Case Application: A Look at the Flat-Rate Tax There are periodically proposals i
ID: 1118702 • Letter: C
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Case Application: A Look at the Flat-Rate Tax There are periodically proposals in Congress for a change in the income structure to a flat-rate tax. This change is a particular favorite of supply-siders, who believe that the existing tax structure discourages work and investment. Another advantage claimed for the flat-rate tax is that it would greatly simplify the tax system, making it easier and cheaper for people to calculate their taxes and for the government to administer the system. Since it would eliminate a multiplicity of income exemptions from taxes, it should remove the existing inducements to invest in tax shelters and to devise other ways of avoiding taxes. It is alleged that this would increase the efficient allocation of our financial resources, reduce the time and expenses allocated to tax accountants and lawyers, and otherwise provide incentives for productive efforts in place of tax avoidance efforts Tax reforms in 1986 did eliminate most tax shelters, but the resulting tax system was at least as complicated to calculate and administer as the old system. In actuality, it increased the business of tax preparation firms. The main objection to the flat-rate income tax is that it would make the tax system more inequitable. Federal taxes other than the income tax, as well as state and local taxes, are largely regressive. They take a higher percentage of the incomes of low-income earners than of high-income earners. Only income taxes counterbalance the regressivity of the rest of the tax system with their progressive structure Economic Reasoning I. What would be the effect of a flat-rate income tax on the vertical equity of our tax system? 2. How might a flat-rate tax increase the efficiency of the tax system? 3. Are you in favor of a pure flat-rate tax, the modified flat-rate tax bill passed in 1986 (and amended in 1993), or the previous, progressive income tax system? Why?Explanation / Answer
Answer:- the vertical equity is a concept of tax collection in which higher rates of taxes are imposed on the wealthy individuals and thus greater taxes are paid by the rich members of the economy. While on the other hand, in case of a flat tax rate, a fixed tax rate is imposed to all the taxpayers irrespective of their income and therefore it means that both rich and poor will pay the uniform tax determined by the government.
If a flat tax rate is implemented in the economy then the rich and poor both will pay similar taxes and this will again put the poor at a disadvantageous position as they are paying the same tax as rich despite having the lower income.
With the flat tax system, the issue of lesser investment and work can be overcome and it will help the economy to attract the new investments.
Answer:- the efficiency of the tax system will be improved by implementing the flat tax rate as it will reduce the complexity in calculating taxes to be paid, make the entire tax collection process simple, and government can monitor the entire process effectively. As this system will overcome the multiplicity of income exemption from taxes, the prevailing inducement to invest in different tax shelters will be avoided along with various other methods of avoiding taxes. I will help in attaining the higher level of efficiency allocation, reduce the time and money spent on lawyers and consultants and will motivate the taxpayers to pay their taxes.
Answer:- I am in favor of progressive income tax as in this tax system higher tax rations are taken as the level of income increases thus the individuals who have higher income will pay more tax than the individuals having lesser income this is kind of ethical tax system as lesser taxes are charged from lower-income individuals and higher taxes are imposed who can pay more as they have greater income
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