscalisation of cash registers can increase the amount VAT collected from businesses as the transactions incurred can be monitored through a memory card placed in the registers which are linked to the revenue authorities. The Value Added Tax Act [Chap 23. 11] is the main authority which governs the collection of VAT Tax bands are used on individual income in countries like South Africa, Zambia and Botswana.

The use of tax bands makes PAYE a progressive tax which is redistributive. This leads to the reasoning that the proportion of tax revenue from PAYE should be higher than that from the non progressive taxes such as VAT and customs duty. In Zimbabwe tax is classified under proportional tax, progressive tax, regressive tax and direct tax. Individuals’ income from employment is taxed using tax bands, while income from trade or investment has been taxed at the same rate as that for corporate tax which was a flat rate 30% in 2009 and has gone down to 25% in 2010.

The tax free band for income from employment was set at US$150 a month when the economy was dollarized in 2009 and was increased marginally to US$160 a month The advent of the Inclusive Government in 2009 in the post inflationary period where the tax and revenue base were dwindling resulted in the implementation of tax reforms to revive the tax system. This was difficult especially in the collection of corporate tax as most companies were operating below capacity.

Corporate tax currently charged at 25% . Since tax is highly linked to development, tax incentive to foreign companies willing to invest in the country have been made so as to alleviate development. Tax concessions under special mining licences are also given, windfall gain tax is also charged in the mining sector. The holder’s of special mining rights are charged at a lower rate of 15% and are subject to Windfall Gain Tax which is levied on the additional profits.

This profit is not attributable to production but occurs when the price of a certain commodity rises above a certain level (AFRODAD 2011, pg19). This tax charge is currently set at 31. 176%. The government once made an attempt to exempt ZIMPLATS from paying tax on additional profit tax but ZIMRA never implemented this action and still went on to collect tax from it. The Income Tax Act is revised and reformed from time to time this is the responsibility of the Tax Steering Committee which was set up soon after the Inclusive

Government was established. This Committee comprises of the minister of Finance Mr. T Biti, some representatives from the private sector and ZIMRA itself. The committee aims to solve the challenge faced by tax authorities in Zimbabwe of trying to broaden tax base and at the same time simplify tax collection and easing the debt burden. The Final Deduction system is also a notable development of Zimbabwe’s tax system. It is a system in which the employer is required to deduct P. A. Y. E from the employee’s income in a way that it becomes the final tax. The final deduction system (FDS) was implemented in 2000 but it was initially introduced in 1997/98 (AFRODAD 2011, pg 18). The directive governing the deduction of P. A. Y. E under the F. D. S system is taken from the 13th schedule of the Income Tax Act. There is then no need for the employees to submit tax returns at the end of the tax year.

Zimbabwe Taxation Essay

Federal Income Tax Essay

Federal Income Tax Essay.

  1. ABSTRACT:

Of late, tax reform is the main subject widely debated in all the corners of the US. As an alternative to the existing federal income tax system, there are many proposals such as “reduction of tax rates, broadening of tax base, reducing tax to GDP ratios, flattening of tax structure “.  The Flat rate tax system is a viable alternative to the existing tax system as it offers more advantages.

This research paper mainly looks into the various advantages that will accrue to the U.

S economy if it switches to flat rate Federal Income Tax. This research envisages significant macroeconomic gains by substituting the current federal tax system with a flat rate system. All sections of society including upper-income, middle income, corporates will be much benefited because of the flat rate system. This research will also analyse how simplification of tax structure will help to abolish most deductions and tax penchant in both personal tax codes and corporate. This study also reveals that under flat rate tax, the poor shell out lesser income taxes and attains extensive welfare gains.

This study also finds out that flat-tax reform would usher significant gains in productivity and output. This study also discovers that a flat rate tax system will be fair, not complex and confusing and will be stimulating people to save substantially on their income and above all, it helps US manufacturers to be of more competitive globally. This study also reveals how flat rate tax or tax cuts helped the federal revenue to soar and even revenues doubled in 1980 and 1990.

 This study reveals that flat tax system minimizes the intricacies and inequalities, tax credits, deductions, loopholes of the existing tax system. Further it also reduces the compliance cost and present disincentives to saving and investing are eliminated. Thus economic growth is attained through enhanced savings.

