Introduction
Governments rely on taxation systems to get adequate financial resources for funding a wide range of public initiatives, expenditures, and projects. Legal mechanisms are usually put in place to identify and punish those who fail to remit their taxes. Citizens can pay taxes in different levels, including purchase of specific products and the amount deducted from their incomes. Unfortunately, the America tax system has a fair share of blame because it is identified as one of the leading factors behind the increasing level of income inequity. While the American tax model is intended to remain progressive, little gains have been recorded so far since the level of tax inequality has remained the same over the years. Evidence-based measures aimed at empowering the disadvantaged members of the society and a widened income tax model will help mitigate this kind of disparity.
History
Taxation has remained a common practice in the United States since the late 18th century. From the period, the new nation would collect taxes from whiskey, imported products, among other times. Other key areas where local leaders and states collected taxes included property, voters, and even commercialized buildings. The passage of the 16th Amendment to the United States Constitution would result in the legalization of what is today known as income tax. During the Civil War era, the government tried the idea by imposing income taxes (Ambrosio 52). The passage of the Tax Reform Act of 1969 would result in the introduction of the Alternative Minimum Tax (AMT). Such a framework was implemented with the aim of targeting households with high income levels. Unfortunately, the AMT model continues to attract criticism and concerns from different players in the country (Ambrosio 59). Today, taxation has become a wide area with unique policies and guidelines that dictate the way citizens contribute to public projects and government’s undertakings.
America’s Tax System
Over the past decades, the American government has promoted and implemented a unique tax system that is identified as progressive in nature. The concept means that the country’s “marginal tax is higher than the average rate” (Ambrosio 72). The federal system is designed in such a way that it has seven rates spread between 10 and 37 percentages (Palil et al. 192). Income levels below the standard deduction would usually be zero-rated. According to the model, any increase in the recorded income means that the earner will have to suffer higher taxation rates. The promoted structure presents ranges or income brackets whereby the individual will be taxed accordingly. As of 2020, individuals or households with an income of above 518,400 US dollars and couples with 622,050 US dollars will be on the top rate or bracket (“How do Taxes affect Income Inequality?”). The government has also put in place mechanisms for ensuring that tax brackets remain revised annually depending on the level of inflation.
Effects on Income and Income Inequality
Many analysts and scholars acknowledge that income inequality is a reality affecting the American society. Within the past four decades, the country income inequality has been rising steadily. Palil et al. reveal that a few percentage of the population get over half of the total income in the country (193). For instance, a report by Nallareddy et al. revealed that around 20 percent of the country’s population with increased income levels shared over 50 percent of the country’s labor patterns, capital income, and government-related insurance benefits, include Medicare and Social Security (5).
Just like many other nations across the globe, the United States has continued to grapple with the rising level of wealth and income inequalities. This trend could be attributable to a number of factors, such as racial imbalances, prejudices, and poor distribution of resources. The measures and initiatives the government puts in place could also be linked to some of the trends recorded in the country (Martorano 258). Over the years, experts have been interested and willing to complete additional studies in an effort to analyze the nature of income taxes and how they contribute to income inequalities. The presented findings and observations have shed more light that could help address the situation in the future and transform the experiences of more people.
In theory, the American progressive taxation framework has been designed in such a way that it could help reduce income disparities and transform the lives and experiences of more citizens. However, the tax cuts introduced by Barack Obama and George Bush regimes resumed in shrinking figures. The new figures would only have equalizing implications on both the income inequality and the recorded taxes. Using the famous Gini index, it would be agreeable that the taxation model has played a recognizable role in helping reduce the overall level of income inequality in the country.
The Gini index is capable of guiding analysts and economists to measure the gap between the after-tax income index and the one for before-tax. The resultant figure will dictate how taxes will help minimize the level of inequality. When the differences are higher, it becomes clear that the imposition of income tax will help equalize the overall level of income. However, while federal taxes became progressive beginning in the 1990s, the level of after-tax and before-tax figure widened the level of income inequality (Biswas et al. 706). Consequently, many experts would acknowledge that the level of inequality has reverted to the figures this country recorded before the 1980s (Martorano 260). This outcome means that the level of income has continued to become diverse, thereby exposing the recorded level of inequality.
From this kind of description, it would be agreeable that the recorded income inequality in the United States has continued to increase sharply within the past four decades. This trend has become noticeable despite the measures the federal government has been putting in place. The foundational theory was that individuals who were earning higher salaries and incomes would be paying increased taxes (Biswas et al. 694). Consequently, the practice would maximize chances of minimizing the rate of income inequality and make it possible for most of the underpaid citizens to lead high-quality lives and pursue their goals. Unfortunately, the mitigating implications of the country’s taxation system has done very little to address the situation. The reality is that the country has continued to grapple with the problem of income inequality just as it did before the 1970s (Schlozman et al. 101). The measures put in place have proved to be counterproductive and incapable of transforming the experiences and lives of more people.
