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Latin America has faced various economic challenges in the past few decades, such as high rates of unemployment, high inflation rates, decrease in gross domestic product (GDP), high foreign exchange rates as well as increased capital outflows. The Latin American economy has also suffered from instability and volatile currency and decreased government revenues (Franko 26). In my opinion, the decrease in government revenues may have resulted from formulation, adoption, and implementation of non-supportive tax policies by the government. For example, the government proposed a new tax law the Buffet Rule. Information about the Buffet Rule can be found in article titled “Economics, Politics and Social Issues in Latin America” written by Lassiter Mary in The Economist Journal, Volume II Issue No. 6.
Summary of the Article
According to The Economist Journal, the Buffet Rule has been designed by the government to ensure that people who are earning a taxable income of more than one million US dollars should pay taxes at the rate of at least forty percent of their gross income. The article further argues that this tax rate is too high and thus should be revised and harmonized with other tax rates charged on middle and lower class income earners. The Economist Journal further revealed that the intention of the government in increasing the tax rate amongst the rich was to offset budget deficits it experiences.
According to President Obama’s speech, requesting the rich to pay more taxes was not a struggle or warfare of social class between the rich and the poor. President Obama asserted that the Buffet Rule would help raise additional revenue of approximately five billion dollars annually. This was an adequate amount of money to offset the deficit in government budgets. The article further argued that the Buffet Rule will not only help in budget deficit, but can also be used as a basic principle of equitable taxation. The writer puts forward that the introduction of the Buffet Rule was democratic theft from the rich.
Critical Evaluation of the Article
In my opinion, the article failed to explain the various impacts of the Buffet Rule other than its goal of reducing budget deficits. The article gives rise to more questions than answers, for instance, were the opposition leaders, employers, investors, public policy officers, and economists given adequate time for analysis of the impacts of the Buffet Rule on the Latin America’s economy before its adoption and implementation? Furthermore, the article failed to address question such as is it through taxation that the government can raise revenue or do tax policies of governments express societal fairness and equity between the rich and the poor?
Additionally, the negative effects of the Buffet Rule were also not illustrated, for example, there might be high chances that the new taxation law might raise the costs of producing goods and hence lead to increased inflation. It is claimed that the Buffet Rule received harsh opposition as most politicians were questioning its ability to raise taxes in a non-punitive and discriminative manner (Lassiter 84). Opposers of the Buffet Rule argued that the rule was politically formulated and thus in inclined towards reaping most of the government’s revenue from the rich only. The writer of the article goes ahead to convince readers that the hit of the Buffet Rule concerns neither politics nor discrimination of the rich in terms of high taxation, but rather an application of natural fairness and equity in taxation.
From my point of view, the government is capable of cutting down its expenditures so as to reduce the budget deficits it is experiencing. The government can also use public borrowing as an alternative way of financing its budget deficits. In my view, increasing income taxes for the rich may result into decreased investments since most rich people will be discouraged from making considerable investments in fear of being taxed higher.
It is a question of whether it is fair for people who are currently paying thirty percent of their total income as taxes to pay additional taxes whereas so many Latin American from the middle and lower social classes are not even paying a single cent as taxes. The article has not elaborated whether the newly introduced rule was able to adequately meet the government’s demand for revenue. Furthermore, it is questionable whether the Buffet Rule considered other taxation principles such as proportionality, equity, and convenience.
Suggestions for Solving Budget Deficit and Taxation Issues
In my view, if the government’s primary concern was to raise revenue, then it could have broadened its tax base in a more efficient manner other than raising higher taxes for the rich only. This implies discrimination based on social status of the rich in our society.
Taxation and Its Principles
A tax can be defined as an enforced contribution usually paid in monetary terms to the government that is levied on individuals, properties or organizations with the aim of raising revenue for funding government expenditures (Tanzi, Barreix & Villella 14).
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Usually, taxes serve two major purposes, namely source of revenue and regulatory purposes. Taxes are levied by the government in order to raise revenues for funding its public projects. As a regulatory tool, taxes can be used to discourage the production and consumption of particular goods in the economy. For instance, the imposition of high tariffs by a government is usually intended to protect the local industries from stiff competition from foreign firms or to discourage the consumption of a product that is considered socially harmful, for example alcohol and cigarettes.
Similarly, the government may adopt the progressively higher tax rates in order to reduce inequalities in distribution of wealth and income amongst the citizens. Taxes can also be used to prevent inflation (Dennis-Escoffier 38).
According to Frend, taxation refers to the act of levying a tax on incomes of the citizens in order to raise government revenues (19). Taxes are the enforced proportional contributions from and property levied by the law-making body the state by virtue of its sovereignty for the support of the government. Taxation should be levied based on various conditions such as fiscal adequacy, equality, and administrative feasibility. Fiscal adequacy implies that the sources for generating the revenues should be ample enough to meet the monetary demands of the government, that is, its public expenditure needs. Equality means that the burdens of paying a given tax levy should be proportionate to an individual’s ability to pay the tax. This gave rise to the ability to pay principle.
Lastly, administrative feasibility implies that the costs incurred in collection of taxes should be economical and should not exceed the benefits derived from the collection of such taxes (Lyon 71). For example, if it costs the government 2 US dollars to collect tax of 20 dollars, then it is economically feasible to collect such a tax. Contrary, if the government incurs a cost of 10 dollars to collect a tax of 12 dollars, then other options of raising revenues should be considered.
In my view, all citizens should be subjected to a tax policy that is proportional to their gross incomes. Furthermore, in order to encourage economic growth and development, the government should avoid taxing capitals. This would act as an inducement for the rich to make more investments and hence will lead to growth and development of the economy. The government may also consider not levying taxes on foreign capital inflows so as to attract more investors.
Similarly, deducting unreasonable high taxes from income earned from employment services demotivate people from working, and thus results in decreased number of people willing to work. This would eventually result into decreased productivity and hence low economic growth and development. Additionally, the government should adopt tax policies based on the declining scale rate with a fixed maximum rate. In order to reduce the tax burden on individuals, taxable income should be calculated on all sources of income with any relevant exempt and deductions before tax omitted. The sources of income include but are not limited to salaries, wages, and fringe benefits from employment, returns form self-employment and personal businesses, interest and dividends form investments such as shares and security stocks.
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Governments should adopt tax policies that do not levy the taxpayer twice, that is, avoid double taxation. A good tax system should also be uniform, proportional, and equitable. Implementation of such policies will require non-involvement of politics. This is because politics have been known for its big hindrance to implementation of effective and beneficial policies.
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