This paper will discuss the income tax system in the United States including a brief history of US income taxes and the kinds of income taxes. The other part will expand by explaining some alternative methods of income tax, such as consumption tax, value added or goods and services tax, flat tax, pigovian tax, etc. In the conclusion, a discussion on some of the most recent proposed income tax changes will attempt to complete the resolution of issues raised in the paper. 2. Analysis and Discussion:
Taxation is one of the inherent powers of the state in all governments in the world. No government could exist without taxation as tax levied is government revenues which are to finance the expenses of government. As an inherent power of the state, the power of taxation is deemed to have co-existed with the state and therefore the US Constitutions does not create said power but the same must be considered to have provided limitations to such inherent power of the state. 2. 1. 1 What is an income tax?
An income tax is a tax which is imposed on the financial income of individual persons or business entities which include partnerships and corporations. Hence basically there are two kinds of income taxation. One is personal income taxation while the other one is corporate income taxation. It is a tax imposed on the privilege of individuals and legal entities to earn revenues in the state, hence persons subject to tax could be residents or non residents of the US. Those resident could also be citizens or not while those not residing may be also US citizens or not citizens.
Income taxation basically assumes the presence of revenues or incomes earned. Hence individuals will have to pay taxes from their compensation income from employment, conduct of business, fruits of their properties and all other increase sin their wealth which are declared by law to be part of their income or revenues except only those declared to be exempt from taxation. Legal entities include partnerships and corporations hence for purposes of income taxation legal entities are subject to corporate income tax as distinguished from personal income taxes.
In the computation of the taxes, the law allows deductions from the gross revenues of individuals and legal entities to arrive at their taxable income and after which income tax rates are applied to get the income taxes for the period. If there are allowed tax credits the same may be allowed to be deducted from the assessed taxes and any difference could be the income taxes due or income tax refundable if the tax credits turned out to be higher. As part of income taxation the US tax authorities also impose income taxes from trusts, decedents' estates, and certain bankruptcy estates.
These are separate from personal or individual and corporate taxation since legal entities were conferred law to these concepts for purposes of taxation because of capacities of these entities to earn income. 2. 1. 2 Income tax in the United States Because the US has a federal government structure, income taxes are imposed at the federal level and the state level. Article I, section 8, clause 1 of the U. S. Constitution proves the first Federal income tax during the Civil War.
Another was that found under the Sixteenth Amendment of the US that was ratified in 1913. Present laws on income taxes could be found both under the various provisions of US Constitutions are imposed together and various sections of Subtitle A of the Internal Revenue Code of 1986, as amended, and also those income taxes of individuals, estates and trusts under 26 U. S. C. § 1 and those income taxes on the taxable income of corporations under 26 U. S. C. § 1. 2. 1. 3 Categories of income taxes
The first category is on ordinary income and capital gains. “Ordinary income includes compensation for personal services such as wages and salaries, business profit and interest income from invested funds while capital gain generally comes from the sale of investment property. ” As US policy to encourage savings, taxpayers are liable for lower tax rates for long-term investment compared with the ordinary income rate. Thus short-term capital gains for one year or less are imposed the same tax rate as ordinary income.
Both ordinary income and capita gains are allowed to have deductions for purposes of reducing the taxable income. Changes have been created complications on categories of taxes. Jobs and Growth Tax Relief Reconciliation Act of 2003 presently taxed non qualified dividends individuals at long-term capital gain rates until 2011, this effecting change from the previous tax liabilities under ordinary income tax rates. The same law also caused different rates on “gains on certain real estate, collectibles, and small business stock each have their own tax rates.
Still the same caused changed the rules for offsetting capital losses with gains (whether capital or ordinary) the increased complications, that would result to calling now those income subject ordinary tax rates to be allowed to be called to under what many called "tax rate". The other incomes are now subject to different tax rates. The second category on income are those called passive income since they come from passive activities and these income are basically subject to final taxes. Compared with the non passive-income, passive incomes are not allowed to have deductions.
