Reform of tax system

Huluban Tabita Management of NGO, year I

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 tax systems in the United States ha#e been mar$ed by significant changes o#er the years in response to changing circumstances and changes in the role of go#ernment. Some of these changes are traceable to specific historical e#ents, such as a war or the passage of the 1 th %mendment to the &onstitution that granted the &ongress the power to le#y a tax on personal income. 'ther changes were more gradual, responding to changes in society, in the economy, and in the roles and responsibilities that go#ernment has ta$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.

%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., ,1conomic of the public sector-, pg. 9 2. The reform in 1981 represented a fundamental shift 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 full8time wor$, remained below the po#erty le#el- .Stiglit/, pg 9"2. 9egarding 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 9eform %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 9eform %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.

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

credit for education and simplification of the tax. %lso there some ma(or reforms) the flat8rate 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 and the top tax brac$ets from 191383:13. It shows how periods of high tax rates follow periods low tax rates and the a#erage historical tax rate for the top le#el is 49;. . http)**www.re#olutioni/e8 retirement.com*tax8hi$es8not8if8but8when*2