The concept of the fair distribution of the tax burden has always been a core issue among policymakers and the public alike. However, in the past few decades, Americans have grown increasingly dissatisfied with the taxation system. Indeed, a majority of Americans currently view the existing tax system as unfair for a good reason. While the question of whether the USA tax system is fair highly depends on the working definition of “fair,” it is evident in a majority of ways that the USA tax system is not fair.
Fairness is one concept that a majority of economists and other financial analysts tend to avoid since it is subjective, a factor that continues to contribute to the deterioration of the American tax system. However, there are three core categories of fairness, equal justice, commonly referred to as horizontal equity among economists, progressivity known as vertical equity, and individual equity (Diamond & Saez, 2011). It is essential to acknowledge, over the past two centuries, the definition and perception of tax fairness have changed dramatically. Indeed, for much of the USA history, taxes were grounded on what an individual consumed as such tariffs and excise taxes were the prevailing taxes. However, after the Civil War, ta fairness was grounded on the ability to pay, thus the rise and subsequent popularity of the progressive tax system in the USA.
Currently, the overall tax system in the USA is progressive. However, the progressive system focuses on the redistribution of taxes rather than the distribution of the tax burden (Diamond & Saez, 2011). For this particular reason, the question of whether the current tax laws are effective in addressing income inequity is at the forefront, particularly among individuals and organizations that consider income inequity an issue.
The unfairness of the USA tax system is evident when considering the issue of equal justice. Undeniably, with a tax system larded with one trillion dollars in tax preferences aimed at rewarding some taxpayers while punishing others, it is clear the country is far from a program where individuals with equal incomes are taxed equally (Gleckman, 2012).
Additionally, the unfairness is evident in the uninformed perceptions among the majority of Americans, including policymakers, that the tax code should be viewed in isolation. Indeed, perceiving the tax system in isolation implies that the existing tax system ignores people who benefit from direct government spending in addition to the one trillion dollars in tax preferences (Pew Research Center, 2017).
The unfairness of the American tax system is evident in the fact that the amount an individual pays is not in reality, dependent on the amount an individual makes. Indeed, the tax system is reliant on other irrelevant factors including whether an individual’s income has capital interests, other forms of income, whether a person owns a house or rents, whether one has children or does not, whether one is single or married, whether one lives in a state with high or low tax rates among other factors that make the American tax system fundamentally unfair. For instance, while the federal USA tax system is progressive, each state has a different tax system that tends to take a more significant share of income from low and middle-income families than wealthy families (Gleckman, 2012). Unfortunately, the lack of graduated personal income taxes and overreliance on consumption taxes pinpoints to the fundamental unfairness of the American tax system. Indeed, in many states, sales taxes are regressive, with low-income families paying almost eight times more of their income compared to wealthy households.
The unfairness of the American tax system is concealed under the system’s complexity and the fact that it is fundamentally outdated. The American tax system is way too complicated. Over the past several decades, Congress has passed a multitude of rules and exceptions as incentives to encourage taxpayers to spend money in certain ways. It is unfair for Congress to pass new laws in the tax system to coerce Americans to spend in a particular way. Moreover, the incentives associated with the extra bills, for instance, encouraging certain forms of energy, are concealed under mountains of instructions that many individuals do not realize they exist; as such cannot take advantage of them, making the system unnecessarily complicated (Thornton & Hendricks, 2019).
Besides, the system is outdated and, as such, cannot serve Americans, consequently unfair. For instance, payroll taxes that concentrate on the currently trending social security and Medicare cannot meet the future needs of Americans (Thornton & Hendricks, 2019). A fair system will focus on keeping taxes as low as possible in addition to taking into account equitability in the effort of raising revenue for government expenditure.
A fair and better tax system would streamline tax incentives for education and pool the personal exemption, child credit, and earned income credit into a higher standard deduction. The corporate income should only be taxed once rather than taxing corporations’ income and investor’s capital gains (Diamond & Saez, 2011). Congress should focus on tax enforcement to ensure the American government gets sufficient funds for its operations to avoid cases where a majority of Americans pay more while others do not.
The question of the fairness or the unfairness of the USA tax system is more a socio-economic issue than it is a financial issue. The American tax system continues to take advantage of low-income earners despite being widely recognized as progressive since the majority of the taxes are consumption taxes. Moreover, with more than one trillion dollars tax preference, in many cases, individuals with the same amount of income do not pay the same amount of tax. Additionally, the system is unnecessarily complicated and outdated.
Diamond, P., & Saez, E. (2011). The case of progressive tax: From basic research to policy recommendations. Journal of Economic Perspectives, 165-190.
Gleckman, H. (2012, May 3). Is the USA tax system fair? Retrieved October 19, 2019, from the Tax Policy Center: https://www.taxpolicycenter.org/taxvox/us-tax-system-fair
Pew Research Center. (2017, April 14). Top frustrations with tax system; Sense that corporations, wealthy don’t pay a fair share. Retrieved October 19, 2019, from Pew Research Center: https://www.people-press.org/2017/04/14/top-frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-fair-share/
Thornton, A., & Hendricks, G. (2019, June 4). Ending special tax treatment for very wealthy. Retrieved October 19, 2019, from Center for American Progress: https://www.americanprogress.org/issues/economy/reports/2019/06/04/470621/ending-special-tax-treatment-wealthy/