From this analysis, it would be agreeable that the country has not recorded significant gains in averting income disparity through the taxation policies put in place. The level of inequality for after-tax income has continued to rise as the same for the before-tax salary (Schlozman et al. 102). Those who are earning little income will suffer the same challenges their counterparts encountered in the last century. From these recorded trends, it becomes quite clear that taxes have failed in offsetting the recorded level of income inequality. Additionally, it would be correct to indicate that the taxation policies put in place have not triggered increasing levels of inequality. The reality is that the country will continue to experience increasing levels of inequalities unless proper measures are put in place.
Difference of Taxes: Division
The first unique element within the country’s tax system is that of corporate income. Just like in the first case, a progressive model is put in place whereby burden is attributed on income from various investments, capital gains, and dividends (Biswas et al. 696). Estate tax forms the third attribute whereby specific families with higher wealth levels. The interpretation is that individuals with high income might have higher chances of having estates that will have to attract specific tax. In such a case, the model will be targeting households with the highest levels of income.
Payroll taxes, on the other hand, could be described as retrogressive in nature. However, individuals will be required to remit taxes for amounts not exceeding 137,700 US dollars (“How do Taxes affect Income Inequality?”). The interpretation is that some of the wealthy people might be getting their resources from dividends and other forms of capital gains. In such a scenario, such gains would not be subjected to this kind of taxation. From this analysis, it would be agreeable that such taxes are progressive bellow the identified 137,700 US dollars mark (“How do Taxes affect Income Inequality?”). Finally, the taxation system provides room for excise taxes whereby specific services and products will have to be purchased at a specific value. In such a case, families and individuals consuming some of the taxed products will be overburdened in comparison with the other members of the public. The price effect of this form of tax presents a regressive model or situation.
These types of taxes are implemented and levied on specified parameters, including personal income, corporate, and products or services. While the American tax model is intended to be progressive in nature, a number of concerns have emerged that are directly linked to the challenge of income inequality. For income tax, the belief has been that the less fortunate or persons with limited salaries will only be required to pay reduced taxes directly. However, the model has created additional divisions that are directly linked to the problem of both indirect and direct taxes (Biswas et al. 707). For trade or sales taxes, the poor and the rich will be compelled to purchase and utilize the same products. The end result is that the poor will be compelled to pay for the same taxes as the rich. Consequently, the poor will be overburdened in comparison with the rich, thereby increasing chances of income disparity.
The nature of excise taxes could be a leading factor in the nature of recorded inequalities in the country. However, it would be impossible for the government to consider superior models that could make such taxes more progressive and incapable of affecting those in lower income categories (Ambrosio 42). Similarly, corporate and income taxes are common in the country and allow create avenues and opportunities for the wealthy to continue recording increased profits. This model means that cases of inequality have continued to increase, thereby making it impossible for them to record the relevant social mobilities.
Within the wider taxation system are social expenditure models. Such strategies are designed in such a way that they can identify individuals who are poor and transform their experiences. The government would consider the use of taxation to meet the demands of the less fortunate and raise adequate funds. However, the inability of the tax system to reduce the level of inequality has only complicated the situation (Saez and Zucman 59). As described earlier, persons with increasing salaries and corporate income levels have continued to get the lion’s share in social security and health programs.
These measures of division are pursued with the aim of reducing income inequality while funding public resources. Unfortunately, the poor have continued to become poorer since all taxes that are intended to remain progressive have only created additional options for worsening the situation for the less fortunate. Each identified taxation approach continues to present unique challenges that all stakeholders should examine and analyze from an informed perspective (Biswas et al. 698). The ultimate aim should be to address the situation and take more people closer to their goals.
Tax Evasion Methods
Tax evasion remains an illegal practice recorded in many countries, including the United States. Wage and salary earners tend to have reduced options or chances of engaging in initiatives that could amount to tax evasion. For business owners, this challenge remains common because the professionals can consider some of the existing loopholes to avoid tax (Saez and Zucman 35). The first type of tax evasion is that of omitting or underreporting a specific amount of income. A good example in the American setting would be for a specific investor failing to disclose the amount of proceeds recorded from commercial buildings.
The second form of tax evasion reported in different case studies is when some individuals decide to make inaccurate entries in their record books. In some cases, the businesspeople might keep different books of entry, thereby contributing to irregularities. This behavior of keeping records that would be identified as inadequate would result in altered figures, thereby resulting in a fraud (Technology Tools to Tackle 6). The third form of evasion would be when a specific individual decides to claim deductions that are false or inaccurate depending on the final outcome. Some unique examples could include providing salaries or wages to persons who might not have completed the outlined jobs or having charitable reductions that are hard to substantiate.
