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Madison Elliott
Dr. Steffen Guenzel
ENC 11020M12
14 April 2015
To Income Tax or Not to Income Tax
In today’s society whether it be working at a gas station or becoming a brain surgeon,
most citizens of the United States have to keep a full time job in order to keep up with the
demands of our changing economy. Once citizens are employed they have the dreaded
responsibility of filing their taxes, a task that most citizens hate and have to hire accountants to
help them with. Usually taught at a youngadult age, filing one’s taxes is completely based off
their W2. A W2 is a document that every employer must send to the IRS and all of their
employees at the end of every year; the document reports an employee’s annual wages and the
amount of taxes withheld from the employee’s paycheck. The employee must then file their
taxes; a process that is not easy and usually requires help from a professional. W2’s are usually
given out sometime in January or February, and filed taxes are due every year on April 15th. If
taxes are filed after April 15th the citizen will be charged and have to pay a fee for it. If a citizen
never files their taxes, they will pay serious consequences. Although it takes a year or two for
these punishments to happen, eventually the government will seize all of the citizens’ assets, sell
everything they own, and take them to jail (Elliott). It is important that citizens pay their taxes
because that is how the national government makes its money and keeps the country running
smoothly.
The current tax system we have in the United States is a progressive income tax. This
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system breaks the country up into seven different brackets: with the lowest bracket being the
poorest families and the highest bracket being the richest families. The higher up an individual,
or family, is in a bracket means a higher percentage of their income must be paid to taxes. If a
family makes $18,150 or less in a year they will have to pay 10% of their income to taxes.
However, if a family makes around $458,000 or more in a year, they will have to pay 40% of
their income to taxes (“Tax Brackets 20142015”). This system does have its flaws and it was not
easily constructed or put to action. The progressive income tax had to go through five decades of
controversy and debate before it was finalized in 1913, and it is still the tax system the United
States uses today (Pollack).
Before 1913, the United States government used a revenue system based off tariff,
custom duties, federal excise taxes, and the sale of public land to make its money. The switch to
a national income tax happened because in the early 20th century Republicans controlled both
houses of Congress and together approved a constitutional amendment allowing for a national
income tax. Ironically, Republican president, William Howard Taft and Republican leader of the
Senate, Nelson W. Aldrich, are the reason we have the income tax today even though they were
against it at the time. During that time the American people desperately pushed for a progressive
income tax, so Taft and Aldrich planned to propose a constitutional amendment authorizing an
income tax because they believed it would fail in Congress and end the fad. They thought if they
proposed the amendment and it got denied, it would shut down the eager push for a progressive
income tax. However, it was passed in Congress and began to benefit the country immediately.
During World War I, the principal source of income for the national government came through
the federal income tax that every citizen had to pay. Still today, more than 50% of the revenue
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the national government receives is from income taxes (Pollack). Admittedly, it would be hard to
imagine our country’s prosperity without this income tax system, but throughout the years it has
proven to provide many problems as well.
The meaning of a progressive income tax – the more you make, the more taxes you pay –
is not what the founding fathers had in mind for our national tax system. In 1913 the tax started
small, where the highest income bracket was taxed only 7% of their income. But now, 100 years
later, the amount of taxable income has grown in size and scope. Each new year comes with
different leaders of our country who want different financial structures. President Hoover used
the excuse of war and depression to raise income taxes from 24% to 63%. Then in 1941,
president Roosevelt raised income taxes to 79% simply because he thought the national
government needed it (Pollack). Year after year new problems arise that have to do with our
national tax, which eventually leads citizens to loathe the tax system and the IRS. Now, with
every new presidential campaign that comes, a hot topic is always the national tax system. There
are tax advocates that want to replace our current system with a flatrate income tax, others
prefer a national consumption tax, and some push for a national hybrid tax. But at the end of the
day the question remains, what is the best national tax system for the United States?
Switching to a Flat Income Tax
The first alternative tax structure would be switching from a progressive income tax to a
flat income tax. This means instead of breaking the country up into brackets and applying
different percentages based on income, every citizen would be given the same percentage that
they would have to pay. There would be a flat rate across the board that all citizens pay, no
matter how much they make or spend (Elliott). Robert Hall and Alvin Rabushka, two colleagues
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at the Hoover Institution, first proposed the flat tax in the 1980s. They named it the flat tax
because “all individuals and businesses [would be] taxed at a flat rate of 19%” (Jones). Hall and
Rabushka’s goal for the flat tax is to set the tax rate as low as possible but to keep the tax base as
broad as possible. With our current tax system, citizens are able to reduce the amount they pay in
taxes by filing for deductions or exemptions, such as: owning a house, giving to charity, having
medical expenses, etc. Citizens take advantage of this law by filing for as many deductions as
possible and reducing the amount they have to pay in taxes. But for Hall and Rabushka’s flat rate
proposal they want to keep the tax base as large as possible, so they allow a deduction for having
a family but no other deductions or exemptions would be allowed. Their reason for wanting a
large tax base is because “some taxpayers take undeserved deductions, narrowing the tax base
and shifting the burden to other taxpayers who are attempting to file their taxes in the most
honest way” (Jones). Nevertheless, this method allows the government to maintain steady
revenue while pleasing taxpayers because they are able to keep more of the money they earn by
utilizing the low tax rate. Using this method, more citizens in the United States would pay taxes,
but as a whole it would be a much lower percentage than what citizens pay now (Jones).
