The US Tax Policy, Essay Example

Tax policy does the job of developing and implementing policies and programs. It reviews revenues and the rulings in order to administer a particular internal revenue code. It also negotiates various tax treaties, provides legal and economic legal policy analysis for international and domestic tax policy decisions. Finally, the tax policy provides the US citizens with the information regarding the president’s budget, cash, management decisions as well as fiscal policy decisions. The United States office of tax policy also does the role of assisting the secretary and is also responsible for the development and implementation of tax programs and policies thus providing the official and recommendable estimates of various government receipts regarding the treasury cash, the president’s budget as well as the fiscal policy decision. It also negotiates various tax treaties for the US and represents the US in works and meetings of various multilateral organizations that deals with tax policy matters. Finally, it also does the provision of legal and economic policy analysis for internal and domestic decisions regarding tax policies. One crucial question that many Americans have been asking is ‘who really pays tax according to the US federal government tax policy?’ Stephen Moore, Wall Street senior economic writer gives a brief discussion on the process and how Americans pay taxes (Tax Foundation, 2009). He goes further enumerating various ills and disadvantages of the policy system. The aggregate policy orientation reveals how taxation takes place in states and other local regions as stipulated by the American law regarding revenue collection. This paper discusses the two policy types to come up with the appropriate or most preferred policy regarding the advantages and disadvantages of both sides (Andrew & Gerald, 2012).

Moore starts his article by referring to John F. Kennedy’s quote, “It is paradoxical truth that tax rates are high today and tax revenues are too low…” Tax rates in the United rates are always set to go up annually each year. The Obamacare law raises tax on all wealthiest people by 3.8 % each year. The president and other people in the congress have constantly argued that higher rates are appropriate and justified due to the growing consensus that the rich normally do not pay their fair share on taxation. The author asserts that unless something is done to ensure spread of the tax burden equitably, the US society will become very unfair and the US economy will remain unsustainable each year. Looking at the policy, it seems that the tax rate issue is inseparable from the tax fairness issue because higher taxes obviously shift the wealth of the society from the private to public sectors. However, the reality is that the tax is redistributed to many low wage earners as well as the needy Americans. In reality, most of the beneficiaries of the high tax rates are the people at the bottom or individuals whose incomes are way too low. For instance, salaries of most corporation CEOs are subjected to high taxes so that the salaries of the low income earners are increased in what the government considers boosting the income of low income earners to enable fairness. This process is appealing and good at least to many individuals leaving below the poverty line in the US. This is common especially to individuals living in the southern parts of the US such as Mississippi and its neighborhoods.

Another typical example through which the US government distributes income is through the unemployment benefits. The federal unemployment benefits are considered one of the best ways to ensure that the economy is boosted to a greater level (Andrew & Gerald, 2012). The unemployment benefits work in the way that those who do not have jobs are given some money for them to manage the basic needs. This is obviously good to anyone below the poverty level. The US Federal tax policy ensures annual increment in the amount of taxes paid by individuals who toil daily to produce high outcome from their efforts. Unemployment benefits do the provision of a lifeline to all people who are jobless whenever they need it most. Through this, the prevention of the most common rampant breadlines as well as tent cities as witnessed during the historical great depression in the US in 1929. Other economists argue that unemployment does help economic gr4owth since those who are unemployed usually use the money they are given to buy the basic needs including food, clothing and shelter. Statisticians reveal that every dollar that is spent in unemployment benefit consequently stimulates approximately $1.64 in the economic demand due to the ripple effect. For instance, a dollar that is spent at the grocery store usually pays for the food and salary to the clerk, the truckers, as well as the farmers growing the food. The ripples effect, as analyzed by the American tax policy, keeps the demand very strong thus creating the necessary additional benefits. In essence, every one billion dollar spent in the unemployment benefits usually creates about 19000 jobs (Ernst & Young, 2008).

