tag:blogger.com,1999:blog-2135788133426971614.post8843397891227000993..comments2024-03-28T01:09:48.303-07:00Comments on 21st Century Taxation: Reforms desired by businessesProfessor Nellenhttp://www.blogger.com/profile/03288632402197167948noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-2135788133426971614.post-55559667144520852132012-04-17T22:14:28.032-07:002012-04-17T22:14:28.032-07:00It is possible that the income tax could be replac...It is possible that the income tax could be replaced with a consumption tax in the near future? <br /><br />I do not think we will see a complete replacement of the income tax with a consumption tax because of significant transitional issues that will impact individuals and businesses. For example, a family that is not paying any income tax due to the fact that they live under the poverty line will need to pay tax for every product that it will buy (assuming a replacement of the income tax with a consumption tax). The replacement of the income tax with a consumption tax raises another concern regarding the progressive rate structure - under the actual U.S. tax system, it is easier to keep a progressive tax rate structure and higher incomes get taxed at higher percentages than lower incomes. Consumption taxes are by nature regressive because the low and middle income individuals must spend more of their money on taxes than high income individuals. Even though a consumption tax might encourage people to save more instead of spending, the high income individuals will do most of their savings because the individuals from low or middle income class typically spend a larger percentage of their income than the individuals in the high income class. <br />On July 26th, 2011 the House Ways and Means Committee held a hearing to evaluate the pros and cons of two different consumption taxes to replace the income tax: FairTax (that calls for replacement of actual income tax with a national sales tax) and the Value-Added Tax.<br /> The Committee heard from a variety of economists, among them advocates and opponents of both models explained the pros and cons of those different consumption taxes. One of the Panelist Bruce Bartlett, a former Treasury Department economist in the Reagan Administration, enumerated several problems with the Fair Tax and called the proposal “pie in the sky”. “I just don’t think it will work,” he said of the FairTax. “It is the most pie-in-the-sky major tax reform I have ever heard of. Even by tax policy standards, it is grossly complex, a virtual Rube Goldberg contraption of pieces that are unworkable individually and become exponentially more unworkable as they are layered on top of each other. The idea that this is a simple form of taxation is nonsense.”<br /> What is interesting about this hearing is that they focus only on analyzing these two forms of consumption tax and did not discussed the possibility of replacing the income tax with a the flat tax or consumed income tax. A pure flat tax model eliminates all loopholes and tax breaks, ends taxation of investment income, and puts everyone within the same tax bracket regardless of how much they make. However, it brings issues that state government would face it if the current federal tax system were to be replaced with the flat tax because state and local governments have <br />come to rely on a large number of features of the existing federal income tax system. Taking away any of these features could create complexity at state and local government's level and maybe the House of Ways and Means Committee try to avoid adding more complexity to the tax system. <br /><br />Reference: <br />Article: Hearing on Tax Reform and Consumption-Based Tax Systems; Author: The House Ways and Means Committee; Date: Jul 26, 2011; Website: http://waysandmeans.house.gov/Calendar/EventSingle.aspx?EventID=252676Danahttps://www.blogger.com/profile/10149979325569783890noreply@blogger.com