Income tax refers to a tax imposed on an individual or a corporateÂ Â who earns income by the government. In simpler terms is the tax paid on income. Personal income taxes are based on the total earnings of a person while corporates tax usually taxes net profit of a company. Income tax is usually progressive. This means that as one earns more money, a higher proportion of income is taxed. While the income tax is considered to distribute wealth and also provides a stable income stream for the government, its implementation is a bit complex particularly when trying to regulate the rich and the corporations (Jake, 2006). Income tax also lowers the householdsâ€™ standard of living when they are living by their means. As a result, some countries impose zero income tax to its citizens. Some of these countries include Oman and Bahrain;
Like most Middle East nations, Bahrain depends on oil for income. Petroleum production and processing is the countryâ€™s most lucrative field, contributing up to 60% of the total exports and 70% of the government revenues and 11% of the countryâ€™s GDP. There is no income tax imposed on individuals, but the state charges indirect charges; Stamp duty on real estate transfers 3% of the value of the property. No tax on capital gains, estates, interest, dividends, sales royalties or fees. No withholding tax is imposed in Bahrain. However, citizens contribute 7% of their salaries towards social security benefits (Li et al., 2012).
Just like Bahrain, Oman relies on its extensive petroleum reserves and natural gas for its revenue. Revenues from oil accountÂ Â for 70% of Omanâ€™s total revenue amount to $13.7 billion in 2011.Â Â Although the country does not impose income or capital gains taxes, Sole proprietors are subject to tax at a rate of 12% forÂ Â profit amount in excess of RO 30,000. Citizens are supposed to pay 6.5% of their monthly salaries towards social security benefits (Li et al., 2012). Oman does not, levy value added tax, net worth tax, estate tax or gift tax.
It will be almost impossible for US to adopt the tax system used in Oman and Bahrain. The tax system of any country is determined by its economic structure, its public service needs, capacity to administer taxes and many other factors. Unlike the two countries, United States has relatively low natural resources to generate enough revenue that can suffice the socially desired objectives (Cengage, 2014). Income from natural resources and revenue from the tax on consumption will not be sufficient to fund government operations. Lack of sufficient revenue will result in large budget deficits. Deficits have undesirable macroeconomic consequences such as increasing inflation and crowding out private investment.
By adopting zero income tax system, the US government will improve incentives for the investment of capital in the country by both the US residents and the foreigners. Multinational corporations based in the country would have incentives to shift investment and operations to the country so as to benefit from the lower income tax rates. Where bilateral tax agreements apply, the US multinational operating in foreign markets will receive tax treatment comparable to the tax treatments of foreign companies based in the country. That is, if a foreign company enjoys zero corporate income tax in US, the same will still apply to US companies in foreign countries.
A zero income tax model will reduce the administrative and compliance cost for the government and taxpayers. It is estimated that the current taxpayersâ€™ compliance costs amount to 13% per dollar of tax receipts (Claus, 2010). The cost of conformity per dollar would fall as a result of reduced incentives for income evasion since not income tax is implemented.Â Â The high tax wages in the formal sector discourages many people from working in such area. Instead, they prefer working in the untaxed formal sector. The zero income incentives will encourage workers to work in formal sectors
Never the less, the zero income tax models will pose some challenges. First, United States uses their income tax systems to provide income to certain low-income people. As a result, the federal government might struggle raising enough revenue to provide income to such people. Income tax enhances equality by distributing wealth. Those who earn more are taxed more. By switching to zero income tax model, the gap between the rich and the poor will keep on widening. Lastly, the zero income tax system will not provide a steady income to the government.Â Â The government will, therefore, struggle in mobilizing enough funds for developing infrastructures that require a lot of capital (Cengage, 2014).