Without all extended benefits, demand would obviously drop and lying off thousands of workers by the retailers would occur. In addition, the unemployment benefits usually works fast since the government only has to write checks which immediately goes to the economy. In other words, the policy of tax in the US is meant to increase each year in order to create more jobs to Americans (Mikesell, 2013). Critically analyzing the process, it is inarguably true that the whole process may be looked as fairness to all citizens when it is not the case. Research shows that during September to December 2008, unemployment programs paid over 34.9 billion benefits to over 8 million workers who were unemployed. This led to the boosting of economic growth by around 57 billion dollars. From statistics, the unemployment benefits cost taxpayers approximately 10 billion US dollars. In addition, it also generates about 16.4 US dollars. Researchers show that unemployment benefits are very much cost effective compared to the normal tax cuts.

The United States Social security tax is always more regressive when compared to the income tax. However, the payroll tax usually makes less difference than anybody may think. Payroll taxes are charged on the first dollar of an individual’s income, and this tax is capped at around the income of $110,000 during the 2012 fiscal year (Andrew & Gerald, 2012). According to the current tax policy under the Obama leadership, the tax on dividends, which was cut by around 39.6 % to 15% during the Bush administration has been maintained and many Americans pay less dividend taxes. The long term capital gains tax is currently 15% from the previous 20%. In addition, the tax on business investments have been considerably lowered to facilitate business activities in the United States (Andrew & Gerald, 2012). Obviously, with this system, the wealthier Americans saved more in taxes compared to the poor Americans due to the fact that they had more money in their accounts. It is also important to note that ordinary Americans pay more taxes compared to their fair share of the taxes. Nonpartisan foundation found that during the 2009 fiscal year, almost 42% of the Americans who did filed tax returns ended up paying no tax in the end. In 2008, the percentage was about 36%.

There are several reasons why federal government’s policies are more redistributive compared to the common fiscal policies of the local and state governments. The federal government ends up spending more and taxing more compared to the state and local government. During the 2012, the federal government dis spend two times as much as local and state governments. In essence, the federal government tax policies are more convenient and distributive than the state and local governments. Secondly, the spending that is done by the local and state governments is analytically and normally less focused on the transfer programs. Local and state governments usually tend to be highly engaged a mainly in the provision of government services to Americans such as public safety and education (Tax Foundation, 2009). Finally, the local and state government programs that perform the role of transferring programs are financed through the federal government aid. The federal tax system is considered more progressive, especially when talking of income tax. In short, the federal tax policy is more convenient and preferable compared to the state and local government systems (Ernst & Young, 2008). Besides, some states do not have personal income tax whereas in other states, people are being overtaxed. For instance, in South Dakota, there is no personal income tax being paid by citizens whereas in Rhode Island, the personal income tax progressive and is calculated using the percentage of federal liability. In South Carolina, the taxation of food increases, to a greater extent, sales tax in a regressive manner.

Federalism is considered one of the most crucial features of various systems of government. Fiscal federalism concerns itself with the comprehension of instruments and functions that are best centralized and which are usually placed within the decentralized government levels. In other words, fiscal federalism is defined as the study of how the competencies within the expenditure sides aid the revenue are normally allocated across the various levels of the national administration. A crucial part of it is whereby the grants, sometimes called the transfer payment system whereby the government share the revenues with other lower governmental levels. Notably, the US federal government utilizes the power to in enforcing the national regulations and standards. Intergovernmental relations involve itself with the coordination of the local, state, and federal governments in order to achieve a particular target. A typical example is whereby the local police, the FBI and the state coordinate with a single target of boosting the security of the United State. The intergovernmental relations provide several types of services to the state, tribal as well as the local government. The relations ensure that all activities are conducted in a manner such that the local, the state and the entire country benefits based on the stipulated guidelines and procedures. Intergovernmental relations ensures that the people living in the most interior parts of the United States get what their best share of the public services due to the appropriate coordination by the various individuals working in various ranks. For instance, distribution of certain drugs takes place right from the high ranks of the governments downwards to the lowest ranked individuals in the distribution channel. The federal grants and mandates have significant effects on the local and state government fiscal policies. They give the federal government opportunity and powers to enforce the necessary national standards and rules (Ernst & Young, 2008). Notably, thee federalism concept is not always associated with decentralization. Decentralization aims at the distribution of powers to the lower ranks of government. It does not only concern itself with the resources but management of the resources at lower levels. With this, it is inarguably true that intergovernmental relations still stands as the best type of relation that should be given an upper hand. It enables distribution of power and resources to lower ranks of the government hence appropriate for steering the national development. It can easily eradicate poverty compared to other methods of relations.

