Paper Example. The Fairness of the Federal Income Taxes in America

The federal tax brackets in America are set by the Internal Revenue Service (IRS) and are used to establish the tax rates for both individuals, trusts, and corporations. The tax brackets are usually adjusted over time due to different political influences on the overall economy's taxation effects. The federal income tax can be structured into either a progressive structure or a flat structure. The tax system where the rate increases with an increase in the base amount is a progressive tax. On the other hand, in a flat tax system, the taxation rate is standard and does not increase with the base amount. With the increased debate in America about the fairness of the two structures, this essay aims to provide recommendations for improving the fairness of the tax brackets. To do this, the essay comments on the fairness of progressive federal income tax, argues on the maximum federal income tax that individuals should pay and analyses the potential benefits of the flat tax structure.

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Opinion on the Fairness of the Progressive Tax Structure in America

In my opinion, I consider the U.S progressive income tax structure as a fair system for most of taxpayers in America than the flat tax system. As Hines (2020) provides, a progressive tax structure means that high incomes above certain rates are taxed at high rates. It means that an individual pays an effective tax rate based on their average marginal tax rate after all the deductions. As such, the progressive structure ensures that individuals earning more get to pay more taxes that individuals that earn less. Importantly, the structure is fairer than the counterpart flat tax since it prevents everybody from paying the same tax despite their earnings. In support of my opinion, DeMichele (2020) indicates that half of the families in the U.S pay minimal to almost no tax because of the progressive bracket under the current tax structure. She explains that for this population, it is not about the revenue tax but rather the employee taxes, excise taxes, business taxes, and the assets taxes that make up their tax responsibility. As Hines (2020) points out, the progressive tax system helps individuals earning low incomes since credits and inferences lower their marginal tax amounts.

Comparably, if a flat tax rate was applied in place of the current federal progressive tax structure considering the above, most taxpayers would be disadvantaged. Specifically, as DeMichele, (2020) provides, since a flat tax system applies to every person at a flat rate, the tax burden would be shifted from the individuals that earn higher incomes to the ones that earn lower in the economy. On this account, the federal progressive tax structure is preferable because any tax that moves the burden on individuals that are more burdened with more taxes and with limited ability to pay is generally an unfair system (Michel, 2017). Importantly, the progressive tax is fairer because it accounts for any differences in income and wealth. Furthermore, this tax system tax is fairer for most Americans than a flat tax structure because it can only work if taxpayers cut how they spend, increase other taxes or, as mentioned before, raise the tax on the lower classes.

Another fair aspect of the progressive tax system is that it gives satisfaction to the taxpayers in the country, due to the proper distribution of the taxes. Since this system requires people to pay taxes based on their class, it, therefore, reduce the income inequality between the high class and the lower class. This creates fairness in the economy, both on the aspect of tax remittance and class.

The Maximum Federal Income Tax Rate that Americans Should have to Pay

Judging the current US tax regime requires that economists agree on the three most effective criteria, including fairness, simplicity, and efficiency. In this regard, Michel (2017) notes that tax reform does not just relate to what the tax rate should be, but rather a question of the fair amount that Americans should be taxed. Therefore, there should be a defined maximum tax rate that taxpayers should be charged, despite the existing argument about tax fairness. In my opinion, the maximum tax levied to Americans should differ, in line with the progressive tax structure. In this regard, individuals earning up to $20,000 should pay a maximum of 1%, while individuals earning up to $500,000 should pay 7%. Ideally, as identified before, a progressive income tax would be fair to avoid transferring of the wealthy’s burden to the lower- and middle-income earners (Michel, 2017). With the suggested maximum tax for both the low- and high-income earners, individuals who can pay the most taxes should pay the most, without affecting the lower class.

The suggested maximum tax for both classes highly depends on what each individual makes or buys. However, if the country decides to apply the flat tax structure to tax the country's individuals, I think that the maximum amount that each individual should be levied should be around 10%. With this amount as the maximum tax, individuals will have some amount to invest in starting their own business to improve their lives. On the same aspect, I also think that more should be left on individuals' pockets to be inclined to give back more to the economy. Furthermore, with the maximum amount of 10% on a flat tax structure, everyone will share the burden significantly, without having to press on anybody.

