Taxation should be changed

This paper seeks to argue how each of the following categories of taxation should be changed to help address the economic crisis facing the country: personal income taxation (both federal and provincial), consumption taxation (GST and provincial sales taxes), and corporate income taxation (both federal and provincial). Arguments for proposed change in each category will demonstrate how the said change will work although with the corresponding negative consequences of each proposal. 2. Analysis and Discussion 2. 1) Personal income taxation (both federal and provincial)

Reducing income tax rate would have the effect of increasing disposal income of earning individual and this will lead to more consumption. More consumption will in effect create a stimulus in the production of goods and services, as this will cause increase demand for goods and services. Producers return, in turn, will increase production and would generate or encourage more investments from savings (Samuelson, and Nordhaus, 1992). This would again restore the eventually confidence to the stock market and would help in the economic recovery.

A negative consequence of this proposal is that it will reduce the sources of revenues for the US government. Given that the US government is already in a budget deficit situation, the lower taxes that could be collected because of reduced personal income tax rates could increase the deficit. Higher budget deficit while increasing consumption would result to inflation (Slavin, 1996). Inflation would have a bad effect because the same can be considered an indirect taxation as the purchasing power of the dollar will fall.

The original advantage of income taxation its imposing taxation based on ability to pay theory so that those who have less in wealth will made to share less in tax and those who have more should pay more. Thus, another reason bad consequence in reducing income tax rates is contradiction of the intention of implementing progressive taxation. This could therefore cause the creation of the reverse effect of progressive taxation, which is regressive taxation. However, this will also reduce the criticism of progressive taxation in increasing consumption while moving away from increased chance of capital investments.

To lessen the bad consequence the reduction should be temporary until the economy recovers. 2. 2) Consumption taxation (GST and provincial sales taxes) Decreasing goods and services tax (GST) or valued added tax (VAT) in the state level and in the local level would have the effect of also increasing the disposal income of the people to have more money for consumption. This will in effect increase the demand for goods and services, which will increase consumption and thus will increase economic growth (Carroll, Thomas, 1983).

Since GST differs on each state of the US, the effect would vary because some rates after the change could still high and hence the effect could be minimal. There are also taxes at the city or municipal level in addition to state level sales tax. To illustrate, in the state of Alabama, a general state tax of 4% but the tax could reach up to 10% in some cities like in (Montgomery Alabama Department of Revenue 2,006). Alaska, on the other hand, does not impose sales tax in the state level but the local governments can impose a levy of up to 7%.

There are also variations in the some regulations across the state (Bankrate. com, 2009). Implementing in the state and local level of each state would require a separate action from each state since GST is not a federal tax. This reduction in GST rates as proposed change will either cause the supply curve to shift to the right in a demand and supply curve analysis because decreasing the consumption tax would reduce the cost of production for manufacturers. Reduced cost of production is an incentive to producers since the same could increase their profits (Slavin, 1996).

The negative consequence will be almost be the same as the reduction in personal income tax as the proposal will reduce the sources of revenues for the US government. The government deficit could also increase as result and higher budget deficit together with increasing consumption due to higher disposal income would result to inflation. 3) Corporate income taxation (both federal and provincial) The economic crisis could also be addressed by reducing corporate taxes in the state and provincial level.

Since corporate income tax is also a federal tax as the personal income tax, the reduction of the corporate tax rates could be done in the federal level and this would bind all other states except those separately imposed by each state. The arguments for reducing taxes would have almost the same effect as personal income tax reduction except that this time it is done on the corporate level. This would therefore motivate investors to make more expansion in business since lower tax means higher amount of available funds for expansion or investment in projects that would generate employment for many people during this time of crises.

With increased motivations to increase production, economic activities would improve, as people would have more purchasing power to buy goods and services. This would create a multiplier effect in many levels. If the tax rate reduction in the state level would redound to the local level, the same reduction could also encourage foreign companies to come to invest in the US and this would restore the business confidence that went down with the crisis. Increase revenue reconciles with wealth maximization objectives of corporations (Brigham, and Houston, 2002).

Not all corporations are subject to federal corporate income tax. To be subject to federal corporate income tax, a corporation must not be an ‘S’ corporation as defined the in tax laws of the US and that the same must be formed in the US and conducts trade or business in the US (Nowick, 2008). Thus, state corporate taxes could apply to those foreign corporations. The negative consequence will be almost the same as the reduction in personal income tax and GST in terms of reduced sources of revenues for the US government.

Being aware however that the implementation would just be to address short-term economic concerns, the proposed measure should be temporary as the ballooning government deficit could create the greater danger if inflation become unmanageable. 3. Conclusion In every action, there is a counter-reaction. Thus, each proposal has its effects that must be watched out. However, since the economy is in crisis, each of these proposals or a combination of them should only be used to address the situation temporarily.

For the cause of US economy recovery and the rest of the world, which depends on America, something that makes sense as proposed must be done.


Alabama Department of Revenue (2006) , State Tax rates, {www document} URL http://www. ador. state. al. us/salestax/staterates. html, Accessed March 26, 2009 Bankrate. com (2009),State tax round up , {www document} URL,http://www. bankrate. com/brm/itax/edit/state/profiles/state_tax_Aka. asp, Accessed March 26, 2009 Brigham, E. and Houston, J.

(2002) Fundamentals of Financial Management, Thomson South-Western, US Carroll, Thomas (1983) Microeconomic Theory Concepts and Applications, St. Martin Press, New York, USA Nowick, I. (2008), A Progressive Way to Reform and Reduce Corporate Tax Rates and to Empower Shareholders, http://www. californiaprogressreport. com/2008/08/a_progressive_w. html, Accessed March 26, 2009 Samuelson, P. and Nordhaus, W. (1992), Economics, McGraw-Hill, Inc, London, UK Slavin, S. (1996) Economics , Fourth Edition, IRWIN, London, UK