Of course with any method there are pros and cons that apply. A significant benefit of the
flat income tax is pretty obvious: because it is simple method. A flat tax would make paying
taxes easy and it wouldn’t be such a burden to citizens of the United States. With the current tax
system, almost all citizens have to hire an accountant or lawyer to help file their taxes and figure
out the IRS regulations. Texas governor Rick Perry argued for a flat tax because taxpayers would
be able to “complete their returns in minutes and submit them on a postcard” (“A Flat Tax”). One
tax rate would make the Internal Revenue Services’ job a lot easier, while also providing
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taxpayers with a straightforward and simple payment. The flat tax gives citizens a sense of
fairness, and that every citizen is treated equally. However, there are cons with this approach as
well. Opponents of the flat income tax state that this method penalizes the lowincome side of
our country. This is argued because lowincome taxpayers will be paying more than they pay
now, and highincome taxpayers will be paying less than they pay now. Ultimately, this will be
making the poor people poorer and the rich people richer, causing an even bigger divide in the
classes of our economy. Opponents say a flat tax may simplify the tax code and give a sense of
“equality”, but that would only happen at the expense of lower and middle class families.
Overall, it seems unlikely that our country would be able to completely switch to a flat income
tax. First proposed in 1981, and several times since then, it has never been approved or gained
much support. The government takes a long time to discuss changes and an even longer time to
enact changes, so redoing the entire tax structure is not an easy task to accomplish. Every citizen
will have a different opinion about the tax structure depending on where they stand financially,
so a true outcome as to how this tax structure would work cannot be determined until it is put to
action (Meehan).
Switching to a Consumption Tax
The second alternative tax structure would be switching the income tax to a consumption
tax. This system would completely alter how our current national tax system works. It would
completely get rid of tax season, filing taxes, and ultimately the IRS and accountants. No taxes
would be withheld from paychecks, and “filing your taxes” would no longer be a thing. A
consumption tax is also known as a sales tax, so this method would solely rely on how much a
citizen spends, instead of how much a citizen makes. Fortyfive states in the U.S. already have a
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successful statewide sales tax, which is a tax paid on all goods or services that are purchased
and consumed in the state (Drenkard). So, a national consumption tax would be a tax placed on
all final goods and services in the country. States that do not have a sales tax would only have to
pay the national consumption tax, but the fortyfive states that do have a sales tax would have to
pay consumption taxes to their state government and the national government. This may seem
like the cost of all goods and services would increase, and that would be correct, but the
elimination of the income tax would mean more money available for people to keep in their
pockets. The current tax system takes tax money directly out of everyone’s paychecks, but with a
consumption tax this would not happen, so paychecks would have a higher dollar sign on them.
Technically, everyone would be making more money on their paychecks so they would be able
to keep up with the rising prices when the consumption tax is applied to all goods and services.
The main questions constantly asked with this tax structure are: what is the appropriate tax rate
and should it vary for different kinds of goods or services? How would consumers react? If
people were to stop buying as much goods and services, less tax revenue would be generated for
the federal government, and the economy would decline. Again, with any alternative tax
structure there are pros and cons that would apply if it were put into action (Tomlinson).
An easy advantage to a national consumption tax is that it would eliminate all income
taxes. This means filing of income taxes would no longer happen because everything would be
paid at the point of sale. This would make citizens’ lives much simpler, although this implies a
large chunk of the IRS would be eliminated. Another advantage of the sales tax is that everyone
has to pay it, whether they are a legal citizen or illegal immigrant. As well as those participating
in illegal activities that currently get out of paying taxes would now be subject to paying taxes
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along with everyone else. Americans would have control over how much of their money is given
up in taxes, because they have the right to decide if they want to be frugal with their money or
spend a lot. Businesses would also benefit from a consumption tax because they would be able to
lower costs and hire more workers due to their own tax rates decreasing (Elliott). Overall, a
consumption tax is a fair and simple method because filing taxes would become nonexistent and
everyone in the United States would be forced to pay the tax. This way, the government is
ensured to get their money and citizens no longer have to jump through hoops to pay them.
Along with the positive aspects that could come with a consumption tax, there are
definitely some negatives as well. Given that citizens would be able to control the amount of
money given in taxes by spending more or saving more, this could potentially harm the economy
if a large amount of citizens chose to cut back on spending. Another disadvantage to the
economy would be the attorneys, accountants and IRS employees losing their jobs due to the
easier tax system. Although, the biggest challenge with switching to a consumption tax is the
journey it takes to get there. Not only would the changes be expensive to the country but new
options would need to be made to fund social security, welfare, etc. A major problem for retirees
is that they have already paid taxes on the income they earned during their lifetime, so then they
would be taxed again on items they consume. Ultimately, they would be paying taxes on already
taxed goods and services (Mulligan). Overall, a national sales tax would allow Americans to feel
more empowered and given a sense of belonging to their country. However, the transition from
our current tax system to a consumption tax could put the economy in shock and the job loss that
may occur could be detrimental. The national consumption tax debate will continue on for years
to come, and as long as our country is in debt, new ideas will continue to blosom (Elliott).
