Tax Fairness Is A Big Challenge Essays Example
The tax is a form of government levy charged on individual and other entities’ wealth, property, and income. In most cases, individuals and other entities such as companies and financial organization pay a certain amount of their revenues or on their wealth or consumption to the government. The governments of the United States, and of course other nations gain revenues a wide variety of ways, (Gruber, 2013, p.524) and the tax is an enormous part of the income. There are various ways in which the government can use to collect taxes from the public. Such taxes include individual payroll taxes, consumption taxes, property taxes, and real estate taxes. One of the ways the United States government raises its revenue is public taxation. The revenue received by the government can be used to pay its debts and finance public projects. The governments also use the money they receive to improve taxpayers’ living environments through construction and maintenance of infrastructure, provision of security and other activities that facilitate economic growth and stability.
Paying taxes is a mandatory obligation of every citizen as expressed by law. Taxes collected by the administration can be divided into two major categories. The two classes of taxes imposed by the government include direct and indirect taxes. Direct taxes are those taxes charged directly to an individual and thus the cost obligation and impact are felt by the individual. In such cases, the tax obligation cannot be transferred to another person. Examples of direct taxes may include income tax, corporate tax, and social security contributions. Indirect taxes are those taxes that the obligation of payment is imposed on one individual, but the impact is felt or transferred to another person. Indirect taxes are mainly charged on expenditure, consumption, or privileges (Cubero & Hollar, 2010). Some of the examples of indirect taxes may include excise duties, import tax, sales tax, and value added tax.
Direct and indirect taxes charged on individuals can also be described as progressive, digressive, regressive, or proportional. Proportional taxes are government levies charged on personal income, wealth or property that remains constant though there may be costs in the tax base. Therefore, a proportional tax system requires a constant proportion of tax on a rising or decreasing tax base. In a progressive tax system, the levy charged by the government on the tax base increases at a greater rate than the increase in the tax base or income. Therefore, a progressive tax rate system extracts taxes at an increasing proportion of rising income. A regressive tax system is the exact opposite of the progressive tax rate system. In this tax system, charged levies decrease as the tax base increases. The government can also employ a digressive tax system to collect tax revenues from the public. In such a tax system, a progressive tax approach may be used to a certain limit. After the limit is exceeded, the digressive tax system charges a flat rate of taxes on individuals.
The most common tax systems used in many countries are the progressive tax systems, proportional tax systems, and digressive tax systems. The merit of a proportional tax system over a progressive tax system is that it leaves the taxpayer in relatively the same economic status. It is also simpler to calculate than the other tax systems. The digressive tax system may impose a fairly heavy tax burden on low-income earners and a lighter tax burden on high-income earners. It is because it charges an increasing rate of tax as the income increases and taxes a fixed rate above a set limit. The individuals below the limit will be experiencing a heavier tax burden than those above the set limit.
In the calculation of direct taxes to be paid, it is, therefore, important to establish factors such as the amount of income earned by an individual. Factors that are considered in the calculation of indirect taxes may include expenditure, consumption, or privileges. In regards to direct taxes, factors considered in the calculation may include payroll tax and tax on privileges. Direct taxes on income may be charged differently depending on the tax system employed by the government. For example, the government may use a tax system that costs more on low-income earners and charges less on high-income earners. Such a tax system may result in unfairness and unequal distribution of national resources. One of the principles of an effective tax system is equality. Therefore, a tax system that does not ensure equality should not be used by the government. Generally speaking, balance in the society with regards to income and wealth distribution should be achieved through equality in taxation. It can be achieved by taxing individuals with high incomes at higher rates than those with lower incomes. The reason for this is because higher income groups tend to have a greater ability to pay and can maintain a high standard of living in the face of a higher tax burden. It would, therefore, seem more appropriate if the government would impose a higher tax on individuals earning a higher income. The reason for this is because individuals and groups with high income can bear a bigger tax burden than those with a lower level of revenues. Greater social equity may also be achieved by imposing a lower tax on low-income earners and a higher tax burden on high-income earners. It can also facilitate fairness in the taxation system employed by the government.
Therefore, the process of measuring tax fairness is an important political issue. The process involved in establishing equity in a tax system can be challenging. The politicians need to establish the items that need to be included in the tax base, the tax rate to be used, and the proportion of the income that need to be considered adequate for taxation. The politicians should also establish the criteria that can be employed to determine the tax rate. According to Lee and Friedman (2003), there are several different ways to measure fairness. In most cases, politicians are likely to choose the tax system that best fits their agendas in advocating or opposing a tax change. For this reason, it can be pointed out that building rational tax distribution that considers all taxpayers requires a tremendous amount of researching works. Researching works may result in a huge cost of time and human capital. It is because people who work on this issue need to study basic economic theories in the tax field in order to answer those questions above when considering fiscal policies. After the studies, they can then apply those theories into practice. The tax issue is a significant social problem, and there is by no means a way to achieve absolute tax fairness since it is impossible to mandate every taxpayer to pay the very same amount of tax. Any single tax policy that is not entirely considered appropriate will make taxpayers unsatisfied so that they may no longer pay tax in a regular manner or even default to pay, and then many conflicts may appear. Moreover, many complicated cases that may have two or more parties involved can raise other problems such as how much burden should each party take. For example, imagine a company creates contaminative components such as polluted water in producing process and commits the polluted water disposal to another company. Unfortunately, the company’s waste still does harm to local water quality and thus has a negative impact on local people’s health. It means there are negative externalities, and the government decides to impose a tax. In this case, there are three interested parties involved: the company, the polluted water disposal company and local people. So a tax incidence is issued that each party may take the burden of the whole tax proportionally, and tax distribution can be difficult to achieve fairness.