  1. INTRODUCTION:

There is a general opinion that current federal Income tax structure is complex which thwarts US’s growth. The ordinary working class and business community are the worst affected as they are not entitled to tax breaks that are extended to those influential community which is being backed by the high-ranking politicians. Thus why many have started now advocating for the simple and flat rate tax system. As a result of this, Bush has appointed an advisory panel to suggest a total, viable, tax reform that will address all the inherent disadvantages of the current tax system. Law makers and Department of Treasury are exploring the possibility of introduction of flat tax or other reform options.

Affordable tax structure is the significant factor in attracting talents and foreign capital investments. In the past, tax advantage is the most attracting feature for US to attract intellectual talents and top creamy layers who will in turn augment the US economy due to their productivity.  The complying cost of tax burden alone estimated to the tune of $ 205 billion annually or $ 705 per each individual To understand various statutory deductions available, tax credits and other special privileges available in the tax law, it needs a lot of expertise and an ordinary office going citizen or small business owner may not have the enough talent to understand this complex tax structures. Today, US Citizens are over-burdened with highest tax rates and major lion’s share of income is originating from the tax revenues.

Now most of the countries are turning to flat tax rate system. Many other countries are following the suit. The main purpose of flat rate tax structure is to prevent tax evasion and to drive more revenues by bringing more assesses within the tax bracket to pay tax without avoidance or evasion.

Thus consumers are forced to spend more in taxes as compared to necessities like food, clothing and shelter. Higher the tax more will be the reluctance to pay the tax honestly thus in turn will lead to shrinking the nation’s economy.

  1. IDENTIFICATION OF THE PROBLEM:

This study deals with the question whether is it necessary to have tax reform in US?  Why there is a need to introduce a flat rate system? What are all the salient features of the flat rate tax system? How the flat system overweighs the current tax systems? What are all major economic benefits going to be derived from the flat rate tax system? Is the flat tax system is having any fair advantages over the existing tax system?

What are all the disadvantages of the flat rate system? How the flat rate system is going to address the major disadvantages that are being pointed by critics if it is implemented? Whether a stable and consecutive economic growth is possible under flat rate tax system.  Is the flat rate system is prevalent in any other economy and if so the major advantages that economy has derived from the flat rate tax structure? These are the problems that are going to be addressed in this research essay.

  1. LITERATURE REVIEW:

On the economical front, flat-rate taxation would offer both political and economical benefits. On economic point of view, it would encourage employment, saving and capital accumulation. On political aspect, present tax code can be deployed to remunerate or penalize individuals based on their location in accordance with various political affiliations in the society.  Thus we can describe the flat tax regime as an operation of political liberation that would produce economic advantages.

Flat tax rate would replace the existing tax system with a single rate. For example , a federal tax collections are about 10% of U.S total personal income and thus a flat tax of 10% on the whole base of personal income would collect the exact revenue  to the treasury .

One may recall the great fiscal lesson of the 1980 taught that when there is lower tax, it will always generate higher revenues. In 1980 after Regan’s tax cut measures, federal revenues soared from $ 530 billion to $ 1031 billion in 1990. Likewise, tax revenue increased at a 20% faster snip in the 1980s than in 1990s, which witnessed two world record tax increases. [1]

Regan tax cuts had been criticized that the share of income earned by the wealthy 5% of the population increased from 17 % to 19% but they have disregarded the fact that segment’s share of the tax burden also augmented from 38% to 49% of cumulative federal income-tax collections. A reduction in marginal rates would stimulate economic development thereby increasing the size of the taxable assesses. Thus the whole society will be benefited from the increased economic activity.

Further under Flat rate tax, income from dividends, interest, investment gains are exempted from tax. This brings severe tax burden between those who earns income from employment and income earned from investments as the former has to shell more tax than the latter. Further flat rate tax is applicable only to the federal income tax and does not cover social security tax, In other words, the tax burden under social security tax is being kept in tact.  Thus the flat rate tax will be more beneficial to underemployed, unemployed and the rich than the working class as it has to shell more tax. [2]

The concept of flat rate tax revolves around more tax exemptions for individual tax payer and dependent. For instance, let us assume if there is no tax up to $ 40000 on income per annum, a family with less than this annual income need not pay federal income tax. Under this concept, the higher the income, higher will be the income tax to be payable by the assesses A family with a $ 50000. Income would have to pay on only $ 10000 of income and if we assume that flat rate of tax is 17%, then federal income tax will be $ 1700 which is equivalent to 3.4% of its total income. Likewise, if a family with an income of $ 150000, shall to shell out $ 18700, 12.50% of its total income.