The best tax plan for US is the one that creates economic pressure on its citizen. Fairness in the taxation system requires that those with the greatest capacity to pay more than those with lesser capacity to pay. A personâ€™s income does not necessarily reflect what he/she owns. Letâ€™s take a case of a fresh graduate who has just landed a well-paying job. He/she earns a large amount of money but not rich. Wealthy individuals might also have a little income but a high standard of living. The state should, therefore, switch to national sales tax. The national sales tax would eliminate many of the distortions associated with the current income taxes. The main objective of the national sales tax is that individuals to pay their fair share depending on what they spend (Murray et al., 2002). . Taxing consumption will encourage citizens to save and invest therefore stimulating production and economic growth. This tax system will increase efficiency and promote equity in the following ways.
First, if the income tax is eliminated, the Internal Revenue Service, as well as the large number of pages of tax code, would become obsolete. Persons will not be required to report their personal financial information to the government. People who live rich will be taxed on goods they choose to spend. The tax base should be wide to capture most good and services. This will help reduce distortions in goodâ€™s consumption. Few item such as gasoline, alcohol, and tobacco products may be taxed at a higher either because the demand for these goods is somehow unresponsive to taxation or for regulatory reasons. Basic goods such as clothes and food products may be taxed relatively low to favor the middle-class as well as low-income earners. This will, in a way promote equity. National sales tax should be set as low as possible. Whenever possible, a single rate of tax should be imposed on a broad-based instead and imposing differential rates on each segment. This will further increase efficiency (Murray et al., 2002).
The national sales tax plan will also help solve the problem of double taxation. Currently, a business must pay sales tax on raw material they use to create the products they sell, which are then taxed again. However, under the national sales tax,Â Â items purchased directly can avoid tax and thereby avoid being taxed twice. The plan should also include an annual consumption allowance (Probate) to relieve poverty level Americans that provides a monthly check that would offset all their sales tax expenditures. The amount of allowance would be based on the poverty level guidelines and would ascend would increase for larger families. National sales tax plan will also make it easier for the government to predict tax revenues since consumption rates are much more stable than incomes (Claus, 2010). Estimates will, therefore, be accurate.
The best way in which the federal government can make up any shortfalls does not collect its targeted revenue is through the income tax is through appropriate design for a VAT adopted at the federal level. The VAT should be imposed on broadest consumption base. It should be consistent with the structure of the federal government and also maintain neutrality between public and private sector provision of goods and services (Caragata, 2008). Further, the VAT should adopt the credit-invoice method and impose at a single uniform rate. The VAT should be set at a rate high enough to raise sufficient revenue to suffice government expenditures, justify the administrative burden of the VAT on businesses and government and also discourage subsequent rate increases.
However, it would be impossible for the federal government to assess an excise tax on non-commercial states and local government services. Instead, the state and the local governments will be required to pay a VAT on the purchases but still receive a refund from the federal government for VAT paid.
Economists agree that a well-designed VAT imposes a lower excess burden than most of other taxes for anyÂ Â given amount of revenue raised. Reducing the excess burden of taxation on the economy is an important way that the tax system can encourage growth. The system is also efficient as it does s not distort consumersâ€™ choices among goodsÂ Â and services and does not discourage savings or distort the allocation of capital (Caragata, 2008). The VAT has been adopted byÂ Â major developed countries expect the US. Thus the treasury Department and the IRS should study and apply best practices from around the world. Also, Most US multinational corporations have extensive experience in complying with VAT, and the current remit the taxes in most countries in which they operate.
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Claus, I. (2010). Tax reform in open economies international and country perspectivesÂ Â Â Â Â Â Cheltenham: Edward Elgar.
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Jake, O. (2006). Fundamental reform of personal income tax, Paris: OECD.
Li, C., & Whalley, J., (2012). Indirect tax initiatives and global rebalancing, Cambridge, Mass.:Â Â Â National Bureau of Economic Research.
Murray, M., & Washington, D. (2002). The sales tax in the 21st century. Westport, Conn.:Â Â Â Â Â Â Â Â Â Â Â Praeger.