Term Paper on "Progressive Income Taxes"

Term Paper 7 pages (2042 words) Sources: 1+

[EXCERPT] . . . .

laws governing taxation have long been an issue of debate. A progressive income tax is a plan that has long been used and touted as essential to fair taxation. The purpose of this discussion is to examine the progressive income tax. The investigation will detail the history of progressive taxation and clearly define progressive taxation. In addition, the research will present the problems associated with progressive taxation and the solutions to these problems.

History of Progressive Taxation

The issue of taxation is steeped in American history and demonstrates the interdependence of the nation and its citizens (Frantantuono).

The progressive tax system came to prominence between the years of 1860 and 1920. Throughout this time span congress slowly implemented a progressive income tax on several occasions (Frantantuono). The first of which came in 1863 and was establish to aid in the financial costs associated with the war (Frantantuono). This was known as the indirect tax. After the war the tax was challenged and eventually repealed in 1872. (Frantantuono)

The next implementation of a progressive income tax came in 1894 the tax was reinstated spurred by the Panic of 1893 caused by the economic conditions in the nation (Frantantuono). However the Supreme Court deemed this Taxation act unconstitutional. Eventually, legislators desiring greater social equality approved Amendment XV of the constitution, which gave congress "the power to lay and collect taxes on incomes (Frantantuono)."

The Progressive Income Tax

In the modern era the debate over the constitutionally and the practicality of the progressive income tax has raged on. In the years since the Amendment to the constitution there have been many changes to taxation laws. The most profound of these changes was the tax reform act of 1986. This particular tax reform was important in defining the current tax system because it increased the progressivity of the combined personal and corporate income taxes (Wallace and Wasylenko). The reform act of 1986 reduced the highest marginal income tax rates from 50% to 28% for high-income persons and removed some lower-income persons from the tax roles. Initially it was believed that such reform would promote economic efficiency in labor supply and result in welfare gains for all citizens.

In the United States and many other nations around the world the Progressive Income tax is utilized. A progressive income tax is defined as one in which the marginal tax rate exceeds the average tax rate facing individuals at all income levels, the associated property of an increasing average tax rate as income increases produces what is referred to as built in flexibility or revenue responsiveness of the tax system.. This flexibility is measured in unit free terms using the concept of the income elasticity of tax revenue or revenue elasticity (Creedy and Gemmell).

Basically, the progressive tax requires people to pay taxes based on a percentage of their income. The higher the income, the higher the percentage of taxes the individual pays. The progressive tax system has often been looked down upon because it seems to unfairly tax those they can least afford it.

In some ways, such a tax system may seem fair, but many argue the opposite. Such opposition to the progressive tax system is compounded by the complexity of the tax laws. The complexity of the laws makes it difficult for taxpayers to pay the accurate amount of taxes owed. As a result, many people overpay their taxes.

Problems associated with a progressive tax system

Many have suggested that such a system is problematic and places unnecessary burdens on middle class families and even the working poor. Under the current system of progressive taxation, middle class families are often taxed at a rate that represents a high percentage of their income. The problem with such taxation is not the middle class families pay more than upper income families but rather that the burden of taxation is greater. In other words, a middle class family that has two children in the household and an annual income of $50,000 is more burdened by taxation than a family that has one child and an annual income of $750,000 although the higher income family pays more in taxes. This burden is compounded when the middle income family has a child on college or suffers some other type of financial hardship that is not tax deductible at a rate that would lessen the burden. This middle class tax burden is a serious problem because many middle class people live paycheck to paycheck. Such a tax burden can result in a diminished quality of life.

This problem has been addressed more in recent years as a result of the tax cuts initiated by George W. Bush. The tax cuts implemented by George W. Bush were designed to increase the reduction of marginal tax rates on individual taxpayers and reduce taxes on equity investments (Hoey). This tax cut came as a result of a surplus. According to Boyd the main purpose of the tax cut was personal tax reduction. The author reports that there was a difference of opinion on who should get the relief and in what format it should be given. Republican favored across -- the board tax reduction, with elimination of some of the inequities in the current tax structure, most notably the marriage penalty. Democrats were concerned that this would mean that most of the tax relief would go to the wealthiest taxpayers. They proposed lowering the rates more at the lowest tax brackets, and increasing the child credit and earned income credit. The 2001 Tax Act is a compromise of each of these approaches. (Boyd)"

However, the problem with the president's tax cut is that it is not permanent. The progressive tax system was left in tact but some relief was given to tax payers at all levels of income. The president believed that such a plan when spur the economy but recovery has been slow and painstaking. Although this tax cut offered some relief to the middle class it benefitted the wealthy the most. As was explained previously this is problematic because the tax burden that the middle income families face is much greater than that of wealthy families.

In addition, on the other end of the spectrum some opponents to progressive taxation assert that it has a tendency to punish the wealthy. In doing so it is believed that such a system can have the unattended consequence of discouraging hard work and success because people begin the believe that the more money they make, the more money they will have to pay in taxes, and so there is no reason to strive to be successful. This is a sentiment that is often reiterated by the president to justify tax cuts in which many wealthy people benefited the most.

Indeed the most significant problem with the progressive tax system involves the tax burden placed on middle-income earners. In addition such a tax system can discourage prosperity and saving.

The next section of the discussion will focus on how these problems can be remedied.

Solution to the problem of a progressive tax systems

Many seeking to reform the current tax system have presented alternatives to the progressive income tax. All of these variations are forms of a consumption tax (Weiler). A consumption tax exempts all savings from being taxed.

Advocates assert that such a tax system would lead to "increased savings and investment, which in turn increases the capital stock, makes American workers more productive, and raises the standard of living (Wieler)."

The most popular of the consumption taxes is a flat tax. If a flat tax is implemented businesses would pay tax based on their total sales revenue excluding the cost of salaries and wages paid, investment goods, and material inputs. In short the flat tax would remove wages and salaries paid from businesses and place them at the individual level (Weiler). According to an article found in Review of Social Economy asserts that Flat taxes are advocated on the belief that they will provide a strong stimulus to investment., employment, and output...supporters are convinced that the economic benefits are sufficiently large to make everyone better off, therefore there is no need to be concerned about the distributional effects of flat taxes (Fougere and Ruggeri)."

Advocates of a flat tax also assert that such a tax would reduce the likelihood of tax evasion. The article explains that under the flat tax evasion is less likely because recipients do not tax capital income so the opportunity to evade taxes is reduced dramatically in this particular area (Fougere and Ruggeri). However, under a flat tax capital income is taxed under a comprehensive income base and can be evaded, but not to the extent of the current taxation system (Fougere and Ruggeri).

Another form of the consumption tax would be a personal consumption tax. This type of tax would allow the taxation of consumption at the individual level. For instance, "All income -- wages and salaries, interest dividends, rents and so on- is included in… READ MORE

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