Taxes in America - Book Report/Review Example

Introduction Joel Slemrod and Jon Bakija book d “Taxes in America: What everyone needs to know” avails a concise elaboration on how the tax system works, as well as how it influences individuals and businesses. Slemrod and Bakija’s book also avails insights on how the American tax system can be improved through comprehensive tax reform. # 1 The income tax represents one of the several kinds of taxes that individuals pay, at a given year and over the course of their lifetime. The mortgage interest deduction represents one of the oldest and biggest tax expenditures within the federal income tax and remains one of the biggest single federal subsidies for owner-occupied housing. The changes registered within tax deduction for home mortgage interest has a significant impact on the distribution of income tax liabilities, loan-to-value ratios on the home-occupied homes, and the consumption of housing services. Portfolio adjustment heralded by changes in the mortgage interest deduction might influence tax revenues and the marginal cost of owner-occupied housing. Income tax provisions connected to owner-occupied housing account for some of the largest entries within the annual tax expenditure budget (Slemrod and Bakija 274). The present federal income tax provisions influence the after-tax cost of owner-occupied housing, as well as income tax revenues. The mortgage interest deduction, unique handling of capital gains on owner-occupied homes, the lack of taxation on imputed rent coming from owner-occupied homes, and the property tax deduction have a significant influence on the efficient cost of housing services. The present treatment of interest, dividends, and deductions within the U.S. income tax is prone to misrepresenting taxpayers’ economic income. The U.S. income tax is highly vulnerable to inflation, whereby real value of depreciation allowances hinges on rate of inflation. Furthermore, fictitious capital gains can be taxed, and tax rates on real interest income can easily surpass the statutory rate. The differences occasioned by the manner in which various sources and uses of income can generate a number of undesirable effects. It is unmerited that that the income tax paid by families with a set amount of income should differ so significantly, just only because of the source and utilization of the income. The present system tax system also distorts the allocation of economic resources (Slemrod and Bakija 275). Tax preferences (a favorable treatment of capital gains), as well as the deductibility of interest expense, can be merged to generate tax shelters, which yield to allocation of capital to unproductive investments and weakens equity and the perception of fairness. # 2 The tax system, especially income tax system has become increasingly complex, and citizens have been incurring high compliance costs, which has been rising at an unsustainable rate. Business and individuals remain increasingly subjected to multiple taxes from all levels of government, which has been unnecessarily intricate, and difficult to comprehend, frequently burdensome and labor-intensive, and even duplicative or contradictory from one jurisdiction to the next. The objective of tax simplification lies in making taxes fairer, simpler, and more efficient. Tax simplification is in the public’s best interests and is rewarding to individual taxpayers, the government, businesses, and the economy; nevertheless, tax simplification carries a high political cost and any tax reform typically involve trade-offs and choices (Slemrod and Bakija 56). The core reason why tax complexity arises stem from the fact that people require the tax system to serve several conflicting purposes such as responding to a number of financial and economic circumstances, and guaranteeing fairness for taxpayers. Furthermore, tax bodies expect the tax system to avail taxpayers with a reasonable level of certainty. Some of the ways that can be applied to simplify the tax system include: adjusting or repealing the alternative minimum tax; removing or aligning income limits and phase-outs; simplifying the taxation of capital gains; combining and coordinating various tax benefits; and, combining tax incentives and consolidating programs directed at benefiting various segments. Unfortunately, the various forms of tax simplification can conflict and interdict each other, which in turn, make it counterproductive. Despite the widespread consensus that the tax system remains too complicated, the tax proposals presented by either party dwells on highly contentious issues such as fairness and size (tax cuts). A number of factors explicate on why taxes get complicated. First, simplicity frequently conflicts with other policy objectives and taxes should be simple, conducive to economic prosperity, fair, and enforceable. Consequently, policies mainly represent a balance among the competing objectives and regularly simplicity loses out to the competing objectives (Slemrod and Bakija 57). Furthermore, the political process generates more complexity as interest groups and politicians support tax subsidies for groups or activities. Ultimately, the targeted subsidies complicate the tax system by generating distinctions among the tax payers, as well as among the various uses and sources of income. Similarly, some complexity may be considered necessary so as to deter tax avoidance as taxpayers have the liberty to minimize their taxes by any legal means. This generates an unending cycle that yields to highly complex rules and increasingly difficult avoidance strategies. Hence, the different forms of tax simplification may in the long run conflict. # 3 The valued-added tax represents a consumption tax; under VAT, there is a smaller tax (usually 5%) that is added every time the product is resold or the moment the value has been added. The Hall-Rabushka flat tax, on the other hand, represents a two-tier consumption tax based on subtraction method VAT. The Hall-Rabushka flat tax represents a flat tax on consumption, whereby the consumption tax may be affected through taxation of income while at the same time excluding investment. The consumption tax system developed by Hall-Rabushka achieves some of the administrative