The fourth type of tax evasion reporting in this country would be the move to claim that specific personal expenditures are business in nature. This kind of fraud would be common since they are some items that would have both personal and company roles, such as computers. The fifth type usually occurs when individuals decide to hide their income or specific assets (Saez and Zucman 61). This kind of concealment means that the reported funds will not to be taxed appropriately. For instance, a specific employee might only be compelled to have deductibles for a smaller amount of salary.
The sixth type of fraud in taxes occurs when individuals choose to engage in transactions that could be identified as a sham. In such cases, citizens and investors might decide to identify specific transactions differently, thereby making it impossible for officials and auditors to make the relevant adjustments. The nature of these methods reveals that more people in this country would be keen to engage in malpractices that would result in tax evasion (Saez and Zucman 62). The rich are usually keen to consider some of the available options and strategies to evade taxes and eventually benefit themselves.
From this discussion, it is agreeable that a loophole exists whereby some of the rich members of the society could pursue to evade taxes and eventually get an unfair advantage over the less fortunate citizens. This challenge explains why powerful mechanisms have been put in place to identify the culprits and discourage others from promoting the vice (Saez and Zucman 92). Over the years, the IRS has been on the lookout for malpractices and initiatives that many businesspeople pursue in an effort to reduce their taxes or evade completely. Consequently, the apprehended individuals would be compelled to pay such taxes and eventually be convicted accordingly.
Reducing Tax Inequality
Tax inequality stands out as a unique problem many citizens continue to encounter in the United States. Unfortunately, most of the taxation measures put in place have done very little to address the recorded economic disparities. The outlined taxation brackets for income tax have only helped maintain the status quo. The outstanding fact is the system has compelled more citizens to spend more income on excise tax just as the rich members of the society (Shafer et al. 8029). This reality explains why a paradigm shift would be necessary to fix or reduce the current level of inequality.
The first recommendation would be for the government to introduce new policies that approach this predicament from an economic perspective. Specifically, leaders can focus on additional incentives that have the potential to maximize the current minimum wage. This strategy means that more people will be empowered and capable of affording basic and secondary items (Biswas et al. 708). This approach could be coupled with additional measures to provide high-quality education to citizens who have been underrepresented over the years. Such a strategy will make it possible for the government to record positive economic results.
The second proposal is for the country to consider an expanded income tax framework. This initiative means that the government will earn additional revenues that could be used to uplift more people by providing incentives and empowering them to overcome the challenge of poverty. Such resources could also be delivered to empowered the less fortunate members of the American society and provide additional employment opportunities (Schlozman et al. 102). The same finances could be utilized to promote and implement new incentives that can address some of the key issues contribution to inequality in the country. Some of them include poverty, lack of resources, and systemic inequality. The consideration of these efforts will help transform the country and pave way for a superior tax system that resonates with the demands of the greatest number of citizens.
Conclusion
The above discussion has identified several taxes that form the basis of the American tax model. From a theoretical perspective, the system was designed in such a way that it remained progressive and capable of empowering more people to record positive experiences. However, little gains have been recorded so far since inequality has remained unchanged since the 1980s. In conclusion, evidence-based measures are needed to empower all disadvantaged members and introduce a widened income tax.
Works Cited
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Biswas, Siddhartha, et al. “Income Inequality, Tax Policy, and Economic Growth.” The Economic Journal, vol. 127, no. 601, 2017, pp. 688-727.
“How do Taxes affect Income Inequality?” Tax Policy Center, 2020, Web.
Martorano, Bruno. “Taxation and Inequality in Developing Countries: Lessons from the Recent Experience of Latin America.” Journal of International Development, vol. 30, no. 1, 2018, pp. 256-273.
Nallareddy, Suresh, et al. Corporate Tax Cuts Increase Income Inequality. Harvard Business School, 2018.
Palil, Mohd R., et al. “Issues, Challenges and Problems with Tax Evasion: The Institutional Factors Approach.” Gadjah Mada International Journal of Business, vol. 18, no. 2, 2016, pp. 187-206.
Saez, Emmanuel, and Gabriel Zucman. The Triumph of Injustice: How the Rich Dodge Taxes and How to Make them Pay. W. W. Norton, 2020.
Schlozman, Kay L., et al. “Growing Economic Inequality and Its (Partially) Political Roots.” Religions, vol. 8, no. 55, 2018, pp. 97-113.
Shafer, William E., et al. “Support for Economic Inequality and Tax Evasion.” Sustainability, vol. 12, no. 19, 2020, pp. 8025-8042.
Technology Tools to Tackle Tax Evasion and Tax Fraud. OECD, 2017.