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Economics of Taxation - Essay Example

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Economics of Taxation

This is made up of the personal exemption of $3200 ($6400 for 2) and a joint standard deduction for the married couple of $10,000. The same value calculated for household 2 amounts to $8200 for personal exemption ($3200) and standard deduction ($5000).
As per the Simplified Income Tax Plan proposed by the advisory panel on tax reform, Family Credit replaces the personal exemption and standard deduction. It is available to all taxpayers. For a married couple with no children, it amounts to $3300 whereas for an unmarried taxpayer it is $1650. Assuming that the current income tax brackets prevail, the following comparative analysis would justify whether the taxpayers prefer the old tax code or the new Simplified Tax Plan:
2. Which is more equitable: the current system with the personal exemption and the option to take either the standard or itemized deduction, or the Family Credit which everyone can take, even if they also itemize deductions Discuss both horizontal and vertical equity and explain your answer.
Solution: "Tax equity focuses on equal treatment of similarly situated taxpayers" (Sommerfeld, Anderson, & Brock 9). There are two tax principles, namely, horizontal equity and vertical equity. Horizontal equity is a basic yardstick used to measure whether tax burdens are fairly distributed. According to this principle, taxpayers with same income should pay the same amount in taxes. On the other hand, the principle of vertical equity is a proponent of the progressive structure of tax assigning high income earners greater responsibility to share the tax bill (Kaplow 1989).
Under the current system, personal exemption is available to all taxpayers (phases out with income) as well as the standard deduction. It reduces tax liability by a greater amount for most taxpayers due to the application of standard deduction as compared to using the fixed Family Credit that is available to all taxpayers regardless of the salary bracket. Under the Family Credit, low income earners will be disadvantaged as their tax liability will be higher having lost the ...Show more

Summary

1. Consider two households: a married couple filing jointly with no children and a joint AGI of $200,000 (assume split evenly between husband and wife), and a single individual with an AGI of $100,000. Under our current 2006 tax system, what is the value of the personal exemption and standard deduction for these two households Compare this to the value of the Family Credit that has been proposed as a replacement for the personal exemption and standard deduction…
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Economics of Taxation essay example
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