Question

We found in current articles that the US tax system is overall regressive when you incorporate local and state sales and other taxes. The wealth tax had been floated as a way to force our tax system to reduce inequality and give US citizens a more equal opportunity to have the “American Dream”. Given what you have learned in this class so far, explain the advantages of this tax. What would be important for policymakers to think about when designing the specifics of this tax?

Answer 1

A tax system is said to be regressive when the burden of tax falls disproportionately more on the poor. This implies that, Indirect taxes, such as sales tax, are same for the rich and for the poor, irrespective of their income. Hence, a poor citizen pays a higher proportion of its income as tax than a rich citizen. Thisnpromotes inequality. The developed nations tend to move away from indirect system.of taxation to direct system of taxation.

On the other hand, direct system of taxation is a progressive mode of taxation as its burden proportionally falls equal on all the citizens. For example, if wealth tax is 25%, a rich person will be paying a higher amount than a poor citizen because 25% of its wealth will be higher than the 25% of the wealth of the poor citizen. Hence, progressive system of taxation tends to reduce inequality.

A wealth tax is an annual tax levied on the net worth, or total assets net of all debts, of an individual or household above an exemption threshold. Net worth includes financial assets ( such as bank accounts, bonds, stocks, and mutual funds) as well as non-financial assets (such as real estate, luxury goods, etc.).

Advantages of wealth tax:

1. Tends to reduce inequality: A wealth tax tend to reduce inequality as its burden falls proportionally on the citizens making it a progressive form.of taxation.

2. Raises revenue: The introduction of direct system of taxation will raise the revenue of the government.

3. Doesn't only include the current income but also net worth.

4. Affects less number of people as not everybody will fall under the bracket of crossing the threshold income.above which Direct taxes are imposed .

Hence, all these adavntages tend to give Americans equal opportunity.

Following are the specifics that policy makers need to keep in mind while designing a tax system:

1. Economic Efficiency: The policy makers shall identify the resources available in an economy such that the taxes imposed shall meet the ability of pay principle. The taxes shall.proomote efficiency.

2. Fairness: The taxation shall be fair and progressinve. The burden shall be less disproportionate and the poor shall not be paying a higher proportion of their income as tax as compared to the rich.

3. Incidence and imposition: The policy makers shall be very clear of whom the taxes need to be imposed and who shall be actually paying it.

4. Economic Goals: The taxation system needs to be in line with the defined economic Goals of the policy makers. The sectors which the policy makers are willing to promote shall be imposed with lesser tax burdens than the ones which the government see as already doing well.