Why We Shouldn't Reform the Current Tax Code

Why we shouldn't reform the tax code

Every day, our government is spending billions of dollars to support and defend American citizens. Programs in education, social security, welfare, environmental regulation, national defense and many other realms of our society require massive budgets to function and grow. So to fund all the interests of the country, many different types of taxes are imposed on people and businesses. But due to recent economic downturns, some doubt the tax code and want reform. While there may be some benefits to a change, altering our tax system would end up creating many more problems than it would fix, hurting the nation's economy and its growth.

The country's basic tax policy is comprised of income taxes, corporate taxes, payroll taxes, transfer taxes, and excise taxes. Income tax is the percentage citizens must pay out of their yearly income. This is where the majority of the government's budget comes from. Corporate and payroll taxes deal with taxing on businesses, and transfer taxes take a percentage from assets being passed from one person to another. An example of this could be the inheritance of property. And finally, there are excise taxes which are a tax on goods or services (Nguyen). Together, these taxes fund the majority of our government's budget and the upkeep of our nation.

The tax code began in 1912 when the 16th amendment to the constitution was adopted. This enabled the federal government to levy taxes directly on income. Soon, economists worked to better this by adopting a graduate income tax, otherwise known as a progressive tax. In this system, the government charges a higher percentage for those individuals or businesses that earn more income. To decide who pays what, congress devised the marginal tax brackets. The goal of this was to fairly decide who pays the different tax rates. First, they divided the country into four different household types, or categories to file taxes under. This includes single, married or joint filing, married but filing separately and head of household filing. Then you combine this classification with an individual's annual salary or income and you can find their marginal tax rate. There are 6 marginal tax rates, starting at 10% and rising all the way to 35%. The tax rate you pay depends on what household classification you fall into and also what income range you are earning within. This makes sense because the amount of taxes a person pays should be proportional to the amount of the money they earn and how many people they are supporting. An example of how the tax rate is calculated can be seen easily with a model citizen. If a person is filing their taxes alone (single) and earns between 0 and 8,700 dollars they are required to pay 10% of their income on taxes. If their income rises and they move into the next range of $8,701 - $35,350 then their marginal tax rate increases to 15% (Wikipedia). The tax rate paid becomes progressively higher as a person's income increases and they move into new income brackets or change household classifications. It is a benefit that we have a graduated tax system so that the wealthy pay a higher percentage. This makes sense because they have more money and can take some of the stress off of lower income homes.

Another feature of the marginal tax rate that helps American's is how it taxes your dollars. Individuals pay the tax at a given bracket only for each dollar within that bracket's range. For example, a single taxpayer who earned $10,000 in 2009 would only be taxed 10% of each dollar earned from their first dollar to the 8,700th. But, they would be taxed 15% on each dollar earned from the 8,701st dollar to the 10,000th dollar. If calculated, it can be seen that this individual is paying only $1215 instead of the $1500 they would pay if all of their money was taxed at 15% (Wikipedia). By only taxing dollars at the marginal rate they fall into, citizens are less burdened by the high taxes and save money that they will most likely spend or invest, boosting the economy. The progressive tax supports economic equity for all Americans. It gives everyone a more fair chance to climb the socioeconomic ladder and follow "The American Dream". Also it makes sense that the wealthier should pay more. If they have more money they shouldn't be paying the same amount as those in tough financial times (Rugy). This is why a flat tax, the same tax rate for everyone, would not be effective.

The flat tax or poll tax is an alternative tax code that has been suggested. It would be a constant tax rate