The state of current progressive federal income tax structure

According to a recent research, most Americans do not like the federal tax system.  However it is not as many people may envision because they think they pay excessively. People think individuals other than themselves do not pay their just share. Six out of ten citizens say they are troubled by the idea that some rich individuals and a few companies don’t pay what’s coming to them. 27% of citizens refer to their personal tax bills as something that disturbs them a great deal, despite the fact that 40% think they pay more than what is considered fair considering the benefits they get (Viard & Carroll, 2012).

The fact is that big corporations financing a littler share of general government operations than they used to before. In 2014, the federal government gathered 320.7 billion dollars (10.6% of its aggregate income) from corporate income tax. Back in the 50s, corporate income tax created between a third and a quarter of federal income. Since the 70s, the fragment of federal income that has developed the most is the payroll tax. For the vast majority, payroll taxes take a much greater portion of their paycheck than federal income tax. This makes it unfair to most Americans facing high cost of living. This happens because 6.2% Social Security tax applies only to earnings up to 118,500 dollars. For example, a worker getting 40,000 dollars per month will pay 2,480 dollars in Social Security tax. However an employee getting 400,000 dollars per month pays 7,347 for a viable rate of only 1.8% (Viard & Carroll, 2012).

By difference, the 1.45% Medicare tax does not have an upper point and highly ranked employees pay an additional 0.9%. This investigation affirms that, after every federal tax is considered the U.S. tax system is viewed as progressive. The upper 0.1% families pay an equivalent of close to 40% and the lower families 20% have negative tax rates. People can and will diverge on whether any of this constitutes a fair tax scheme. Depending upon their personal lives and politics, some people would favor a more inclined progressive framework and others for a flat system (Viard & Carroll, 2012).

The maximum federal income tax rate an individual should pay

An income tax rate is essentially the amount of income the state gets from taxes. In America, a solitary income tax rate does not typically apply to the total earnings. Rather, a person is guaranteed different rates in different segments of the taxable income. Taxable income is the remainder after claiming all exclusions for which one is qualified. The quantity of distinctive tax rates and the income levels at which they apply shift broadly. A tax rate is the percentage at which taxes are settled on one dollar of earnings. A tax bracket is a range of amounts of income that are taxed at a specific percentage. Every filling status has a precise tax brackets (United States Bureau of Internal Revenue, 1994).

 However the tax charges are equal for all filling statuses. A large portion of people pay income taxes over a number of tax brackets, thus making the system. When asked what tax bracket one falls into, it is the rate of marginal tax that is in question. This is the tax bracket the last dollar of a person’s income falls into, and hence the highest tax a person pays. In the event that the marginal tax rate is 25%, it does not mean that the entire income is taxed at a rate of 25%. Income is usually taxed at diverse rates. For example, if a person’s annual income is 40,000 dollars and the filling status is single, the first 9,075 dollars are taxed at a 10% rate. Each dollar from 9,076-36,900 dollars is taxed at a rate of 15% (United States Bureau of Internal Revenue, 1994).

In addition, every dollar from 36,900-40,000 dollars is taxed at a rate of 25%. If an individual sums up the taxes that he pays on every part of his income, and divides the figure by the aggregate pay (multiply by 100), the resultant figure represents the effective rate of tax. This is the actual tax rate a person should pay on his taxes, regardless of the marginal rate of tax. Many states force income taxes in the same way the federal government does. However, some states apply a single income rate of tax to every person, regardless of the total taxable income they get. This is referred to as a flat tax (United States Bureau of Internal Revenue, 1994).

The potential benefits that a flat tax structure might have on both taxpayers and the United States Treasury

A flat tax is a tax scheme that alludes to a tax on family unit income, taxes at an even rate, regardless of the level of income. America executes a progressive tax scheme, implying that high-income personnel pay taxes at a higher rate than low-income personnel. Although many people suggest implementation of flat tax in America, the system stays progressive. Simplicity is viewed as a huge advantage of the flat tax scheme. One tax rate allows for simple calculations by the Internal Revenue Service and direct installments from taxpayers. Since the flat tax applies only income, it is less demanding to comprehend and to report. Taxpayers spare the budgetary expense of consenting to current IRS regulations, which frequently incorporates attorneys, bookkeepers and other assets. The flat tax remains a prominent idea to a limited extent because it reduces chances of double taxation. It eliminates the area of the tax code that is one-sided against the formation of capital. Flat tax also takes out capital gains tax, dead tax, and double taxation of reserve funds and profits (Varsano, Kim, & Keen, 2006).

