Most governments have reformed their tax systems, notably, a reform of income tax in order to have a tax system that is economically liberal and that addresses externalities. The tax reform is important because it enhances job creation and long run economic growth, encourages investments and savings, and …show more content…
There are also those who think that the US income tax system is founded on the economic consideration meaning that it should be changed. For instance, the charitable deduction has been argued by many as an attempt to correct the free rider problem that might result into insufficient provision of charity in the society. The earned income tax credit, on the other hand, reduces the disincentive of the working poor to go for the low paying jobs. The income tax system might be manageable for those people with wage income but for large corporations and people with complex incomes, the income tax system has resulted in higher compliance costs for the tax payer (Dalsgaard 8). Changing the income tax system to a flat tax or national sales tax will make the tax system fairer, transparent, simpler, and also conducive for investments and savings. However, the flat tax system will be better compared to the national retail sales tax (Dalsgaard …show more content…
With flat tax, deductions can be allowed for purchases from other businesses and cash wage and salary payment. The flat tax system is better that the income tax system because it is more simplified and efficient. This reform will involve shifting to a cash flow where incentives to invest and save and consumption tax base will not be distorted. Flat tax system implies that normal returns to capital will not be taxed but rents at the business level will be taxed at a flat rate. Since the flat tax equalizes marginal tax rates across different sectors of the economy as well as assets and investments, it will eliminate the current distortions to savings decisions (Dalsgaard