Tax reform of one kind or another is inevitable. As previous tax laws expire and the federal government’s budget is reorganized, policy makers are faced with tough choices. For example, when tax policies such as the payroll tax cut and estate tax rate change, the Internal Revenue Code or Title 26 of the U.S. Code is either adjusted or replaced either to the benefit or detriment of the economy. How this tax reform takes place is a far reaching and dynamic subject because it influences all Americans, affects industries, and determines how much money is entrusted to the government.
Receipts
The U.S. Internal Revenue Service (IRS) is responsible for collecting tax owed to the government. Each year on time payment of taxes fall short of the actual amount due and this amount is labeled the tax gap. The tax gap for previous years has been 24.3-27.9 percent per the IRS. Simplifying the tax code could make it easier for Americans to file their taxes and reduce the non-compliance rate experienced by the IRS. Moreover, a tax reform that simplifies tax filing at a lower rate would also serve as an economic stimulus, especially if the compliance rate led to tax receipts higher than the previous tax gap at the higher tax rate.
Debt
Tax receipts have fallen short of federal expenditures for the past decade according to the Office of Management and Budget. The national debt is currently above $15.3 trillion dollars per the Treasury Department and continued deficits at this level are unsustainable. Even though In 2011 the government trimmed over $500 billion off its deficit, tax reform will still be necessary. Moreover, how this debt problem is solved via tax reform will directly affect Americans. For example, if the national debt is addressed by delaying and lowering receipt of social security contributions, then Americans will have to retire later with less.
Complexity
According to research by the Congressional Research Service, problems with tax reform are related to problems with measuring potential tax revenue from a tax base. For example, if revised tax policy implements higher income tax, Americans will have less to spend unless their incomes also rise. Furthermore, if the nation as a whole spend less, corporate revenues could decline causing tax receipts from corporations to drop, and potentially lead to layoffs causing income tax receipts to also drop. Complexities that make it difficult to forecast income are compounded by political issues that cause gridlock such as how much government should spend.
Policies
A number of possible types of tax reform have been proposed by researchers and think tanks. According to Raul Garcia of Forbes, some of these options include the flat tax, national sales tax and negative income tax. Each of these different tax reforms has different effects. For instance, Garcia reports the flat tax is said to benefit the wealthy and hurt the poor. This is because poor tax payers may currently be taxed less and not be able to claim tax credits or deductions under the flat tax. If on the other hand income tax is replaced by national sales tax, then it could effect corporate financing because stock and bonds would have less basis to be excluded from that tax.
Solutions
For tax reform to be effective in capitalist sense, it must ultimately benefit the most people and increase national wealth. Even though many organizations such as the Cato Institute, the Heritage Foundation and Americans for Tax Reform advocate a flat tax, the chances of this type of tax reform being implemented is low per Kiplinger. Moreover, according to Kiplinger, of seven possible tax reforms, the one with the best chance of becoming law is an adjustment to the existing tax system rather than a replacement to it. Proponents of this solution believe it will optimize and recalibrate the existing tax system to be simpler and more optimal for the ends of economic growth and higher tax revenue.