2. 1. 4 The problems under the present US income tax laws One of the problems caused by the present system is its complexity. This has been observed even by respected legal scholars. One of them is Judge Learned Hand who has expressed surprise and frustration with the intricacies of the U. S. income tax laws. Judge Hand found meaningless procession and too many cross referencing to the US tax laws . Even the sole issue of complicity itself is enough ground to motivate academicians to look for alternative methods of income tax. 2. 2 Some Alternative Methods of Income Tax
Due to certain problem on present income tax system of the US, authorities and academicians continue to find alternative methods on income taxes to attain a more rational and just basis of imposing taxes pursuant to the goals of attaining a more progressive base of taxation 2. 2. 1 Consumption taxes One alternative is the use of consumption tax which is a tax imposed on the purchase of a good or service. Since the basis of a "consumption tax" would be consumption as against income or labor, the same may be structured like a sales tax.
An objection posed to this kind of tax is its being regressive but proponents agree that by using graduated rates and deductions and rebates, the same could be made “progressive, while allowing savings to accumulate tax-free. ” As to the origin of the concept, American history taxes may be argued to have been levied principally on consumption. The Founding Fathers evidently put the same kind of tax in the Constitution on the ground that said consumption taxes will find it hard to rise to confiscatory levels as compared to incomes taxes .
Alexander Hamilton wrote about the security against excesses in using the consumption tax since if one does not consume there is no tax. Of course this will be impossible to happen. Hamilton explained that if duties are too high, they decrease the consumption. As a result the collection is avoided and expenditure of government will be confined within proper and moderate bounds. It is therefore believed that a complete barrier against any material oppression of the citizens is available under this type of tax due to a natural limitation of the power of taxation
One of the first detailed analyses of a consumption tax was developed in 1974 by William Andrews made the first detailed analysis of consumption tax in 1974. From the analysis there was this proposal, that people would only be taxed on what they consume, but their savings would not be affected by taxation, hence its name was called a consumption tax, or a cash-flow tax, or an expenditure tax. One of its advantages I over the income tax is based on an economic principle called "temporal neutrality".
Consumption tax is neutral for not altering spending habits or behavior patterns of people and hence not distorting the allocation of resources. 2. 2. 2 Value added tax Value added tax on goods and services is a tax on exchanges as it is imposed on the added value of the good or service arising from each exchange. While a sales tax is imposed on the total value of the exchange, VAT is imposed only on value added; hence Vat has the characteristic of being neutral with respect to the number of means of access that occurring between the producer and the final consumer.
Being an indirect tax, the tax is collected from the seller who is different from the person who actually bears the cost of the tax. Government authorities normally exempt exports from taxes since these consumed abroad hence taxpayers who are exporting could claims refunds on VAT for inputs since the goods or product or service are sold or consumed outside the taxing jurisdiction. A noticeable feature of the method is that end-consumers of products and services cannot recover VAT on purchases, but businesses can recover on the materials and services that they buy.
The reason is that VAT is a passed on tax. It enactment is traced to very high sales taxes and tariffs that had encouraged cheating and smuggling; hence it must be better than sales tax. Nevertheless its down side is its being a regressive tax as against the progressive feature of the ordinary income taxations which is direct on the person liable to pay tax. 2. 2. 3 Flat tax A flat tax is imposed as constant rate as is usually used in household income, and possibly corporate profits that are taxed at one marginal tax rate.
Flat tax is already in implemented in some part of US income tax system but for others the concept is still being proposed. The implemented is found usually in exempting household income below a statutorily determined level. This determined level is a function of the type and size of the household. The result of flat taxes is to remove the proportional character of usual taxes. Although a flat tax is normally used in taxation of incomes the same can be applied to consumption.
Flat taxes are opposed to a graduated tax on household incomes and corporate profits, but its principle is applied at the lower and upper threshold of the income brackets hence it could be made distinctly separate from income tax and consumption tax. It main objection therefore is its tendency to depart from the principles of progressive system of taxation if the bases for imposing taxes will no longer recognize the possibilities of substantial distinction on its subjects of taxation.