Since time immemorial, any existing public administration that is legally recognized by a certain territorial constitution has been known to bear the responsibility of providing public goods and facilities free of charge to all its members. These administrations are referred to as governments and the members are its citizens. It is an assumption that the public goods and services are free but in real sense the citizens pay for them indirectly. This is effectively done through taxes. A tax is a pre determined amount of money that is paid or deducted by the government on income, service offered or product to an individual or corporate person that is legally recognized (Whittenburg & Altus-Buller, 2009). The two common taxes that have been a center of debate in America are income tax and sales tax. Income tax as the name suggests is derived from earnings of the individual or corporate business entity. This implies that it only arises after the level of income is determined and consequently assessed for its payment or submission. This has been known to be periodical by nature and to in some circumstances it is predictable. Sales tax on the other hand happens or has a point of incidence when goods or services are exchanged for financial consideration. It is instant by nature and mostly included in the price set for the goods or services. The prevailing economic trends and increase in the number of taxpayers in America has made it more difficult to accurately manage the income tax collection among other reasons which makes the sales tax popular (Eccleston, 2007). This has made me convinced that the current income tax code should be scraped and replaced with a national sales tax which provides more revenue, saves money and is fair to all Americans.
Economists and financial experts have been engaged in serious debates on replacing the income tax system and the US government has hosted the same arguments for a long time in history. The preferred replacement is the sales tax and this can be attributed to the fact that it is dormant in other major countries and economies around the world like the United Kingdom (Eccleston, 2007). This paper will discuss several factors that favor sales tax over income tax while highlighting the pros and cons of each tax system.
The income tax is derived by applying specific pre-determined percentage rates on various amounts of income and it is practically proven that the higher the income, the more tax one is likely to pay (Konigsberg, 2007). The various levels of income have been divided into several tax brackets with which have progressive rates of taxes as one goes from a lower to a higher tax bracket. This is good in wealth distribution responsibility of the government. Having in mind the fact that the majority of United States population covers the lower tax brackets, it makes obvious sense for them to fully support this tax system. One weakness is that, the system can in one way discourage citizens from generating more income whenever an opportunity arises because of the tax implications which are unattractive. This has also led to a disgruntled group of the wealthy people categorized at the higher tax brackets. It is considered to be punishment for success by extreme lobbyists against this tax system. A survey carried out in the year 2007 clearly indicated that half of the income tax was collected from about 5% of the wealthy people in United States yet in the same year, around 41% of the population did not pay income tax (Steuerle, 2008). This defeats the principle of equity which should characterize a good tax system. This is one of the main reasons why sales tax system is being preferred and suggested. A simple evaluation of sales tax application is where all the existing tax categories can be generalized and compressed within a single higher percentage rate which makes collection easier. This means that business entities will be the main tax collection points and that leaves no room for any citizen to evade their taxpaying responsibility. The American private citizens will not have to go through the hectic process of self assessment and filling of the income tax forms. Furthermore, the government will have a reduction on its spending in terms of reduced tax administration costs.
The income tax system is important because it generates constant funds for government spending. It is preferred because of its stability and convenience knowing that the structures of administration constantly monitor the amounts collected and any fluctuations can be confirmed and addressed in good time. The administration has a wide net of employees within the internal revenue service (IRS) and the tax audit industry that ensure that proper submissions are adhered to and track defaulters (Cordes, Ebel & Gravelle, 2005). This system is however complex and full of loopholes which organized individuals and groups have taken to exploiting in huge tax evasion schemes. The government struggles to oversee active enforcement of every tax code rule and uses a lot of employees. Establishment of a sales tax system would massively reduce this administration costs and leave the government with more IRS and tax audit staff members to be trained and utilized in other government income generating programs.
While it an advantage for income tax to be paid at the source which is the employer thus leaving employees free from calculating and paying taxes, this relief is only experienced by those in formal employment ( Cordes, Ebel & Gravelle, 2005). The Sales tax has the ability of trapping everyone within the economy and would still give the same satisfaction. The sales tax has a further advantage because the collection is instant and occurs on a real time basis although it is more random. While it is easy to look at the advantages and disadvantages to base our argument on which system is better, some considerations of the external environment can also favor a certain tax system. If we consider a sales tax system, it is assumed or it rather makes sense to claim that it has an ability to generate more taxes than the income tax system. This is mainly because a larger taxpayer base is trapped under the sales system thus, the contribution is supposed to numerically be higher. With the current debates and refusal of the government to cut down on its spending, it makes sense to adopt a system that would generate more income. The current income tax system is insufficient in generating revenue for government spending to a level that even certain cuts would not make the funds enough to sustain the government. A sales tax is more obvious and that would make the government think twice before raising the tax rate (Konigsberg, 2007). This will further instill financial discipline that would make the government partake programs that it will comfortably support with the lean budget.
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The income tax system by nature favors labor intensive production over the capital intensive one which is not the case with sales tax system that would be fair on all aspects due to its uniform application irrespective of the nature of production. This will therefore recognize significance of every factor of production within the economy and encourage expansion in all production centers.
The prevailing economical trends have the United States of America being at a disadvantaged position in terms of the balance of payment with regards to developed countries that have established a sales tax system (Steuerle, 2008). This means that their goods for export will have the prices reduced by a specific amount but determining the same for the United States is difficult since pricing of exports has various aspects of taxation included in the price as factors of production.
