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Tax reforms are changes made on the existing laws that govern how income earners remit part of their income to their government to enable the government to meet their annual expenditure. Such reforms are important because they would simplify the laws on taxation and also help in reducing the heavy cost of complying with the laws by the taxpayers. It would enhance economic growth by creating more investment and increasing savings by the taxpayers. This would add more strength to competitiveness in the marketplace worldwide. However, tax laws should be reformed in a way that is neutral to revenue so as not to reduce the amount of tax raised by the current system. (Brautigam, 2008)
Tax Laws Should Be Reformed To Encourage Saving
According to the current system of taxation, taxpayers are expected to cooperate on a voluntary and honest basis in reporting their total income together with deductions. Because of the lack of honesty by taxpayers, there is always a shortfall of about 300 billion dollars compared with the amount of tax owed to the federal government. Taxpayers avoid paying the full amount by deflating income while at the same time inflating deductions and sometimes not filling the tax information details in the tax return forms.
The current system was put in place a long time ago when the global economy was dominated by the United States but today this has greatly changed. For example in the 1960s 40% of global domestic product was represented by the United States while today it is rated at 30%. Investment across the border is also rated at 50% attributed to multinationals while today it is less than 22%. The economy in the United States is today more opening internationally compared with about four decades ago.
The current system of taxation overburdens the taxpayers in complying with the laws because about 60% of them have to pay a professional who prepares tax returns on their behalf. For example, individuals pay a total of 85 billion dollars to professionals who compile receipts for income tax of 125 billion. A total of 40 billion dollars are also paid to professionals to compile receipts worth a similar amount for businesses. This implies that the taxpayer has to pay more than half the tax due on top if he has to comply with the current laws of taxation. (Kwall, 2006)
(Murphy, 2005) argues that, the current tax laws allow preferential treatment for some industries, individuals, and groups. There are also special deductions, exemptions, tax rates, credits all of which target tax benefits. This reduces uniformity and makes the whole process more complex and even creating perceptions that there is unfairness to some of the taxpayers. In this environment with special treatment, decision-making in business is based largely on consequences of tax instead of economic consequences and therefore alters normal decision making. Evaluation of Tax expenditures also known as targeted tax benefits is difficult to make.
For example, tax incentives to encourage the construction of houses for low-income earners do not actually increase low-income housing. The program should be an outlay of the government instead of taking the form of an incentive. In this form, it is very difficult to find out if the expectation of the congress is met by the program.
In general, the current system of tax is very complex and it creates an ordeal when it comes to compiling records because of the lengthy instructions and schedules that are complicated. The schedules involve a lot of forms and worksheets which require a lot of illogical computations. Compliance with the current laws is too costly as one has to hire a professional to do the work. The current system of income-based tax where taxation is made on both saving and income should be replaced with a system based on consumption where only consumption is taxed. (Freeland, 2007)
Brautigam D. (2008): Taxation and state building in developing countries: Cambridge University Press.
Freeland J. (2007): federal income taxation of estates: CCH INC.
Kwall J. (2006): the federal income taxation of corporations: West group.
Murphy K. (2005): concepts in federal taxation: cengage learning.