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Switching to a Hybrid Tax
The third and final tax alternative would be switching to a hybrid tax. A hybrid tax is a
combination of an income tax and a consumption tax. Like the consumption tax where there is an
additional tax on all goods and services, that method would apply to a hybrid tax as well except
the tax would be a much lower rate. It would be lower because the consumption tax is not the
only tax style used, it would be combined with the income tax method as well. So although taxes
are being paid on everything a person buys, they will also have to file taxes on all the money
they save. For example, say an individual makes $100,000 a year, but they only spend $40,000
of it. They will have to pay consumption taxes on the $40,000 that they spend, but also file an
income tax and pay for the $60,000 that they saved. This way both tax systems are being used
and the government is guaranteed to receive its money (Elliott). This hybrid tax style is proposed
because with the current income tax many citizens get out of paying the real amount they are
supposed to due to deductions and exceptions. Likewise, with the consumption tax the
government is concerned citizens would cut back on the amount they spend and not provide
enough money to the government. Using the hybrid tax the government is ensured to get its
money, whether citizens are frugal or big spenders. Combining the two tax methods,
consumption and income, citizens are able to spend/save money as they please without the risk
of underpaying the government. The hybrid tax style is a happy medium between income and
consumption taxes and that is why there are many advocates for this structure (Hymson).
Concluding Why Hybrid Tax is the Best Tax
Overall, all three tax alternatives offer great changes and positive outcomes. The flat
income tax is similar to the tax structure we have now, but instead of splitting citizens up into
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different brackets and taxing them all differently, the tax base becomes larger and all citizens pay
the flat rate of 19% of their income to taxes. The consumption tax is completely different than
the tax style we have now. There would no longer be money withheld from paychecks, filing
taxes, or tax season at all. Instead, there is an additional tax put on every good and service in the
country. So when goods and services are purchased that money goes directly to the government
and that is how the government receives its money. And lastly, the hybrid tax is a combination of
the two. There is a national tax tacked onto all goods and services so citizens would be paying a
consumption tax, and citizens would also have to file taxes on all the income they did not spend.
All three tax styles offer great alternatives to what we have now, but they could all bring
different kind of risks to our country as well. The hard part in choosing a new tax method is
determining which method would bring the most benefits even with the risks of transitioning.
In conclusion, the best tax method to transition to would be the hybrid tax. The
Congressional Research Service has stated, “there appears to be insufficient theoretical or
empirical evidence to conclude that a consumptionbased tax is inherently superior to an income
based tax or vice versa.” Ultimately, a hybrid tax would produce many consumption tax benefits,
but without the hardships and transitional problems that would occur from converting to a
complete consumption tax structure (Hymson). To completely switch to a hybrid tax our
government would just have to implement a few consumption tax features, and modify the
income tax we already have. These changes could be made without having to reconstruct the
entire tax system. The main benefit to the hybrid tax is that Americans will still have the right to
do what they want with their money, but the government will be ensured its money as well. If
citizens want to spend a lot of the money they make, they will pay consumption taxes on their
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spendings. If citizens want to save a majority of the money they make, they will pay income
taxes on their savings. This way, the government is still receiving finances to run the country
while Americans have the freedom to spend/save as they please. It is not easy to find a happy
medium between the income tax and the consumption tax, but a common ground is found when
using a hybrid tax.
Works Cited
"A Flat Tax: The Good, the Bad and Why It Probably Won't Happen." Money Talks News. N.p.,
n.d. Web. 21 Apr. 2015. <http://www.moneytalksnews.com/aflattaxthegoodthebad
andwhyitprobablywonthappen/>.
Drenkard, Scott. "State and Local Sales Tax Rates." Tax Foundation. N.p., 18 Mar. 2014. Web.
23 Apr. 2015. <http://taxfoundation.org/article/stateandlocalsalestaxrates2014>.
Elliott, Brent. "Different National Tax Methods." Email interview. 12 Apr. 2015.
HYMSON, EDWARD B.1. “The Debate Over Replacing The Present Income Tax With An
Alternative Tax Structure.” Southern Law Journal 23.2 (2013): 181209s. Index to Legal
Periodicals & Books Full Text (H.W. Wilson). Web. 12 Feb. 2015.
Jones, Rita C., John F. Thomas, and Teresa K. Lang. "Income Tax Reform And The Flat Tax."
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Mulligan, Kevin. "Pros and Cons of a National Sales Tax." EZRateQuotes. N.p., 24 Nov. 2011.
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<http://www.bankrate.com/finance/taxes/taxbrackets.aspx>.
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<http://www.okfairtax.org/consumptionvsincome.pdf>.