Therefore a summary of the main advantages of having a sales tax over income tax away from the direct comparisons can be determined through the general effects on the economy which are:
- Massive increase in productivity since employees will prefer to work overtime and earn full salary than use the free hours to participate in non-work related issues. The financial reward for extra hours worked is minimal because this succeeds in only throwing them further up the next tax bracket for major efforts input for extra income. This is why employees consider leisure and relaxation activities as better than working extra hours.
- Increase in savings because people do not like spending in taxes whenever they can. Through increased pricing, an increase in personal savings will occur thus generation of private capital that would eventually be converted to personal investment thus a growth in economy (Eccleston, 2007). The current fraction of the population in private personal investment is so low and this might be the stimulus that the economy needs to be more vibrant.
- Due to eventual increase in savings and demand for investments, the instruments for investments such as the bond will be on high demand which will make their acquisition prices to increase but their rates of interests will significantly fall to reflect the increase in demand (Eccleston, 2007).
- Sales tax would also encourage citizens to spend more outside the United States than at the moment. This is because their income is not yet taxed and so they can do international spending without the fear of the double tax factor. This should improve foreign exchange between the United States’ economy and the other nations but the American dollar will become weaker.
It is important to consider and appreciate that possible resistance from the citizens, government and general economy might arise from various aspects of establishing a sales tax system. The aged within the society might feel the effect of being taxed twice. This is because their savings were mostly accumulated during their working years and taxed through the income tax system. When they age and are living on their savings, sales tax would effectively subject them to being taxed twice (Cordes, Ebel & Gravelle, 2005). This therefore calls for special considerations to be given to the aged whose existing savings resulting from income taxed earnings. The poor still pay income tax in a way and establishing a sales tax would ensure that they suffer a drastic increase in tax since most of their primary spending is on consumption goods for survival. This can however be sorted by the government recognizing them and offering rebates each month for their subsistence. The income tax system has various deductions which favor families like the credit for childcare. If a sales tax is introduced, the various alternatives available to families will not exist therefore being a disadvantage to families. Finally, unemployment will arise due to lose of jobs by taxation employees within the IRS and the tax audit industry (Steuerle, 2008). This is majorly because the American economy will self-regulate collection and submission. The economy also acts as a self- check and control against evading of tax payment responsibility by individuals and corporate citizens.
In spite of the seemingly more dire consequences, various correctional reactions are available as partly suggested. Further consideration of the huge population that would gain from the system makes it a favorable one. This population includes people who are more inclined to saving because of alternative options. The other group is the people with an ability to make purchases outside the United States, especially near the Canadian border (Slemrod, 1999). Business owners will have the privilege of purchasing and using goods less sales tax because the structure targets products for personal consumption and it is not levied on firms purchasing goods for resale. This makes it possible for them to buy goods in pretext of business purchases. The wealthy will have justice in terms of fair taxing as opposed to progressive taxation which is propagated by the income tax system. Tax evasion and tax avoidance options gives the majority of the population an avenue to chose between not purchasing goods that they deem to be unnecessary or buying from across the border.
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Having considered the advantages and disadvantages, the main point of consideration is to have a tax system that will generally increase the revenue earned for government spending. All the resistance to a possible change is based on fear of the disadvantages of the new system. Compared to the income tax system, the sales tax system has fewer shortfalls which can be controlled on establishment (Slemrod & Bakija, 2004). It further has more advantage in overall revenue amount collected with special consideration being the current reluctance of the government to cut down on its spending. It is possible that the resistance to adopt the sales tax system is not due to principles but fear of change and the uncertainty of the consequences. America being a world power is confident and stuck on the old system because any substantial weakness if noted would be fully taken advantage of by competing nations. This notwithstanding, I am fully convinced that a change would bring more activity into the economy and have more Americans participate in the investment processes. The visibility of the sales tax makes it easier for Citizens to have an idea of the general government revenue in terms of tax because it is standard thus having a sense of predictability. This tax is also pronounced than the income tax which has a sense of confidentiality from one employer to the next or one industry to the next. It should however be emphasized that the sales tax system is capable of having the economy stimulated through its exempting all the investment activities and intended savings (Slemrod & Bakija, 2004).
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In conclusion, the basis of a tax system is to generate adequate funds that should be able to run government projects and cover its responsibilities towards its citizens. There need not be several systems as long as one suitable system that covers the targeted contribution amount in taxes is attained. Utmost care should and must be taken by evaluating three aspects of introducing or settling on a certain tax system. The first aspect is the impact that may arise from a change or introduction of a new system with regards to economy and spending habits of the consumers or citizens. Secondly, we should be able to determine which parties gain from this change and which ones will incur losses. This is very important because it acts like a guide in taking care of the needs of disadvantaged parties to an acceptable level (John, 1998). Finally, a proper feasibility study must be done so as to determine if the new system is economical in terms of costs of implementation against actual financial gains. Every applied tax system has advantages and disadvantages. The income tax system is favored by the United States government because it is apparently effective. The Tax code applied is lengthy but fully satisfies the need of the government and some citizens feel that they pay the lowest amounts in taxes compared to other developed economies. This is missing the essence of paying lower taxes. The economic efficiency and value of a tax system is not only restricted to the amount eventually paid by the taxpayers or earned by the government. The other non financial costs make a significant impact too, especially conveniences associated with saving extra costs of tax administration. It is also important not to look at a tax system from only one perspective. This is with reference to the taxpayer or government perspective. That is why, I strongly feel that based on the two perspectives being harmonized to create a balanced situation, a sales tax system would be far more ideal for America.