It seems the economic cost of measuring tax fairness is implicit. Certainly asides from doing researchers and instituting tax distribution there is little value of this process. However, a sound fiscal policy will bring several benefits. First of all, a good fiscal system will reduce many further complaints from taxpayers so that many court cases are avoided. Either potential plaintiffs or defendants are then able to save much time and money because there is no need to let the courts deal with their conflicts. Secondly, a sophisticated tax policy generated from comprehensive tax fairness measurement will bring the tax system great stability. The government will also benefit since it will collect tax payments from taxpayers in a much easier way. This situation is because fewer people will oppose paying tax. With sufficient funds, the governments can do its best for improving the local living environment of the taxpayers. This process will make the taxpayers more willing to pay their taxes. Increased revenue for the government would also ensure the development of infrastructure thus benefiting the taxpayers. Therefore, both the governments and taxpayers can receive advantages in a way that taxpayers pay tax fairly.
There is a report called “Report of the Tax Fairness Commission” conducted by the Tax Fairness Commission in the state of Massachusetts. This organization is charged with doing tax law analysis and the equity of current fiscal policies. The Commission found that the overall tax system in Massachusetts was regressive, which means that middle-and-low income taxpayers pay a greater share of their income in taxes than higher-income taxpayers. Moreover, this finding, in the student’s opinion is far less detailed because it only captures the general situation that people in different income level pay different size of the share of their income in taxes. So what fiscal policy results in this phenomenon? Is the income tax policy flat or graduated (e.g. Does the tax rate vary when taxing taxpayers in different income levels), and if it is a graduated tax policy, what range of income is taxed at a same tax rate and what’s the tax rate in each income level? Their conclusion does not answer the questions of that are important in order for taxpayers to be more fully informed.
It is established that Massachusetts uses a regressive tax system. One of the greatest disadvantages of a regressive tax system is taxing the low-income earners more and taxing the high income less. This process can also be an advantage since the high-income earners will have more income to save. The savings are usually used for investments, which in result create employment for the low-income earners who could not save. Due to the creation of more jobs opportunities, government can have an increase in collection of tax revenues. Therefore, it can be established that regressive taxes encourage savings and investment from the high-income earners thus generating more taxes for the government.
Regressive taxes also increase the net government revenues collected from the public. This situation can be explained by the Laffer Curve, which shows an increase in taxable income with a decrease in taxes imposed by the government. In this theory, Laffer states that individuals tend to save more for investment when the tax rate is reduced, thus generating more taxable income in the long-run. Regressive tax systems also facilitate an increase in earnings. The reason for this is because; the public views such a tax system as a punishment for, not having a high income in order to pay lower taxes. It encourages most people to work harder so as to earn more to reduce their tax burden.
When a regressive tax is imposed on a consumer commodity, people may have a sense of freedom of choice. Therefore, the people willing to consume the product are the ones to carry the burden of the tax. It also means the more an individual consumes a commodity that is charged a regressive tax, the more they pay the tax. Regressive tax can also be used to control or discourage the consumption of some goods. Their demand will go down and thus discouraging consumption of such commodities by imposing a higher tax on certain goods. The greatest disadvantage of progressive tax is decreasing an individual’s revenues. The reason for this is because needed tax incomes could decline if the consumption declines. This process usually takes place when consumers reduce their spending. An increase in an existing tax may also result in consumer consideration of the product or service. Where the revenues collected from taxes are used to deliver necessary public services, a larger segment of the population would suffer as a result of decreased revenues.
The Commission also listed some recommendations it has to improve the current tax system. Recommendations include reforming tax system by instituting a graduated income tax through a Constitutional amendment, adjusting tax rate of different income level, adopting more tax policies such as a separate reduced small business corporate tax rate, and finally Commission members believe that any tax policy changes should be made in both a fiscally responsible and fair way (Commonwealth of Massachusetts, 2014, p.1). However, throughout the whole report there’s no introduction of what researchers the Commission has done and who came up with these recommendations. According to the report the Commission voted on a number of proposals that strive to make the overall tax system fairer in Massachusetts, and by majority vote the Commission has concluded these recommendations (Commonwealth of Massachusetts, 2014, p.1). We neither have information about those who promoted the proposals that the Commission mentioned nor knew much about the “majority voters”. Furthermore, we do not know the voting rules as well. As a result, some doubts about the profession and usefulness of the recommendations the Commission provided will arise.
The remaining part of the report focuses on introducing more of the Commission, general background information on the tax system in Massachusetts and how taxes impact on people and economic competitiveness. Overall this report includes so many pieces of useful information about the tax system in Massachusetts and tax fairness problem. Less detailed information showing the Commission’s profession and lack of supportive data make the whole report less convincible.
I have also learned a lot in researching this topic and reading this report. I noticed that the though paying tax is such simple that taxpayers only need to withdraw a share of their income and give it to the governments, running an effective tax system needs so much prior researching works and may be difficult to practice as well. The tax fairness is a great issue that every taxpayer in different income level pays much attention to, and finding a way to measure tax fairness seems simple, but its way harder to put the results in practice as well. All in all, the tax fairness issue may continue to be a significant topic in our life for a long time and the governments should stay focused on enhancing the tax equity in the Commonwealth.
Commonwealth of Massachusetts. (2014, March 7). Report of the Tax Fairness Commission. [Feb. 5, 2015]. Retrieved from <https://malegislature.gov/Content/Documents/Events/TaxFairnessReport.pdf>
Cubero, R., & Hollar, I. (2010). Equity and fiscal policy the income distribution effects of taxation and social spending in Central America. Washington, D.C.: International Monetary Fund.
Jonathan Gruber. (2013). Public Finance and Public Policy, Fourth Edition. Massachusetts:
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