Proportionality by Stature

Form the calculations above; the statutory sales tax rate is fixed at 5%. This represents proportional sales taxation method where the tax imposed is fixed irrespective of the annual earnings of individuals. Proportional denotes the distribution effect or the total expenditure of individuals. It refers to the way the sales tax remains constant (does not hike from “high” to “low” or from “low” to “high” as the consumption or income changes) where the marginal sales tax rate equates to the mean tax rate. From the results above, it is evident that the total taxes that the sales taxes are proportional by stature since family A pays $750 as tax from the purchase of goods worth $15,000 while family B pays $1,000 for goods worth $20,000. The means of taxation can be applied overall tax systems or individual tax systems; lifetime, multi-year, or a year. This type of taxation is preferred since it maintains equal tax incidences disregarding the ability-to-pay since it does not shift disproportionately as the amount of annual earnings shift. Flat (proportional) taxes normally exempt from levying taxes in households that income is below a statutorily amount which is determined by the size and type of household. Conversely, this taxation policy is disadvantageous since it oppresses the poor people. Low-income earners are taxed at the same rate as High-income earners, and, as a result widening social gaps.

Regressive taxes are imposed in a way where the tax rate drops as the income of the individual increases. “Regression” implies a distribution effect on expenditure or income as the cumulative taxation rate transforms from high to low as the mean tax rate rises above the marginal tax rate. From calculations above, family A that earns an annual income of $35,000 pay sales tax at a rate of 2.14% while family B that earns $85,000 pays sales tax at a rate of 1.18%. It is evident that income has antagonistic effect on the sales tax. In terms of individual wealth and income, regressive tax results in greater burden on the economically-challenged than on the rich. This is an inverse relationship existing between taxpayer’s ability and tax rates. The implication of this tax is reduction of tax incidence in a population that has higher ability-to-pay as the incidence shifts disproportionately to individuals with lower ability-to-pay.

The regressive effect of a taxation system factors the prosperity of taxpayers as they engage in taxed activities that are relative to their resources. Similarly, if the expenditure under taxation is performed by the poor rather than the rich, the taxation system can be regarded as regressive. Its effect is measured by determining the elasticity of income of the product being taxed and the income substitution effect of the individual (Mikesell, 2013). As illustrated in the calculations above, family A will feel the taxation burden more that B although both are taxed under the same statutory tax rates. For instance, expenses for clothing, shelter, and food tend to contribute a higher percentage on economically-challenged families in their overall consumer budget. Although tax may be uniform, consumers earning low incomes experience its full effect since they cannot afford it.

Implications of Tax Policy

Generally, increase in cumulative taxes has adverse effect on the poor people in the society. In the United States, increase in consumer prices leads to reduced consumption at domestic levels. Conversely, the fall in consumption is not proportional in the entire society because of the regressive effect of taxation system. It also changes with divergent elasticity of demand for various services and commodities (Mikesell, 2013). From the results above, the poor people are not favored by the tax regime which results in lower production levels in businesses and industries. The manufactures, whose income is higher than that of consumers, mark profit reduction as the demand for their products decrease. This taxation system affects the general economy of a country of a country since it widens the economic gap between the rich and poor people. The poor people are over-taxed while the rich people are under-taxed. To counter this effect, new taxation policies such as progressive taxes should be put to place. Under progressive taxes, the taxation rates are proportional to the annual income of an individual.

References

Andrew, C. & Gerald, P. (2012), Who Pays Taxes and Who Receives Government Spending? An Analysis of Federal, State and Local Tax and Spending Distributions, 1991-2004, Tax Foundation Working Paper No. 1, http://taxfoundation.org/sites/taxfoundation.org/files/docs/wp1.pdf.

Ernst, P. & Young LLP (2008). Total State and Local Business Taxes, http://www.cost.org/WorkArea/DownloadAsset.aspx?id=84767.

Tax Foundation (2009). Allocating Tax Burdens and Government Benefits by Income Class, 1972-73 and 1977, Tax Foundation Government Finance Brief No. 31(Feb. 1, 1981).

Mikesell, J. (2013). Fiscal Administration. 9^th Ed. New York, NY: Cengage Learning