Tax Reform - Essay Example

Running Head: TAX REFORM Tax Reform: Outline of the of the Tax Reform: Outline Thesis ment Tax reform has become a major governmental policy issue in the United States as well as in the rest of the world. Countries are attempting to balance both economic efficiency and provide equity in taxation. Governments are looking to rewrite tax codes to minimize their impact on economic growth. Specifically, governments throughout the world are attempting to preserve incentives built into taxation to maximize economic efficiency. At the same time, these governments are trying to cope with the growth in social welfare programs throughout the past three decades. Key Terms Deficit. The result of the government taking in less money than it spends. Inflation. The simultaneous increase of consumer prices and decrease in the value of money and credit. Tax Code. The official body of tax laws and regulations. Tax Credit. A dollar-for-dollar reduction in the tax. Can be deducted directly from taxes owed. Tax Cut. A reduction in the amount of taxes taken by the government. Tax Deduction. A part of a person's or business's expenses that reduces income subject to tax. Tax Exemption. A part of a person's income on which no tax is imposed. Research Problem The Bush tax cuts have not proven to be good for our economy. Although, we had a budget surplus our government jumped the gun with the tax cuts. These tax cuts will decrease the surplus extremely quickly and this money should be going towards most of the governmental run programs that usually are geared toward the moderate to low income people. Bush did not anticipate any future events that could lead us right back into a budget deficit and this has become the biggest problem our economy is facing today. Taxes are necessary for the administration and funding of governmental organizations, as well as construction and universal infrastructure services. Taxation presents positive and negative characteristics within an economic system. History of Research As history presents, most taxes have been geared toward the middle to lower classes with the upper classes receiving many tax breaks. With tax cuts for corporations, estates and the top one percent of high incomes all the little people will be left out in the cold. By demolishing the entire budget surplus, government programs, such as social security, will be neglected once the baby boomers begin retiring (Friedman, et al May, 2001, p 1). As Mark Breslow states, "The corporate income tax, which is relatively progressive, has been replaced by taxes that are a particular burden on people with moderate and low incomes. The cut of the alternative minimum tax has done nothing to help put money where it is needed, in the moderate to low income pockets. These people would definitely help stimulate the economy to help get us out of the recession we are falling into. John Miller points out, "that only two percent of estates are actually taxed and even the well off have little to worry about (Miller 2001 p 59.)." This still does not help the situation with the moderate to low income taxpayers. This group is being over taxed because they can never make enough money to meet the upper one percent of income that would be a benefit to them. This group also does not participate in the decision which does not help their situation. Robert S. McIntyre argues that, "The individual tax changes, which includes a ten percent decrease in capital gains taxes, are sharply tilted towards the wealthy (McIntyre, 2001 p. 1)." According to Joel Friedman, "some fifty-five percent of the stimulus package benefits are going to the wealthiest one percent of taxpayers (Friedman, et al November 2001 p. 1). This is very discouraging but it seems that if the people really cared about or was fully informed of the results of these tax cuts there would be severe rallying in the streets. Bush's tax cut, or stimulus package, has only been geared toward the upper class and this class has a very low marginal propensity to consume and therefore will not contribute to our failing economy (Friedman, et al November 2001 p. 1). This group usually does not change their spending patterns based on a change in their income. On the other hand, the lower and middle class have a higher marginal propensity to consume thus the tax cuts would have a direct effect on consumers in this tax bracket. Middle class consumers are exposed to extreme effects of taxes, and may even be affected more than any other group within the economy. The increase of prices on products due to the increased taxes makes up most of the potential profits for businesses. These consumers lose out because of the increased prices and the fact that the tax cuts did not include their tax brackets, so their money is worth much less, leading to less overall consumption. After September 11, 2001, consumers became reluctant to be impulsive with their money. This has led us further into a downward economic spiral. With Bush's stimulus package not yet working and a national disaster at our heels these things helped to push us further into a hole without a safety net (Friedman, et al November 2001. p 4). Consumers began spending less on goods and services and saving more in fear of an economic crash. With this problem and the tax cuts just out of the bag the economy has moved forward without the stimulus Bush thought would ensue after the tax cuts. With the decrease in purchasing by consumers and the decrease in selling by the businesses, comes a decrease in hiring of