Improvements into the areas that show glaring unfairness between low- and middle-income families versus wealthy Americans can improve the American tax system and Americans’ faith in it.
Taxpayers always have something to say about the American tax system, especially regarding the wage gap between low- and middle-income individuals and those with higher incomes. The reason why American’s feelings towards the tax system are so important is that compliance is essential. The tax system depends on its acceptance by taxpayers, and while most tax players comply because it’s the law and they want to avoid penalties, they do complain.
Most people recognize that taxation is necessary to fund the government, but there are different views about the size of the government and how much should be funded, along with the structure of the tax system, its rates, and its impacts on different groups. In this article, we’ll discuss the different types of problems people have with the American tax system and why.
Unfair Tax Burden Distribution
The American tax system is referred to as “progressive,” meaning that the rate you pay goes up as your income increases. A progressive tax system applies graduated higher rates on higher levels of income. Someone who makes $50,000 a year will essentially pay more in income tax than someone who makes $35,000. However, there are instances where this isn’t the case. With this system, one would assume that the higher the income, the more a person would pay in taxes. After all, it’s only fair.
Unfortunately, that’s not always the case. The national tax burden is not always graduated according to income level, particularly when it comes to corporate businesses. There’s been news about corporations like Amazon not paying income tax, which can undermine American’s confidence in the entire tax system. It’s hard to imagine that an individual feeding a family of four off of less than $50,000 a year would pay more in taxes than a multi-million or billion-dollar corporation, but it has happened and will continue to do so until there are changes in the tax system.
Tax Brackets Receiving Higher Benefits
While the tax code increases tax rates on taxable income as income brackets rise, the progressive tax system is countered by things like exemptions and exclusions for certain types of income, lower rates for some income categories, deductions for expenditures, and more.
These adjustments are referred to as deductions and can lower tax rates on the incomes of high-income individuals so that they pay less in taxes despite how much they earned. They can help high earners avoid any tax liability at all.
Deductions and Credits
Businesses can see their deductions using an online tax software and other tools to determine how much of their tax liability they can avoid. Deductions produce lower taxable incomes. For example, if someone running a business pays for new computers for the office, they can deduct it from their income on their taxes. While this sounds fair when you first read it, the allowance of larger tax savings for higher incomes is different than the savings from a tax credit. A tax credit saves taxpayers a percentage in tax liability regardless of income level and tax bracket. However, if the credit amount exceeds the taxpayer’s liability, that taxpayer will not get the full amount of savings unless the credit is refundable, which many are not.
Tax Avoidance
Under the current tax law, there is a 21% tax on all corporate income. That being said, many corporations pay lower effective rates (or zero taxes at all) because of substantial business write-offs, lengthy negotiations when audited, and more.
Unfair Rules for Investment Returns and Business Losses
Under the tax law, there are lower rates for investment returns and tax write-offs for businesses.
Capital Gains and Dividends
There are special low rates for capital gains and dividends that allow taxpayers with investment returns to pay low rates below those applicable to ordinary income. Those whose income consists mostly of investment returns are typically Americans with higher income and are somehow paying less than those with lower income under this law. That upsets a lot of hard-working Americans.
Business Losses
Some individuals can use losses to offset earnings or investment income. Carryback and carryforward deductions for these losses allow eligible taxpayers to claim write-offs that reduce their overall net taxable income, which means that a corporation that makes millions of dollars a year may not be subject to paying any taxes at all.
Non-Income Taxes
The current tax code also imposes payroll taxes, among others. Believe it or not, some of these taxes present issues as well.
Payroll Taxes
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Payroll taxes are necessary to fund Social Security benefits. There’s also an additional Medicare tax that applies to covered wages. Both of these taxes are flat rates regardless of income level, which means that not all of the taxes in the American tax system are progressive. For individuals with low incomes, these taxes can be a financial burden.
Unfair Tax Enforcement
When taking a look at the American tax system, it can be difficult to know whether or not it’s being enforced fairly. When you look at all of the corporations taking advantage of all of the savings they legally can, but low-income families are forced to pay more taxes than the wealthy, you might start to lose faith in the current tax system.
While there are fines and penalties for not paying your taxes to persuade those unhappy with the system to file taxes and remain compliant, there are still many who question the fairness of the system and call for reform. It’s clear that America needs to take a closer look at the tax system to eliminate unnecessary, inappropriate, excessive, and unfair tax benefits that can benefit the wealthy over the impoverished.
While many Americans look to the IRS to deal with their complaints, the IRS alone cannot change the tax code. With better auditing of high-income individuals and corporations, the American tax gap can be reduced. Unfortunately, this requires a larger budget for the IRS that allows auditors to devote their time to evaluate complex information.
Improvements into the areas that show glaring unfairness between low- and middle-income families versus wealthy Americans can improve the American tax system and Americans’ faith in it.