Potential Benefits of a Flat Tax Structure to both the Taxpayers and the U.S Treasury

A flat tax system entails taxing all the taxpayers the same rate, regardless of their income. Supporters of this structure argue that the system is fair, while the low-income earners do not find it a pleasant situation. If applied in an economy, the flat tax system benefits the taxpayers by providing them with a cost-benefit (Spreen. 2018). The financial cost of obeying the regulations provided by the IRS is high because individuals may require lawyers, accountants, among other resources. A flat system can eliminate these, thereby benefiting the taxpayers. Another advantage to the taxpayers, entails eliminating other taxes since it eradicates a part of the tax requirements that might be unfair against the capital development. On the same note, the flat system also removes the death tax, the double tax of dividends as well as savings capital gains. This reduces the burden, especially from low-income earners.

Moreover, the flat system could create a trickle-down effect for all the classes in the economy. According to Michel (2017), greater wealth from a reduced tax rate enables more ability to invest among the taxpayers. This is because, through the promotion of motivations to earn through bonuses, individuals with resources are more stimulated to establish new prospects that will enhance their income source. As a result, more opportunities are also created for more households to earn an income that would increase the tax remittance to the economy (Adhikari & Alm, 2016). Therefore, everybody would be better off, as they would get the chance to join the workforce and contribute to the economy.

A flat tax system is also beneficial to the U.S treasury, a fact that can therefore be preferable to the progressive system. For instance, the flat tax structure is fairly simple for the treasury. Basically, upon implementing the system by replacing just one rate for everyone, the government would have an easy time computing the necessary figures (Spreen. 2018). This is because the system only considers one income, making it easier to understand and report. Additionally, the flat system employs territorial taxation, which helps the treasury generate tax income within the national borders. The system also encourages more compliance with taxpayers' tax laws (Adhikari & Alm, 2016). As a result, it encourages more funds to be returned to the treasury due to the lower tax. This encourages taxpayers to be better compliers, which reflects more revenues sourced by the treasury.

Conclusion

To conclude, my opinion supports the fact that the current federal progressive tax structure applied in America is fair. This is because it eliminates the unnecessary burdens among the taxpayers by making sure that they remit taxes that suit their income, where individuals that earn more are taxed highly while the ones who earn lower are taxed low rates. Therefore, the low- and middle-income earners are in a better position to increase their investments since the only pay the taxes in line with their earnings and purchases. Additionally, as argued in this essay, the maximum tax that taxpayers in America should pay under the current progressive tax structure should be 1% for earners above $20,000 and 7% for earners above $500,000. This would only be fair, considering the lower- and middle-income Americans. On the other hand, if the country decides to adopt the flat tax system, the maximum tax rate should be capped at 10% to ensure that each class is treated fairly. Furthermore, the essay has also established that a flat tax system can be beneficial to both the tax payers and the U.S treasury. Among other benefits, the system increases more investment opportunities to the taxpayers and, as a result, enables the treasury to collect more taxes.

Reference

Adhikari, B., & Alm, J. (2016). Evaluating the economic effects of flat tax reforms using synthetic control methods. Southern Economic Journal, 83(2), 437-463.

DeMichele, T. (2020). A Progressive Tax is More Fair Than a Flat Tax - Fact or Myth?. Fact / Myth. Retrieved 3 September 2020, from http://factmyth.com/factoids/a-progressive-tax-is-more-fair-than-a-flat-tax/.

Hines Jr, J. R. (2020). Income Inequality, Progressive Taxation, and Tax Expenditures. The Political Economy of Inequality: US and Global Dimensions, Sisay Asefa and Wei-Chiao Huang, eds. Kalamazoo, MI: WE Upjohn Institute for Employment Research, 145-166.

Michel, A. N. (2017). The US Tax System Unfairly Burdens US Business. Heritage Foundation, Backgrounder (3217).

Spreen, T. L. (2018). The effect of flat tax rates on taxable income: Evidence from the Illinois rate increase. National Tax Journal, 71(2), 231-262.