Introduction
Tax constitutes one of the fundamental sources of government revenue. However, governments should ensure that the tax laws are formulated effectively to stimulate economic growth. This paper entails a discussion on the pros and cons of the federal tax law coupled with why the federal income tax law should be replaced. This paper evaluates the economic implications of the replacement on the US economic growth.
Analysis
Pros and cons of the federal income tax rate
The US government has considered implementing a progressive tax system to generate revenue to support economic growth through government spending in different economic sectors. Under the progressive tax system, the US citizens will pay taxes depending on their earnings (Grier par. 2). Thus, wealthy citizens will pay a higher tax rate.
The federal income tax in the US is considered too intrusive and invasive to the consumers’ personal income. Implementation of the federal tax policy would have a significant effect on the US economy. First, a high federal tax rate would lead to a significant reduction in the consumers’ purchasing power. This scenario would arise from a reduction in the consumers’ disposable income hence slowing down the rate of economic growth (Murphy and Higgins 6).
One of the benefits of implementing the federal tax rate is that it improves the effectiveness with which the US government would develop its revenue collection. For example, the imposition of different components of the federal tax, such as the value-added tax rate, would improve the government’s capacity to collect revenue. Through the implementation of the federal tax rate, the US government would broaden its economy.
Moreover, the government will be in a position to allocate the tax revenue generated equitably across different economic sectors and industries. This aspect would broaden the economy. Poterba states that a broader tax system would culminate in an effective movement of resources between different economic sectors hence increasing the size of the economy (452). Blakey asserts that firms “pay taxes on their sales but receive credits for taxes paid on their purchases” (28). Based on this aspect, the value-added tax, the US government would be in a position to reach economic activities that were not accessed under the federal income tax.
By broadening its revenue base, the government will be in a position to increase its spending on different economic sectors such as the environment. For example, the government’s capacity to invest in programs intended to minimize climate change would be increased remarkably.
The integration of the federal tax rate would improve the government’s capacity to ensure equity in the administration of the tax law. Under the federal income tax rate, the employees are subjected to the unequal tax rate. Therefore, the federal income tax is discriminative to consumers within the high-income bracket. The application of the federal income tax means that highly productive employees are punished for their effort. However, this situation is eliminated under tax reform.
In addition to the above aspect, the imposition of the federal tax rate would significantly reduce the cost incurred by the government in the process of enforcing the citizens to comply with the stipulated income tax. Conversely, an additional government cost would be created in enforcing the value-added tax.
Economists are of the view that the integration of the value-added tax would culminate in an increment of savings in the total compliance costs. Thus, the federal tax rate is very effective in promoting the level of investment. Bankman and Griffith indicate that the level of savings is correlated directly with the level of investment (52). Therefore, the federal tax rate will play a critical role in establishing a balance between the deficit and supply units.
Replacing the federal income tax rate would contribute to considerable promotion in the rate of economic growth. Blakey affirms that the federal income tax rate reduces productivity hence limiting employment creation (28). In addition to this situation, the imposition of a progressive tax system would culminate in an increment in the rate of inflation.
This assertion means that the consumer price index would increase substantially hence affecting their level of consumer spending. Under the economic circumstances characterized by a high rate of inflation, consumers mainly consider the consumption of basic products. This observation means that the performance of firms that specialize in the production of luxury products and services would be affected adversely.
The negative effect associated with reliance on the federal income tax rate is further underscored by the Phillips curve. The Phillips curve stipulates that an inverse relationship exists between the rate of inflation and a country’s level of unemployment. Therefore, tax reforms such as tax cut and elimination of federal income tax rate stimulate a country towards the attainment of full employment. The tax rate will lead to a reduction in the rate of inflation hence
Furthermore, the consumers will be certain on how the rate of inflation would change hence increasing their capacity to determine the cost. Therefore, incorporation of the federal tax rate would lead to a significant increment in consumer spending due to growth in the consumers’ purchasing power.
The imposition of the federal tax rate would shift the burden of taxation to consumers within the low-income tax bracket. Therefore, the ability of consumers within the low-income bracket to meet their consumption needs would be reduced significantly. This aspect would stifle the rate of economic growth. Poterba identifies the rate of consumption as one of the fundamental economic components that stimulate a country’s real Gross Domestic Product (453).
Conclusion
Governments can stimulate a country’s economic growth by implementing different fiscal policies. One of the notable fiscal policies relates to taxation. Governments formulate different types of taxes to stimulate their capacity to generate tax revenue. Despite most governments’ reliance on taxation in generating revenue, it is imperative for policymakers to ensure that the tax policies are formulated effectively.
The US government is committed to undertaking tax reforms by replacing the federal income tax, which is based on a progressive tax system. Under the new federal tax rate, the US government’s capacity to stimulate economic growth will be improved substantially. For example, the government will have the ability to generate tax revenue from some economic sectors that were initially not taxed will be promoted. Additionally, the elimination of the federal income tax will ensure that consumers are taxed equitably.
Furthermore, such adjustment on the tax rate will culminate improvement in the level of savings, investment, and consumption. An increase in spending will lead to improved efficiency on the ease with which investors access credit facilities due to the resulting balance between the deficit and supply units. Subsequently, the level of unemployment will be reduced remarkably due to the creation of new jobs arising from growth in the level of entrepreneurship. In summary, the proposed tax reforms will promote the country’s economic growth.
Works Cited
Bankman, Joseph, and Thomas Griffith. Federal income tax; examples and Explanations, New York: Asphen Publishers, 2008. Print.
Blakey, Gladys. The federal income tax, Clark: The Lawbook Exchange Limited, 2006. Print.
Grier, Peter. “Is the progressive US tax code fair?” The Christian Science Monitor. Web.
Murphy, Kevin, and Mark Higgins. The concepts of federal taxation with tax cut, tax preparation software, New York: South-West Publishers, 2009. Print.
Poterba, James. “Economic analysis of tax expenditures.” National Tax Journal 64.2 (2011): 451-458. Print.