Further there is a strong recommendation for keeping in tact the deductions for charitable contributions, local and state taxes on the principle of double taxation avoidance, and home mortgage interest for tax payer’s home. Reduction in marginal tax rates is one another economic gain derived from flat rate tax structure. In other words, minimizing the marginal tax rate results in economic benefit which is the primary advantage of flat rate tax.

When there is a high rate of marginal tax say up to 40%, people generally resort to two types of manipulation one is to evade tax and other is to influence politically for favored tax treatment. Had the marginal tax is in the range of 10 to 20 %, they will rather pay the tax honestly rather than searching for political influence or evasion tactics. For example, the members of ways and means of US congress has the extraordinary power to shape the nation’s tax laws and they always successful in getting about 30% more total campaign funds than the other member of the congress.

The cost to individuals of compliance with the personal income tax is estimated to be $ 157 billion by the Tax Foundation and this will reduce to $ 10 billion if flat rate tax is introduced due to simplified procedures. There are approximately about 890 forms under current tax system and the flat rate tax system only needs two post-card size forms to be filled in and it will be more users friendly.

4.1 FLAT RATE TAX Vs CURRENT TAX SYSTEM

It is an easy, simple, just and assures overall growth where as the current system is complex, ambiguous. Current tax system differentiates the assesses on various categories like use, source and level of income but where as under flat rate all assesses would be treated equally and equal justice is assured to all irrespective of their level of standing in the society . The flat rate tax rates ensure lowering of marginal tax rates and reduce tax bias against saving and investment.

Under current tax system, numerous forms have to be filled in and a lot of procedures are to be adopted. Under flat rate tax system, from large corporations like Xerox to a small pizza store would have to adhere identical rules and there is no longer separate tax rules for partnerships, sole proprietorships, regular corporations and S corporations and further all corporations earning income in US irrespective of the fact that they are US companies or U.S branch of foreign companies.

4.2 ADVANTAGES OF FLAT TAX RATE:

 It will not eradicate all disparaging brunt of taxes but it will put an end to tax code’s prejudice against investment and savings and lowering the tax rates will extend relief to downtrodden and poor. A flat tax would result in increased employment, investment and saving. Flat rate tax would augment the national wealth as it would result in rise of income-producing assets and it would also increase the after-tax stream of earnings that they produce.

Even the Internal Revenue Service admits that the present system compel taxpayers to spare 6.6 billion hours each year in the preparation of tax returns. But in the case of flat rate tax system, the compliance system is so lucid and simple and it would reduce the compliance cost to 10 billion dollars. Flat rate will reduce compliance cost by eliminating the role of political lobbyist, lawyers and accountants.

Flat rate tax remove the marriage penalties as there is only one tax, the income of the spouse won’t push a couple into an elevated tax bracket. One another study reveals that the flat rate tax would augment the size of the U.S economy by 10% and it would reduce interest rates by 25% and this will balance the loss on the home mortgage loan interest deduction.

One of the studies has established that it cost to US government $ 1.40 for collection of 1$ under this existing tax system and flat rate would minimize compliance costs by 94%

Further it will eliminate the deductions, credits, loopholes, exemptions and political intimidation. Thus politician’s role will be minimized to zero as they would no longer shed favoritism, help friends and penalize foes and to deploy tax code to inflict their values on the U.S economy.

Erstwhile communist nations like Latvia, Lithuania, and Estonia have introduced the flat rate tax system along with free-market reforms to resurrect their economies. Russia also adopted a flat rate tax structure of 13% from 2001. This has resulted in a spurt in the Russian economy as revenues have risen due to cessation of tax evasion and avoidance. Serbia, Slovakia and recently Romania all joined the band wagon of flat rate tax system.  It is expected that Bulgaria, Croatia and Hungary will shortly switch over to flat rate tax system.

