In an ailing economy and threats of frequent economic crises, one of the main areas of interest is the idea of tax reforms. Some scholars argue, within the context of classical versus Keynesian economic theories, that the ailing economy is a strong incentive for implementing tax reforms to reduce the risks of financial problems.
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However, the importance and need of tax reforms is debatable, especially within the context of economic and political theories. Some politicians and economists have suggested that a flat tax system is the best solution to these problems. However, the economic question is whether a flat tax reform is effective in providing solutions to an ailing economy.
First, it is necessary to examine the concept of flat tax reform. A flat rate tax reform seeks to eliminate the progressive system that imposes high tax rates on high-income earners. In its case, the flat rate system introduces a single rate of taxation common to all income brackets. For example, a proposed 9-9-9 flat rate means that people will be paying a flat rate of 9% on personal incomes, corporate incomes as well as sales. (Katz, 2012)
The flat rate reform seems to be effective in giving taxpayers incentives to work harder as they seek to increase their earnings, thus increasing the economic productivity. In addition, the system appears to be fair because all taxpayers must pay an equal percentage of their salaries, regardless of the level of an individual’s income (Katz, 2012). It also promotes simplicity and fairness in the exaction process (Peters, 2012).
However, the idea is not good because it does not promote equality and affirmative action in a society that is highly diverse in terms of the people’s socioeconomic status. People in low-income class, the disabled, and the marginalized and other minority groups will be forced to pay the same percentage of tax as those in high-income class and other advantaged groups (Peters, 2012). However, this type of tax reform is not fair. Therefore, we do not need a flat tax reform, even though the economy needs a tax reform.
In place of a flat tax, other tax-based reforms could be used to improve an ailing economy. For instance, the value added tax (VAT), the national sales tax and elimination of credits or deductions can be applied as well. Nevertheless, they also have some weaknesses and strengths, which make it difficult to select the best method (Peters, 2012).
One of the best alternative tax reforms is the introduction of the value added tax (VAT). This alternative is worth discussion because it has been applied widely in various parts of the world. Also known as the general sales tax (GST) reform, VAT is based on implementing a method of taxing consumers.
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In a given economy, the tax is imposed on consumers and traders in the form of value added to the products and additions on the purchase price (Peters, 2012). The government requires the manufacturers and other producers of materials and services to remit the difference between the purchase price and value added to the commodities (Peters, 2012).
The manufacturers and producers are allowed to retain the remaining portion as their revenue. On the other hand, the difference between the two amounts moves to the government. It is worth noting that the consumer carries the whole burden of the tax because the producers, manufacturers, distributors and other parties must transfer the tax load to the end users (Peters, 2012).
Merits and demerits of tax-based reforms
Tax-based reforms tend to place an enormous huge burden on the citizens, especially the working people and all consumers in general. The reforms are likely to widen the gap between the rich and the poor (Peters, 2012). However, it is a good approach because the government obtains tax every time a product is purchased for consumption, thus increasing the volume of government funds needed to run the economy and the state affairs (Peters, 2012).
Katz, B. (2012). Remaking federalism to remake the American economy.
Peters, B. G. (2012). American public policy: Promise and performance. New York: CQ Press.