Income Tax

In the United States tax law is a complex system which includes rules related to, but not limited to, income, gift, payroll, and estate taxes. Legally speaking, the current income tax came into being in 1913 when the 16th Amendment was ratified. This Amendment stated that "The Congress shall have power to lay and collect taxes on income, from whatever source derived, without apportionment among the several states, and without regard to census or enumeration (1)." Since it's inception there have been several attempts to repeal the 16th Amendment, and to abolish the Income Tax (2). Whether or not this is the right course of action is hard to determine, but one thing is certain; this is a complex issue which must be closely examined.

One type of alternative which has been seriously considered is a Consumption Tax. A consumption tax is a tax on items consumed. The United States actually already has a type of consumption tax in the form of a sales tax. Some, however feel that we should abolish all other forms of tax and just have a pure consumption tax. One proposal which was introduced in 1999 (The FairTax proposal) would abolish all federal taxes (income, gift, payroll etc. etc.) in favor of a flat 23% consumption tax (3). This proposal would also abolish the IRS, and instead create two new Bureaus within the Department of the Treasury instead. The FairTax has yet to pass committee however. Proponents of a consumption tax claim that by only taxing items consumed citizens will be encouraged to save money instead of spending it. Some also believe that by taxing only products sold we can tax criminals who would not pay income taxes normally (4). Reports conflict on whether an almost pure consumption tax would help or hinder the economy overall, but it is clear that more research is needed.

Another type of tax plan which has been considered is a flat tax. A flat tax is exactly what it sounds like; a constant tax rate imposed on all members of a society. Two men, Robert Hall and Alvin Rabushka, wrote a novel expounding the virtue of a flat tax rate (5). The idea was to simplify the US tax code greatly, and to eliminate marginal tax rates. That is to make it so that as one's income grows one's taxes do not. Hall, and Rabushka felt that this encouraged laziness. Flat Taxes have already been instituted in a number of countries mostly in Eastern Europe (6). Seven states within the United States also have a flat tax rate (7). The problem with the idea of a flat tax rate becomes immediately clear; a flat tax is completely blind. A multimillionaire will feel the loss of 15% of their income a lot less than a person making only $60,000 per year.

Personally, I'm not 100% sure where I am on the issue of income tax. On one level, I understand why one would want to eliminate the income tax. I can understand wanting to keep 100% of the money one has earned. I can also understand why one would want our tax system simplified. Our system seems incredibly complex, and a simpler system would most likely help increase compliance with said code. However, while I agree that we should attempt to simplify the tax code I believe that the income tax should be kept in place. As I said the idea of a flat tax seems to blind, but I also think that a consumption tax may decrease the United States economy. And with the economy's current boom and bust cycle this seems doubly irresponsible. Instead I believe in marginal tax rates. I think that those who have higher incomes should pay higher taxes than those who make less. Which of course is the system the US already has in place. Data has shown that the wealthiest 5% of taxpayers accounted for 60% of income tax, while the bottom 50% only contributed 3% (4). Clearly there is interest in overhauling our current tax code out there, and more research is definitely required.