Fair Tax Plan proposal

This paper discusses the issue of income tax reforms which have been proposed by the Congress through the Fair Tax Act of 2015. The issue of income tax reforms has been informed by a large number of expenditures associated with the current system of corporate and personal income taxes. The current income tax policy involves applying a given tax rate to individuals and corporate income and such tax increase with the increase in the income.

 The current tax income rate is normally a graduated one so that higher incomes are subjected to higher rates the lower incomes.  The objective of the tax has been to base the rates on the ability of a person to pay and at the same time ensuring that the tax systems uses minimum costs. The economic objective is to ensure the government collection costs and taxpayer's compliance costs are held at the minimum (Slemrod and Jon, 2). The advantages of the tax plan are that the tax rate is based on a person's income and hence, ability to pay. The policy places the highest tax burden on individuals with higher income and lesser burden on those with lower income. However, this income tax policy has become complex and its administration has been associated with high cost and this defies the basic objective of having a cost-effective tax plan (Slemrod and Jon, 2). The policy has many income taxes that requires a high amount of funds to be administered.

The Fair Tax Act of 2015 has been proposed in Congress which is a sales' tax aimed at replacing the present income structure in the United States. The proposal seeks to address the cost issue by abolishing the corporate and personal income taxes and other taxes imposed on estates, gifts, Medicare, social security, and self-employment. Then a 23 percent retail sales tax is proposed as the replacement and whose administration is to be done by tax authorities in the state (Congress * Gov, 1).The main complication arising from this reform is that a big share income for the high-income earners will be exempted since these individuals spend only a small percentage of their income for consumption (Burman, 1).

 There are various strengths of this reform and which relates to elimination of problems associated with the administration of yearly income tax and reduced cost. Government expenditure would be greatly reduced when IRS is eliminated. Since people would retain their whole earnings, there would be more consumers spending which in turn would increase the productivity, jobs and gross domestic product.  Through a "prebate", a program for cash transfer, the reform would protect individuals with low income from a higher amount of taxes (Congress * Gov, 1). In addition, the reform eliminates the tax gain which means that an investor is able to a compound growth that is tax-free which provides an opportunity for more people to invest especially those who would be discouraged by tax complications (Congress * Gov,1). The reform also consists of various weaknesses that may hinder the realization of the intended benefits of the new Act. The Act would be unfair to senior persons who are not getting an income since they have paid such taxes in their whole lives and would also be required to pay increased sales taxes. In addition, the pre-bate program could be very expensive and taxpayers would find it hard to manage and complex for administering.

 

 

Works cited

Slemrod, Joel, and Jon M. Bakija. Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes. , 2017.1-2

Burman, Len.The Trouble with the FairTax.2015. Available at: https://www.forbes.com/sites/beltway/2015/05/27/the-trouble-with-the-fairtax/#52c2cab75d7b

Congress * Gov.H.R.25 – Fair Tax Act of 2015114th Congress (2015-2016).n.d. Available at: https://www.congress.gov/bill/114th-congress/house-bill/25/text