workers. The businesses are unable afford to add workers to an already sluggish output. This has lead to major layoffs and other unfavorable economic problems. Our economy has performed exceptionally well in the past several years, combining rapid growth and very low unemployment with declining inflation. Much of the favorable recent economic developments can be attributed to a surge in productivity growth. This rapid productivity growth allowed the economy to grow at a faster pace without raising the rate of inflation. However, the growth of consumer demand is exceeding the increase of productivity--boosting employment, tightening labor markets, and raising concerns that recent growth rates may not be sustainable without sparking a rise in inflation. So why make changes The budget surplus could have gone into funding for a variety of programs to keep our economy going in the same direction. Bush did not anticipate our economic crisis lying in the future. Now, his tax cuts may lead to increased taxes in the very near future. The Federal Reserve has lowered interest rates to help stimulate the economy that should have been stimulated by the Bush tax cuts, but that has not happened yet. Speculations of a stimulated economy from tax cuts have yet to circulate and may just be a fantasy in Bush's mind. Concluding Summary In the article 'The tax reform act of 1986: Did Congress love it or leave it', Randall Weiss discusses the attitudes about taxes in the United States. He details the events and attitudes leading to the Tax Reform Act of 1986, and shows how public perception about taxes has changed since then. He also discusses some of the tax reform proposals that are now currently being thought about in Congress. In 1986 the United States Congress enacted the Tax Reform Act (TRA-86). The act passed with a great deal of bipartisan support. This support was made possible by two features of the act. The first was that federal income tax rates were to be cut dramatically. While this would lead one to believe that federal government receipts were cut substantially as well, it was the second important feature of the bill that allowed it to be revenue neutral. This feature was that the bill was to improve horizontal equity in the tax system. This would be accomplished by eliminating many of the deductions that many individuals, particularly the well to do, were allowed to make. Many of the complains about the tax system in the United States that preceded the Tax Reform Act were about the gross horizontal inequities that it allowed. A great deal of press preceding TRA-86 showed the public how many of the country's wealthiest individuals were able to get away with paying little or no federal income tax. Eliminating many of these tax deductions and loopholes had been the goal of several liberal Democrats for some time. In addition, conservatives in Congress wanted to reduce the escalating federal budget deficit at the time. Also, a prevailing attitude of the time was that reducing marginal tax rates would benefit the economy. It was believed that specific tax breaks and deductions to support economic growth would not be needed with the greatly reduced tax rates. The combination of Democrats wanting more vertical tax equity and Republicans wanting lower marginal rates allowed the Tax Reform Act to gain widespread support in Congress. Since TRA-86, tax policy in the United States has shifted away from base broadening and lower marginal rates toward more progressive taxation and targeted tax reductions. In 1990, and again in 1993, marginal tax rates were raised on wealthy individuals in an effort to close the mounting federal budget deficit. Also, the perception in the federal government was the special tax credits and deductions were needed to promote savings, education, and economic growth. This is a direct reversal of the ideas that lead to TRA-86. People no longer argued that tax rate reduction would in itself provide for economic efficiency. Currently, members of the United States Congress are introducing several different tax reform plans. Some of the plans, particularly the Republican plan for a flat income tax introduced by Rep. Dick Armey, would decrease the progressivity of the current tax system. In addition, a proposal for a national sales tax would result in a tax code that is less progressive than current law. On the other hand, a tax reform plan introduced by Rep. Dick Gephardt would make the tax system more progressive. All of these reforms are intended to reduce many of the remaining tax shelters left in place by TRA-86. The Republican plans in particular are not revenue neutral and are intended to increase investment in the economy and contribute to efficiency. However, these reforms are not in line with the policies enacted after TRA-86, and they are still years away in the future at best. References Joel Friedman, et al, "Final Tax Bill Ultimately Costs as Much as Bush Plan," Center on Budget and Policy Priorities. (May 29, 2001) pp. 1-7. Joel Friedman, et al, "Senate Republicans Embrace Administration Proposal," Center on Budget and Policy Priorities. (November 5, 2001) pp. 1-5. John Miller, "The Repeal of the Estate Tax," Real World Macro 18th edition. (Somerville, MA: Dollars & Sense) pp. 58-59. Marc Breslow and John McDermott, "Disappearing Corporate Taxes," Real World Macro 18th edition. (Somerville, MA: Dollars & Sense) p. 54. Robert McIntyre, "The $212 Billion Special Interest Love Feast," American Prospect. Issue Number 20. (October, 2001) p. 1. WTO 4 Read More