advantages of VAT. Without the personal exemptions, Hall-Rabushka flat tax would be analogous to a VAT; however, the taxes on wages are remitted by households instead of the business. As such, Hall-Rabushka flat tax would be consumption tax, although it would appear as a wage tax to households and variant of a VAT to the majority of businesses. The family exemptions render the tax progressive for low-income households; however, in the case of high end of the income, tax is regressive in the same way as VATs (Slemrod and Bakija 246). VAT has a number of advantages such as allowing mass participation of tax payers, simple to administer, and is more transparent and imposes less burden to consumers. VAT also narrows the chances of tax evasion. VAT derives from value added rather than the total price, which means that price, should not increase owing to the VAT. VAT is costly to implement as it grounded in full billing system. Other drawbacks include complexity of operation, inflationary tendencies and being regressive. One of the positive aspects of the flat tax relates to the simplicity with which corporate and individual tax systems could be assimilated. In most cases, the burden of consumption taxes mainly falls on middle and lower-income households. The Hall-Rabushka flat tax effectively offsets such a shift in tax burden by availing a generous exemption to middle and lower income households (Slemrod and Bakija 264). The simplicity that the flat tax brings is likely to reduce compliance costs for a majority of businesses and households. The Hall-Rabushka flat tax can also herald other benefits such as increased economic efficiency and growth. # 4 There are a number of theories of taxation that exist within public economics as government pursues to raise revenue from diverse sources with the intention to finance public-sector expenditure. A consensus between economists and tax theorists concur that the best system is one that strikes a balance between equity and economic efficiency. An efficiency tax system should not distort the allocation of resources within the economy, which maximizes the overall production. The benefits principle of taxation details that, the government avails benefits to its citizens that ought to be paid for in taxes by every beneficiary in line with the value that the citizens receives from the government services (Slemrod and Bakija 172). As a basis for taxation, the benefits principle (give and take principle) relates to the payment of taxes in return of benefits. The second interpretation of the benefits principle details that government benefits are distributed more or less equal to all citizens irrespective of their income. The sacrifice theory, on the other hand, is in favor of progressive taxation and roots tax regime that extracts from every taxpayer an equal or balanced “sacrifice.” This theory rejects the notion that taxes can be remitted in exchange of government benefits and perceives taxes as a burden (to be tolerated) that ought to be shared in the most equitable way (Slemrod and Bakija 173). Equal sacrifice has a potential shortcoming that it may yield to violations of the Pareto principle. Equal sacrifice should be measured by taking into account both taxes paid to the government and benefits received from the government. The benefits principle fits with the context of fiscal incidence given that it addresses both sides (revenue and expenditure) of government budgets and also aligns with the notions of horizontal and vertical equity. The objective of sacrifice theorists lies in minimizing the aggregate sacrifice of all taxpayers. # 5 The U.S. income tax system has for an extended period being recognized as a hybrid of consumption tax and income tax. Income taxes can be regarded as flat, regressive, or progressive. Income tax does not adequately address equity and efficiency and can be an impediment to economic growth. Income taxes may be a burden to the economic prosperity of a country since income tax is far too difficult for a majority of people to comprehend. Indeed, in most of the instances, it is more expensive to comply with income taxes that the actual taxes paid. Income tax is unnecessarily expensive and complicated to the extent that it has incentivized tax avoidance. This has negative effects on the economic prosperity of the country (Slemrod and Bakija 303). There is growing evidence indicating that states with no income tax usually grow at a faster rate and create more jobs. States that tax less attain better economic performance as this helps to control spending. Lower taxes and lower spending yield to more growth and prosperity. Direct form of taxation such as income tax encourages tax avoidance. Income tax slows down economic growth given that disposable income is a key factor that impacts on public spending. Income tax exerts pressure on the taxpayer and employers by eroding their earnings. States without income tax enjoy better economic growth within the private sector GDP, which translate to an increased number of jobs. Income taxes constrain economic prosperity of a country as they punish productive work, success, and risk-taking. This arises from the fact that a tax on income represents the price that one is paying for, a tax on profits represents the price that one pay for success, and a tax on capital gains represent the price that people pay for taking risks. Income tax places a lot of burden on Americans to the extent that it curtails economic growth (Slemrod and Bakija 114). History indicates that the economy prospered when income tax rates were low because individuals were not hindered or punished for involving in productive activities. Income tax is an impediment to economic growth as it causes inequality within the society and disempowers families. Income taxes are typically volatile and usually fall steeply, especially when the economy is in recession. The volatility of the income tax has a detrimental effect on economic prosperity of a country. The reverse is also applicable since income taxes increase more speedily than sales in periods of economic growth. Works Cited Slemrod, Joel, and Bakija Jon. Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes. Cambridge, Mass: MIT Press, 2004. Print. Read More