Cash-flow tax

A cash-flow tax has nature of a consumption tax where if there is cash flow there is no tax. A study has analyzed the effects of this kind of tax it was categorized into three kinds of cash flow tax, which included the “VAT-type” destination-based cash flow taxes, the source-based cash flow taxes and the “full” destination-based cash flow taxes. The study concluded that he “VAT-type” destination-based cash flow tax had inherited the lump sum property of the cash flow tax in a closed economy in that the study found neutrality of the tax with respect to production, investment and location decisions.

The study also found the tax to be incident on economic rents to the extent that these are consumed in the domestic jurisdiction, they there would be no subjection to competitive pressures. On the other hand, the study found that both the source-based cash flow taxes and the “full” destination-based cash flow taxes are incident on non- resident owners of firms that generate economic rents.

The study further found both two taxes also have positive effects on domestic welfare in the open economy setting but qualified its finding that there are possibilities that these taxes induce producers to relocate abroad since the source-based cash flow tax may unambiguously reduces domestic welfare, while the “full” destination-based tax may result to the same destiny if the tax rates are set too high. Based on the above there are merits to using cash flow tax but there is still no evidence to point that it could be used to replace the present US income tax system.

Although it may be applied in certain instances, it has limitations to match the advantages of the present tax system. 3. Conclusion The US government cannot be said to have found the and perfect way of income taxation as taxpayers under both individuals and corporate taxation have expressed different problems and concerns on the income tax present system. As discussed earlier, there are alternative methods of income taxation, where some principles of these alternatives are already implemented as part of the present tax system but some may still need to be accepted and implemented to see the effects on the lives of US taxpayers.

There is therefore a ground to look at proposed income taxes which may help to find the answer to the continued quest by the US government. One of this is the proposal to impose lifetime income tax. Using this tax required the levy of taxes to persons based on their cumulative lifetime income, rather than their yearly income as presently practiced not only in the US but throughout the world.

One example is the one which is advocated by Tony Clement  of the Conservative Party of Canada , who has proposed that those earning below a certain  threshold will not be any more liable to pay taxes over their lifetime but for certain individual within  a certain bracket , would be taxed at say 14%, while another group having higher brackets of income would be taxed a higher rate, say 24% and those perhaps who makes a million dollars and above would be taxed of say 27% or higher during their lifetime.

The advocates of the proposed system claim a number of advantages. One advantage is that it could be putting more of a tax burden on the middle aged and elderly thus causing them to save and would therefore living a higher standard of living. Another advantage is the protection of people against fluctuations from year to year. One the other hand, some disadvantages of the system may restrain its adoption and implementation. One is the taxing of seniors more heavily compared with other groups and this would unfair many seniors many are not rich.

It could also bring down savings and thus decreasing the available investment capital for society to function well. It is also feared that people are may be assumed to have similar successful year while the truth is not. Necessarily, another strong objection is the implementation of the policy which would very difficult as proponents believe because of the long transition which could be taking many years in addition to the politics of implementation of the system. Hence people in the meantime may not want to see the long term since most people will have to live first for the short term.

Approval of the measure would be next to impossible. Another proposed income tax system is the use of negative income tax. A negative income tax in approved would replace the current progressive income tax system. This has the characteristic of flat tax since each taxpayer would  be given a certain amount in dollars say $20,000 by the government but the same taxpayers would be subjected to 25% flat tax rate. This has been developed by economists who notably include Milton  Friedman but the same never got implemented.

An advantage seen of the proposal is that its implementation would solve several problems with current systems by eliminating the welfare trap and the minimum wage. This would in effect reduce administrative overhead, since the large bureaucracies causing the current mixture of support services could be removed and this increase payout to recipients without increasing taxes. Its main drawback is what is found in almost any income-based tax system such as the need for considerable reporting and supervision in order to avoid fraud.

An incentive to commit fraud is also feared to rise because the monetary reward for fraud could be larger than a taxpayer's total tax liability. Offsetting the advantages thought, the proposal would a negative added expense of policing fraud above claimed reduction in administration due to absence of welfare services. Another objection is its likely effect on removing or decreasing the incentive to work, due to the receipt of guaranteed minimum wage during absence of employment. Based on the proposed alternative tax system, there seem to be lack of popular support which is necessary in tax legislation.

While theoretically long terms benefits may be gained from these proposals, it would be hard to go against public opinion especially for legislators who need the support of the people to be in their positions in the first place. It may therefore be finally said, that it would really take time before the present US income tax system would be replaced. Perhaps its having stayed long in time is testimony to its strength and applicability. 

Works Cited:

Andrews, W. A Consumption-Type or Cash Flow Personal Income Tax, 87 Harv. L. Rev. 1113 (1974) Bartlett, Bruce , The Founders and the consumption tax. Townhall. com. , 2002, {www document} URL http://www. townhall. com/columnists/BruceBartlett/2002/04/05/the_founders_and_the_consumption_tax, Bird, R. ,Why Tax Corporations? , December 1996, www document} URL http://www. fin. gc. ca/taxstudy/wp96-2e. pdf , Accessed December 4, 2007 Bond and  Devereux, Cash Flow Taxes In An Open Economy, February 2002, {www document} URL http://elsa. berkeley. edu/~burch/Bond. pdf, Accessed December 4, 2007