The current U.S. tax system remains unfavorable to a significant number of Americans who eagerly anticipate the implementation of Trump’s proposed tax plans. The current U.S. tax system requires refurbishment in order to facilitate its effectiveness and fairness, which would be positive for commerce in the U.S. Moreover, the enactment of Trump’s proposed corporate and individual tax cut rates would facilitate significant economic growth that would suppress the nation’s current deficit and address significant levels of debt. Furthermore, the proposed alternative tax system would have a number of considerable benefits to the American expatriates abroad through the reduction of the overall tax bill. However, the implementation of a comprehensive tax reform proposal to achieve a simpler, fair, and more efficient tax system is a significant challenge. The current essay will discuss the tax system that has been proposed to replace the current federal tax system.
According to American Institute of Certified Public Accountants, Inc. (2009), the current federal tax system remains unfavorable in the perspective of many Americans who support the complete overhaul of the tax system. A complex tax law, significant tax gap, low domestic savings, obsolete tax provisions, and biased tax system’s impact on business planning and characterize the current tax system. Furthermore, the tax system is not adequately effective to address the current huge federal debt deficits, increasing the demand for healthcare reform, and the impending retirements of the baby boom generation, among others. There is a persistent requirement for significant tax reform from both the American taxpayers and from the political officials. The major underlying issues in the current tax system, which have evoked the reform debates, include the complexity of the federal income tax the wide legal tax gap that is evident for taxes owed, and the amount reported and paid voluntarily on a timely basis.
The complexity of the Internal Revenue Code (IRC) has reached the crescendo, as the major challenge that is faced by taxpayers in the U.S. The complexity cited in the current tax system imposes heavy compliance burdens for individual and business taxpayers. Similarly, the complexity may devastate the efficiency of tax administration due to costly administrative services. Complexity also deters the ability of the IRC to recognize noncompliance due to the excessive workloads. Furthermore, it encourages tax avoidance by providing opportunities for sophisticated taxpayers to evade taxation, while criminals commit the tax fraud (American Institute of Certified Public Accountants, Inc. 2009, p.9). Unfair tax laws tend to compromise the IRC ability to provide competent taxpayer services, leading to public distrust in the system. The proposed simplification of the tax code would certainly facilitate the alleviation of taxpayer burden, as well as improve public confidence in the integrity of the federal tax system. On the positive side, increasing taxpayer awareness regarding the connection between taxes paid and benefits received would facilitate the consistent higher rates of tax compliance and improved civic morale.
Over the past recent years, several approaches to tax reform have evolved. First, is the overhaul of the current U.S. system that was proposed by the U.S. President Donald Trump. The approach would involve considerable adjustments to benefit all Americans. The improvement of the current tax system would include extensive simplification efforts, broadening the tax base, increasing fairness, and cutting on revenues lost due to tax evasion (Ganos, 2012). The proposed tax plans would facilitate the nation’s economic growth by offering significant exemption amounts. The proposals would promote increased economic efficiency, increased incentives for capital accumulation, accelerated depreciation, simplification, increased tax-preferred saving alternatives, and elimination of double taxation for corporate profits. The current Internal Revenue Code is overly complex and needs the overhaul to ensure fairness and transparency and to promote the economic growth. The proposal that was made by the President-elect Donald Trump to reduce the federal tax code would facilitate the cutting of millions of Americans out of any income tax liability. Reducing the top-tier tax rate from the current 39.5% to 25%, as well as the corporate tax cut rate to 15% will simplify the federal tax code, as well as significantly improve the American economy.
Secondly, the alternative to the unusual “extra-territorial” tax system would entail the replacement of the entire current system with a new system of consumption tax. This new approach to the taxation would enable Americans to take charge of their annual tax payment through managing their purchases (American Institute of Certified Public Accountants, Inc., 2009, p.15). The consumption tax would significantly benefit both low-income and middle-income earners through the tax exemption for most households. The individuals could invest the significant exemption amounts in their retirement plans, among others. The consumption tax approach would also benefit the nation through increased overall tax base, work productivity, and reduction of national debt.
Thirdly, another proposed alternative to the current system would entail restructuring the current income tax, which would be characteristic of a hybrid income-consumption tax, rather than a pure income tax. Therefore, integrating more aspects of consumption taxation into the income tax or adding a separate consumption tax would protect the existing investments from retroactive taxation, thereby increasing economic efficiency (Sherlock & Keightley, 2016, p.10). This approach would involve reformations in the existing relationships among the independent legislatures and between the federal government and major economic sectors. The formulation of special rules would address the transition issues to mitigate the substantial disruptions and unintended outcomes. The existing economic situations and future revenue expectations have a significant influence on the ongoing tax reform alternatives. There is the likelihood of several alternatives, materializing as more feasible and appealing, while the rest of the options present undesirable levels of risk of further market disruption. The trade-offs will be a critical aspect in evaluating tax policy alternatives. Consequently, a transition to a consumption tax may turn out as a loophole for some taxpayers and a lifeline for others. The concept of consumption tax may increase economic efficiency. On the contrary, taxing consumption, as opposed to income, may impose an unfavorable tax burden on the part of lower-income earners, in comparison with higher-income earners, thus contributing to a decline in the progressivity of the tax system.
The complexity of the tax code makes it difficult for the IRC to fully realize high-quality administrative services. Taxpayers services offered by the IRC involve answering taxpayer telephone calls and responding to taxpayer correspondence. The complex tax system presents impediments, which strain the IRC ability to administer the tax code (Sherlock & Keightley, 2016, p.8). The exponential increase in the number of calls received by the IRC each year makes it difficult for IRC to answer all of them, despite the implementation of automation to handle taxpayer ever-increasing calls. Likewise, the decline in the IRC ability to process taxpayer correspondence on a timely basis attributes to the increasing number of taxpayer responses to IRC regulation notices. The simpler code would help to eliminate the strain on the IRC due to increased backlog of taxpayer correspondence in the tax adjustments and in telephone calls, therefore, introducing various benefits for the taxpayers and the government.
The current system rips off a larger percentage of an individual’s income. The critical fundamental tax reform is necessary to help the public understand how the taxes they pay are spent and what benefits this has. The realization of a comprehensive tax reform requires trade-offs. Some provisions in the tax code benefit broader taxpayer segments in comparison to others. The federal government should consider enacting the provisions that would introduce significant benefits to the majority of constituents. Some of the common benefits include the deduction for medical expenses, child and dependent care credits, tax-favored employee benefits, and education tax incentives.