We might have witnessed that some business sells at low margin hoping that increased sales will lead to greater profit. This approach is known as Laffer curve. If we apply the same principle if the tax rate is higher as people will shift their work, investment choices, and savings in a style that will minimize the earnings from the government. Hence the flat rate tax can stimulate the people to engage in work so that they will have some handsome revenue and defer lessor tax.

4.3 DISADVANTAGES:

Flat rate tax exempts tax on capital gains or income and critics is of the opinion that this aspect will enlarge the gap between the rich and poor as the rich will plan such way that most of their income are germinating from capital investment and leave the middle class and poor only to be eligible and pay the federal income tax.

Further the flat rate tax creates wide fissure between the family which earns its income from employment as they have to pay  tax on their entire earning after certain limits but in the case of families which earns income from dividends , interest and capital gains , there will be no tax liability  as these incomes are exempted from tax . But the supporters of the flat tax may argue that in the case of all aforesaid capital income are being subject to tax at the business level.

Another argument against flat rate tax is that it will result in the huge budget deficit. The Treasury department has estimated that there will be a budget deficit of $ 160 billion a year if there is a flat rate tax of 17% in U.S.

Some critics argue that removal of deduction of mortgage interest and deductibility of local property taxes and state taxes may have drastic consequences on housing prices. A flat rate tax may bring negative impact on real estate prices but it would be more advantageous the prosperity and liberty of the U.S citizens.

Currently, deduction is available for the funds invested in Keogh plans, 401 k plans and Individual Retirement Accounts (IRA) and investments on these savings are not taxed until these are withdrawn. But any return on this investment will be subject pretax rate of return. The rate of return on these types of savings would fall if the flat rate of tax system is introduced which could reduce the quantum savings in these forms. Likewise, pension coverage could also fall.

4.4 RUSSIA AND FLAT TAX: A CASE STUDY:

After the collapse of USSR a decade ago, Russia had only a rudimentary tax system. Since the government owned all industries and every one worked for government, Russia could not raise enough revenues by just increasing prices. Thus after the fall of communism, its tax rate are very high specifically for entrepreneurs and business and there was high incidence of tax evasion due to this. Despite of high rates of taxes, the Russian government could not raise adequate revenue through taxes and this had forced to increase its money supply to pay the bills thus resulting in hyperinflation.

The International Monetary fund advised the Russia to legislate new taxes and crackdown on tax evaders but these measures only aggravated the defect of the existing tax system. As the result, the tax revenue of Russia dwindled from 11% to 8.5% in 1998.

Finally Russia felt that tax system had to be overhauled to increase the tax revenue and introduced major tax reforms against the advice of the IMF thereby announced a significant tax reform that lead to a 13% flat rate tax system. As the result of this tax reform, Russia could able to achieve an overall increase of about 50% of tax revenue which risen to 16% of GDP in the year 2001. As a further reform, Russian president Putin announced tax cuts to small business mainly to obviate tax evasion and to augment tax revenue.[3]

  1. METHODOLOGY:

For the purpose of this dissertation, data’s and ideas have been compiled from the published articles from reputed magazines, books and periodicals. Further, recent happenings in the industry like introduction of flat tax in Russia, erstwhile USSR have been included for the purpose of elucidation and understanding. In case of data’s to prove that flat rate tax yields more, previous empirical studies have been analyzed and reference is made wherever necessary. Finally, this research has analyzed that usefulness of flat rate tax system by using secondary data’s various articles published in the reputed magazines and has come to a conclusion that flat rate tax system is a viable alternative to the existing federal tax system.

  1. FINDINGS:

Thus this research has established that the flat rate tax system is a viable alternative to the existing federal income tax. If it is introduced, it will eliminate $ 250 million income tax industry. Further, it will be easier and helps to simplify the business accounting and reporting.  As the cost of goods will be more competitive in the flat rate tax system, it makes the country’s product more economical in the international market and stimulates exports. This will encourage the capital repatriation from tax heavens. Low tax rate helps to attract more investments from internally and also foreign direct investments.

