Answer

Thesis

“The tax system can never be fair to everyone. The rich would always want concessions for paying more taxes than the poor while the poor would insist on paying less tax based on their ability to pay”

Introduction

According to Adam Smith the basic tenets of a good tax system is its fairness in wealth distribution and its propensity to deliver sufficient revenue for the government (Glahe, 1977).  The cost of collecting the taxes should not override the benefits that are expected from the tax collections. The ability of the taxpayer to pay the taxes in a manner that is convenient with certainity on the period and amount payable also describes the degree of fairness a good tax code should have.

The American tax code is founded on the basic principles of a good tax system. The code strives to find a balance between the two distinct categories of tax payers. The taxes contributed by the rich in society is just as much as the contribution of the poor whose numbers remain the strength of their high rate of taxes remitted to the government. The internal revenue code of the year 1986 and the federal tax law regulates the payment of domestic and corporate taxes in the US. The taxes cover income taxes, estate, excise and gift taxes. Each state has however its own tax codes that have limited jurisdiction as applicable in the respective state only (Bank, 2010). 

Several theories have been forwarded to galvanize the support of the tax system where the rich and the poor have equal rights to be treated fairly by the state. The American tax code taxes the rich more than the poor.

The Benefit Theory

The benefit theory states that taxes should be designed to levy individuals and corporations according to the benefits that each person derives from the community or state. The more benefits is accumulated from the system the more the beneficiary should compensate the state. The argument is mostly related to the basic services that the state renders to facilitate the free movement of goods and people across the country in order to ensure that the trading activities are thrive and the expansion and growth of revenues is assured. However, the US government is often criticized that the government taxes millionaires highly while the low income earners walk away scot free without paying any taxes at all (Gleckman, 2012). However, the rise of the progressive tax system ensures that there is equity in the tax payment structures where those citizens who earn more high salaries pay more taxes than the low income employees. The major concept being that the tax burden should be distributed equally so that the weight is equal to the pockets of the rich as well as the poor while at the same time the system ensures that wealth id fairly distributed to all the citizens in a country.

The Cost of Service Theory

The other main advantage of the progressive tax structure is that those who derive the highest services from the state pay equally for the benefits that have accrued to them by contributing a higher proportion of taxes in comparisons to those who have benefitted marginally from the system. In the opinion of the US government, state charges basically the actual cost of rendering services to the citizens while also satisfying the element of justice and equity in the taxation system. The determination of the services still remains a contentious issue as it is difficult to quantify the services rendered by the judges, police or the armed forces. Some economists argue that there is absence of quid pro qua in American tax system. However, it is an uphill tax to accurately calculate the benefits enjoyed by each tax payer and tax pro rata to the benefits accrued. The principle of economic aspect of tax collection would be violated by excess costs of determining the taxes to be collected from each tax payer.

Ability to Pay Theory

The most controversial aspect of the American tax system today is its determination of American citizens’ ability to pay taxes. Who should be allowed to pay more taxes or actually be penalized to pay high taxes or be rewarded by non-payment of taxes.  It’s reasonable that the American tax code should be based on individual taxable capacity or simply put, the ability to pay taxes. The trouble surfaces on the definition of the citizen’s ability to pay. Most economists are certainly not unanimous with the America’s exact measure of one’s ability or capacity to pay.

Ownership of property has largely been used by most taxation systems globally including the US as one’s ability to pay taxes. However, some economists argue that this basis is wrong as majority of the American citizens save their incomes in the banks and spend minimal amounts buying property hence pay less tax while on the other hand the investors spend all their savings buying properties and in the process pay more taxes. It is absurd and unjustifiable to tax a person investing on property while exempting the other with equal savings (Huret, 2014). 

To address the issue, it is normal to spend much more when an investor hopes to benefit more in future. By in investing in the property market, the investor is assured of increased value in future while the other will end up with decreased value certainly as a result of inflation. The basis of taxation system encourages prudence in our decisions especially as to whether one should invest or not. The American tax code is fair to both the rich and the poor. The poor is taxed less and derives less benefits from the state where as the rich benefits more by investing for instance in the property market hence they pay more taxes and also benefit more from the system (Fisher, 1996).

The American tax code actually allows the rich to benefit more from the system as huge capital investors enjoy limited taxation in the form of capital allowances that also seeks to promote economic growth and development. The investors are mostly allowed to recoup a relative amount of the amount invested in the initial years of the investment.

The poor also enjoy the benefits from the state in the form of tax exemption for a limited amount of earnings, unemployment allowance as well as the benefits rom the welfare social system.

The capacity to pay taxes can also be measured by the amount of expenditure that one spends in a period of time. A person who has a high budget pays more taxes than those with less. This method is arguably skewed as argued by some economists. A person with a reasonably large family will certainly spend more than someone with a small family notwithstanding the level of disposable income hence the system seems unjust and unfair.

The best system to measure a person’s faculty to pay taxes is basically his income. Economists are in agreement that income is the best measure of someone’s ability to pay taxes.

Proportionate Principle

The principle of proportionate concept was initially forwarded by prominent economist (Hollander, 1985) as a great idea in providing justice in taxation systems. The principle holds that if taxation is levied relative to a person’s income it would definitely provide equal justice. However, some economists argue that the marginal utility of one’s income decreases when income increases. Equal sacrifices can only be achieved by taxing at a higher rate people with higher income while at the same taxing at a lower rates people with less income. The development of the progressive tax systems was designed with such thoughts in mind hence to ensure equal sacrifice for all. 

To conclude, the American tax code is both fair to the rich and poor people in the society. The investors are encouraged to invest more by the concessions that allow exemption and tax benefits on capital expenditures while at the same time investors have the opportunity and favorable trading environment that allows more benefits from the state. In return for the taxes paid the state ensures the basic rights of the American people are protected and the provision of basic services is afforded to all citizens equally. 

The progressivity of the tax system in the US originated from the progressivity of the year 1954 code that was enacted with the respect of income tax chargeable to individuals. The progressivity code has 24 income brackets that apply tax rates from 20 to 91%. The federal marginal tax rates on marginal individual income impose taxable income for both married and unmarried individuals.

The system was designed purposefully to address the grievances in the tax system that sections of the American’s great nation felt were biased on their application. The major advantage of the progressive tax system is that it’s fair to both the poor and the rich. However the system for the corporate tax system is different and it’s limited to a single fixed rate that varies from time to time but it oscillates from 30 to 45%.   Both systems are fare as they are elastic which means that they can easily be adjusted without causing major changes. The convenience and their simple application procedures provide easy application. The taxation system is still not perfect and regular amendments are still enacted to correct the misgivings of some sections while also improving the operating systems that make the payment of taxes more convenient to all citizens.

Finally, the fairness of the US tax code depends on which side of the road one is standing. Whereas the rich contends that the poor benefit more from the current tax code in the US it’s evident that the rate at which the gap between the rich and the poor continue to increase suggest the contrary. The low income earners argue that the rich only pay the minimum wage as enacted by the government and most of the profits end up with the owners of the companies but the government revises the minimum wage allowed in the US from time to time to ensure proportionate distribution of wealth.for generalizing the study’s findings.