 Individuals and families are not needed to report profits, interest or different income related to business income. This is because this income is already taxed at the level of business operations. The flat tax also makes it superfluous to pay interest, profits and different business tax at the personal levels. It utilizes regional taxation, which is the point at which the state taxes income that is created inside the national territory. In the worldwide economy, taxes remain a basic part of business and nations with low-taxes reap benefits from increased capital and jobs. A decent tax strategy is imperative to produce income for business and companies pay taxes to avoid long-term punishment for a faulty tax system. The flat tax removes worldwide taxation and would permit America to compete in the global arena more favorably. Fairness is a commended element of the flat tax. For example, a person who makes 5,000 dollars per year pays equal tax rate as a person earning 500,000 dollars. A person making 500,000 dollars annually pays more tax because he earns more. However, the tax rate is the same for both. The flat tax scheme does not discriminate on the basis of income because each person contributes a constant percentage of his income (Varsano, Kim, & Keen, 2006).

Changes to the current federal income tax structure that would benefit most taxpayers

A research team received a wide range of people’s ideas regarding tax simplification. These ideas have been grouped into general categories; simplification for households, simplifying retirement benefits and savings, simplifying capital gains taxation, simplifying tax filing, simplification small businesses taxes, and the Alternative Minimum Tax. Three proposed changes have been discussed below namely; simplification for families, simplifying for retirement benefits and savings, and adjusting the Alternative Minimum Tax (AMT) (Peckron, 2004).

Discussions with tax specialists and through statements from several taxpayers, tax findings identified that the youth and families are among the most affected by the multifaceted nature in the tax code. The tax code gives various credits and assumptions that decrease taxes for families with kids and for youth related costs like school expenses and day care. There is additionally a special tax rate structure for single people who have family obligations. Today, over 50 million people with children claim no less than one of these child-related tax advantages. However, most households get two or three benefits implying that the system should be simplified to allow for more benefits (Peckron, 2004).

In regard to simplifying retirement benefits and savings, More than 20 procurements in the tax code offer various benefits to save for retirement and for different purposes like medical costs and children’s education. Many people are scared and confounded by the sheer number of records to look over. They are also confused by the way every record is administered by an alternate mix of principles in regards to qualification, commitment limits, and when money may be available. People are worried that this disarray diminishes take-up of retirement schemes. The readiness by companies to offer retirement schemes also reduces imposing negative impacts on the overall objective of expanding savings. Given that saving incentive procurements are the third-biggest tax costs, it is fundamental to simplify public benefits to legitimize their costs (Peckron, 2004).

Lastly, Alternative Minimum Tax AMT should also be adjusted and simplified. An option would be to improve the AMT and blend its requirements closely with provisions in the customary income tax. The agreeability burden of the AMT emerges because the AMT changes are adequately obscure that people cannot foresee whether they will be liable to the AMT. the burden also arises from a lot of people fill their taxes two times where different set of calculations and rules apply. Simplifying the Alternative Minimum Tax to avoid the cost of repeal would make the system less troublesome (Peckron, 2004).

References

Peckron, H. S. (2004). The Alternative Minimum Tax: What You Need to Know about the “other” Income Tax. Phoenix: Sphinx PubLISHING.

United States Bureau of Internal Revenue. (1994). Your federal income tax for individuals. Washington, D.C: United States Bureau of Internal Revenue.

Varsano, R., Kim, K., & Keen, M. (2006). The “Flat Tax(es)”: Principles and Evidence. Washington, D.C: International Monetary Fund.

Viard, A. D., & Carroll, R. (2012). Progressive Consumption Taxation. Washington, D.C: AEI Press.