One of the salient features of the flat rate tax system is that it gets rid of the product tax build up in product cycle. A flat rate tax structure will result in lower interest rates. This form of tax system helps to avoid double taxation of gains from business. It also helps to attain major economic growth and industrial development. One may recall the great fiscal lesson of the 1980 taught that when there is lower tax, it will always generate higher revenues. In 1980 after Regan’s tax cut measures, federal revenues soared from $ 530 billion to $ 1031 billion in 1990. Likewise, tax revenue increased at a 20% faster snip in the 1980s than in 1990s, which witnessed two world record tax increases

  1. CONCLUSION:

The problems faced from the present tax rate system can be addressed by the introduction of flat rate tax system. Thus the complex, complicated present system can be replaced by the simple, easy, users-friendly flat rate system. The flat rate system not only helpful to minimize the exorbitant cost involved in the present tax rate system but also helps to plug loop-hole  , minimize the exemptions , deductions and loopholes . The success of the flat rate tax system in erstwhile Soviet Union states and in Russia itself offers hallmark that the flat tax rate system will craft fine tune to the U.S economy

.It is evident that before introduction of flat rate tax, the Russian economy was in turmoil and composite tax revenue of Russia dwindled from 11% to 8.5% in 1998.Then, Russia felt that tax system had to be overhauled to increase the tax revenue and introduced major tax reforms against the advice of the IMF thereby announced a significant tax reform that lead to a 13% flat rate tax system.

As the result of this tax reform, Russia could able to achieve an overall increase of about 50% of tax revenue which risen to 16% of GDP in the year 2001 Russia is the best example to prove that flat rate tax could resurrect the economy from downtrodden status to a developed economy . One another study reveals that the flat rate tax would augment the size of the U.S economy by 10% and it would reduce interest rates by 25% and this will balance the loss on the home mortgage loan interest deduction.

Among various current flat tax rate proposals, government should seriously consider to implement the flat rate tax system at the earliest with necessary adjustments with offer of safeguard to poor and business.

BIBILIOGRAPHY:

 

  1. Alterman, E. (1996, January 22). Deflating the Flat Tax. The Nation, 262, 5+.
  2. Armey, R. K. (1994, December 19). Flat Tax – Flat Wrong? National Review, 46, 4.
  3. Du Pont, P. (1995, February 20). Flat Tax, Other Reforms Are Pro-Family, Pro-Middle Class. Insight on the News, 11, 36.
  4. Hall, R. E. (1996). Fairness and Efficiency in the Flat Tax. Washington, DC: American Enterprise Institute.
  5. Jorgenson, D. W., & Yun, K. (1991). Tax Reform and the Cost of Capital. Oxford: Oxford University.
  6. McIntyre, R. S. (1996, February 12). Flat on Our Backs. The Nation, 262, 5+.
  7. Mcintyre, R. S. (2002, June 17). The Bush Plan: Tax Complification; the President’s Cuts Push Us toward a Flat Rate and More Paperwork. The American Prospect, 13, 19.
  8. Ponnuru, R. (2004, December 13). The Perils of Tax Reform: Frankly, Tiny and Timid Is Better Than Big and Bold. National Review, 56, 32.
  9. Principles of Tax Reform. (2003, June 10). The Washington Times, p. A14.
  10. Rabushka, A. (2002, July/August). Where the Flat Tax Goes from Here. Commentary, 114, 81.
  11. Schwenninger, S. R. (1996, May 13). How to Save the World: The Case for a Global Flat Tax. The Nation, 262, 16+.
  12. Warren, A. C. (1997). Three Versions of Tax Reform. William and Mary Law Review, 39(1), 157-175.
  13. Weisbach, D. A. (2000). Ironing out the Flat Tax. Stanford Law Review, 52(3), 599-664.
  14. A Flat Tax Will Spare Us the Costs of Paying More Lawyers and Accountants. (1996, February 4). The Washington Times, p. 2.

[1]  Stephen Moore, “Flat and Simple, stupid – Flat Tax – National Review –Feb -1996.

[2] Burson, Robert T, Why the flat tax is wrong for America. The Tax Advisor, 1995.

[3]  Bartlett, Bruce, “Russian Experience bolsters flat tax “Human Events, April, 2002.

Federal Income Tax Essay