reform of tax system

8/13/2019 Reform of Tax System

1/6

Reform of tax

system


2/6

Huluban Tabita

Management of NGO, year I


3/6

In the last period of time there was a succession of reforms that happened and each reform

promised something better. They promised a simple tax code which will promote economic growth and

efficiency, progress. This paper presents the tax reform in the last two decades in the United States,

with an emphasis on the reform from 1981, 198, 199! and 199". The federal, state, and local taxsystems in the United States ha#e been mar$ed by significant changes o#er the years in response to

changing circumstances and changes in the role of go#ernment. Some of these changes are traceable to

specific historical e#ents, such as a war or the passage of the 1th %mendment to the &onstitution that

granted the &ongress the power to le#y a tax on personal income. 'ther changes were more gradual,

responding to changes in society, in the economy, and in the roles and responsibilities that go#ernment

has ta$en.

The main sub(ects of this topic will be) increased fairness, increased efficiency and reduced

complexity*effecti#eness costs.

The debate concerning fairness is focused on the fact that is in the eye of the beholder) most

taxpayers feel that they pay more then their fair taxes and (ust a few taxpayers feel that they pay too

little. % fair tax system imposes similar taxes on those in similar economic circumstances. &ritics on

the current tax system argue that it is unfair it ma$e distinctions which it should not ma$e and it

doesn+t ma$e when it should.

'ne of the critics of the

fairness of tax system is regarding the

treatment of those with nontraditional

household structure. %n example is

about to people with the similar

incomes are getting married in the

states. Their taxes will rise simply for

the fact that they are getting married.

This is not the same for two people

with dissimilar income, they will

recei#e a marriage subsidy-, their

taxes will fall.


4/6

%nother critic is about the current system of taxation of capital income. Some people argue for

the elimination of this tax, other for capital income loopholes-. the fact that the number of special

pro#isions allow much of capital income to escape taxation is #iewed by some as unfair. &ritics claim

that tax system is unfair both in the way it discriminates between capital income and wage income-.

Stiglit/, 0., conomic of the public sector-, pg. 92. The reform in 1981 represented a fundamentalshift in the course of federal income tax policy) it featured a 34 percent reduction in indi#idual tax

brac$ets, phased in o#er ! years, and indexed for inflation thereafter. The 1981 tax cut represented a

new way of loo$ing at tax policy, though it was in fact a return to a more traditional, or neoclassical,

economic perspecti#e. The essential idea was that taxes ha#e their first and primary effect on the

economic incenti#es facing indi#iduals and businesses.-

http)**www.policyalmanac.org*economic*archi#e*tax5history.shtml2

There were two important changes in this act) a new focus on marginal tax rates and incenti#es

as the $ey factors in how the tax system affects economic acti#ity and the second one was the shift

away from income taxation and toward taxing consumption. There were many 6uestions if the rich should pay more taxes, but the 6uestion is how much

larger7 %nd also if the poor, those under the line of po#erty, should pay no taxes. The reform in 198

remo#ed those under the po#erty line from the tax rolls. In 199! actually there was another change for

the poor) it not only reduced taxes on the poor, it actually increased subsidies a#ailable to the wor$ing

poor who, often in spite of fulltime wor$, remained below the po#erty le#el- Stiglit/, pg 9"2.

egarding increasing efficiency, the principle that lower marginal tax rates reduce deadweight

losses and incenti#es for tax a#oidance is a fundamental one. %ccording to Stiglit/, to lower marginal

tax rates there are two ways) by reducing the degree of progressi#ity and by broadening the tax base.

The 198 Tax eform %ct was roughly re#enue neutral, that is, it was not intended to raise or

lower taxes, but it shifted some of the tax burden from indi#iduals to businesses.

http)**www.policyalmanac.org*economic*archi#e*tax5history.shtml2 It also represented a temporary

re#ersal in the e#olution of the tax system, it brought the tax rate down from 4:; to 38;. %lso this act

decreased the highest marginal tax rate. 'ther essential aspect of the Tax eform %ct in 198 is that it

made tax a#oidance more difficult, but what did not happened was simplifying the tax code.

The next table presents the effects of the reform in 198, in terms of taxes and re#enues.
http://www.policyalmanac.org/economic/archive/tax_history.shtmlhttp://www.policyalmanac.org/economic/archive/tax_history.shtmlhttp://www.policyalmanac.org/economic/archive/tax_history.shtmlhttp://www.policyalmanac.org/economic/archive/tax_history.shtml


5/6

Some of the reasons for ha#ing a tax reform were) the large distortion associated with high

marginal tax rates, high administrati#e costs, low le#el of compliance, the percei#ed ine6uities of the

tax structure and the complexity of the tax code. %nd almost all of the reforms wanted to reduce this

complexity, because complexity increased administrati#e costs, both for taxpayer and for the

go#ernment< it reduces compliance< it opens up opportunities for tax a#oidance and it contributes to the

sense that the tax low are ine6uitable- Stiglit/, pg ":=2. In this sense the 199" act focus on the

simplification of the tax code, but they did not achie#e it. Is caused partly by go#ernment+s attempts to

reduce tax a#oidance, partly by attempts to achie#e social and economic ob(ecti#es through the tax

system. The ma(or simplification supporters pointed to, at the act reform in 198, was the reduction in

the number of tax brac$ets, but it was a superficial one. In fact in made it more complicated by

introducing the distinction in the tax law between #arious categories of income.

The reforms of 199! and 199" focused more on using the tax system to express #alues. >any of

them were focused on family #alues) encouraging adoption, reducing the penalty for marriage,

introduced the child credit, encouraged women to participate in the labor force or encouraged to stay

home and ta$e care of their children.

%nother focus was on sa#ings and in#estment in new and small businesses, introduces new tax


6/6

credit for education and simplification of the tax. %lso there some ma(or reforms) the flatrate tax is a

proposal to ha#e a single flat rate. &onsumption rate , which means that an indi#idual will be taxed on

net cash flow income2 minus net additions to sa#ings. The #alue added tax ? the ad#antage of this is

that the #alue is added within large corporations.

%s a conclusion of the tax reform in the United States, the fallowing chart shows the bottom andthe top tax brac$ets from 19133:13. It shows how periods of high tax rates follow periods low tax

rates and the a#erage historical tax rate for the top le#el is 49;. http)**www.re#olutioni/e

retirement.com*taxhi$esnotifbutwhen*2
http://www.revolutionize-retirement.com/tax-hikes-not-if-but-when/http://www.revolutionize-retirement.com/tax-hikes-not-if-but-when/http://www.revolutionize-retirement.com/tax-hikes-not-if-but-when/http://www.revolutionize-retirement.com/tax-hikes-not-if-but-when/

reform of tax system

Documents