HPAVC/HPAVC CD-ROM.iso/HOMEWORK.ZIP/ECONOINF.TXT

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 An income tax is a tax based on the income of an individual or a business.  In the United
 States, personal income tax accounts for approximately 45% of the total tax revenue.i
 Income tax was first used as a temporary method of helping finance the Civil War.  Soon
 after the Civil War, the income tax was repealed.  Then, in 1913 the 16th amendment was
 ratified to allow income taxation.     At its simplest form there are three main types of
 income tax, a progressive tax, a regressive tax, and a proportional tax.  A progressive tax
 means that taxpayers will be taxed at a higher percentage rate the higher their incomes
 are.  A regressive tax collects a smaller percentage of income the higher the income.
 Lastly, a proportional tax would collect at the same percentage rate for all incomes or a
 flat tax. At present, the American income tax system is, quite frankly, a mess.  In my
 opinion, the current tax system is far too complex purely because of present "fair" actions
 to fix past abuses.  Confusion, fairness and a lack of simplicity have been the major
 problems associated with the individual. Ex-President Jimmy Carter once called the U.S. tax
 code a disgrace to the human race.ii  With tax reform on the lips of many on Capital Hill,
 many different tax reform proposals have floated to the surface.  Of the many proposals a
 few standout.  A Consumption Tax is one of the more favored tax reforms being discussed by
 politicians and economists alike.  It entails paying tax only on that part of your income
 which was spent during the fiscal year.  This tax, as discussed in class, is a regressive
 tax due to the fact that the poor spend 95-100% of their income whereas the rich spend a
 much smaller percentage of their income. A Retail Sales Tax is another of the new tax
 proposals being discussed.  It consists of a national sales tax of 6-8% coupled with no
 exemptions or any deductions.  This tax is also regressive due to the same fact that the
 poor spend the majority of their income while the rich do not. Perhaps the most talked
 about tax reform proposal is the flat tax proposal.  The proposed flat tax is being
 spearheaded by Richard Armey the Republican Representative from Texas.  A flat tax consists
 of many different aspects that would promise a new way Americans would view taxes, good or
 bad. The flat tax would consist of the following provisions:
Americans would be taxed at the flat tax rate of 20% for the first three years that the tax
would be enacted.  After the initial three years, the tax would fall to 17%.  The tax is
paid on gross revenue. Taxes would no longer be paid on dividends, capital gains, or
interest. No deductions from gross income.  Deductions for mortgage interest, retirement
accounts, charitable contributions, moving expenses, and child care would be eliminated.
Each adult taxpayer would get a personal exemption of $13,100 and $5,300 for each child
dependent.iii
 There have been several different variations of the same basic idea of a flat tax.  In the
 early 1990's, then-presidential candidate Jerry Brown had a slightly different version that
 version contained a flat tax that was lower and more deductions were also included.iv
 Currently a Pennsylvania senator, Arlen Spector, is proposing a flat tax reform that
 resembles that of House of Majority Leader Dick Armey.v  Although there are many advocates
 of the flat tax there are still hard line critics.  They believe that the tax is a
 regressive one putting the rich and the middle class in the same tax bracket while leaving
 the poor behind.  Critics also believe that the flat tax reform being proposed would be to
 "simplistic". Simplicity is, on the other hand, one of the reasons that advocates of the
 flat tax believe it would be so warmly accepted by the American public.  Found below is a
 possible tax return that could be the size of a post card.







Possible Tax Return

1.    Gross Income                     __________
2.    Personal and Dependency Exemptions    -__________
3.    Taxable Income                                             __________
4.    Taxes Paid (multiply line 3 by 20%/17%)       __________


 Simplicity is only an ends to the means that Armey and others feel will benefit the
 American tax payers and the American government.  Mainly, a flat tax would cut down on the
 cost of operating the Internal Revenue System (IRS) which has been estimated as tens of
 billions of dollars.  The IRS still can't account for approximately $120 billion in lost
 tax revenue due to underreporting of income and overstating of deductions or exemptions.vi
 With a flat tax there is little leeway with deductions and exemptions so the potential for
 lost revenue is lower.  In addition, because of the simplicity of the filing process,
 people who may not have filed in the past may be inspired to fill out the easier form.  A
 flat tax, according to Christopher Farrel columnist for Business Week, would "eliminate the
 need for so many tax lawyers and accountants."  This new reform would also contain the
 potential for downsizing the IRS.  It would also eliminate current spending on record
 keeping IRS audits, and tax preparation fees paid by tax payers.vii Many would argue that
 this is a much lower tax rate for the rich in this country.  True indeed, but the idea
 behind this according to Armey is that with the freed up income, the rich will invest back
 into out economy.  There is no doubt according to Michael ruby, Co-Editor of U.S. New &
 World Report, that taxes would fall for almost all households in the US.  He is quick to
 point out that those households earning more that $200,000 would pay significantly less
 than before the flat tax.  Ruby believes that    The fairness issue can be addressed by
 creating a second tax bracket as mentioned above.  By using a two-bracket approach, the
 fairness issue can be addressed without sacrificing the simplicity to any great extent. To
 build on this, under Armey's flat tax proposal, a family of four can make over $29,000 and
 still pay no taxes whereas now they may pay over $6,000 in taxes.ix Another advantage of
 the flat tax proposal is that people will have more money to spend on health care.  The
 government may be able to lower spending with regards to Medicare and other programs such
 as Welfare and some child care programs. There is also strong evidence suggesting that
 reduced tax rates also have the advantages of increasing the incentive to earn income,
 while lowing the incentive for taxpayers to find loopholes. Overall, the Flat Tax Proposal
 is a very intriguing proposal.  There seem to be a lot of benefits that are coupled to it,
 but with any proposal, at this point there are still some loopholes associated with it.  Of
 the current tax proposals, no one proposal has spurred as much discussion except perhaps a
 national sales tax. Companies such as H&R Block, accountants, and tax lawyers will be sure
 to find on capital hill lobbying against this new easy tax system.  The outcome will be
 interesting to see.








i Holcombe, Randall G. The New Grolier Multimedia Encyclopedia, Grolier Electronic
Publishing Inc. 1993      See. Income Tax

ii Michael Ruby. Three Cheers for a Flat Tax, U.S. News & World Report.  February 20, 1995
pp. 76

iii GOP Tax Proposals, INTERNET. Site-http://edf.www.media.mit.edu/taxintro.html SEE Dick
Armey's Flat Tax Proposal

iv Jeff A. Schnepper and Charles J. Santilli.  Flat Tax Follies, USA Today.  July 1992.  pp.
27

v Malcolm S. Forbes Jr. Fact and Comment: Specter of the Flat Tax, Forbes.  March 27, 1995.
pp. 27

vi Christohper Farrell.  A Jumble Only a Flat Tax Can Untangle, Business Week.  January 9,
1995.  pp. 39

vii Ibid. pp 39.

viii Ruby, pp. 76

ix Department of the Treasury, Internal Revenue Service.  1040NR Forms and Instructions.
1995.  pp.22