SHOULD THE US CONVERT TO A ZERO PERSONAL INCOME TAX
Shouldthe U.S. Convert to a Zero Personal Income Tax?
Personalincome tax entails a form of direct tax that is levied on the incomeof a person. In this case, a person may be considered to imply anindividual, a non-juristic body, undivided estate, or an ordinarypartnership. This form of tax is usually paid annually to thegovernment, depending on the calendar year of the government. Thepersonal income tax emerges as a critical form of tax to thegovernment since it is a major source of revenue to the government(Robert, 2003). Most of the governments in the globe are in aposition to pay for their expenses using the income tax that theycollect. In the United States, this is not different since thefederal government plays a critical role in enacting the income taxand the subsequent rates which help the government in raisingrevenues that are used in financing the expenditure of thegovernment. However, this is not the case in other countries. Sincepersonal income tax provides a lot of revenues to the U.S.government, which is used in financing the government expenditure, itis questionable whether the U.S. government can be in a position tooperate without the personal income tax. This report will analyze howtwo countries offer services and benefits to the citizens without thecollection of personal income tax. Then, from these countries, I willestablish whether U.S. can adopt their model of taxation withoutreducing its total revenue generated through the collection ofpersonal income taxes from individuals and businesses.
Twoof the countries that provide benefits and services to citizenswithout the collection of personal income taxes include Oman andBahrain (Askari et al, 2013). In order to be capable of providingservices and benefits to the citizens, Oman depends on its broadpetroleum reserves as well as natural gas for revenues (Askari et al,2013). As a source of revenue in Oman, oil and gas accounts forapproximately 50% of the GDP this is around 90% of total revenues ofOman. Despite the government not imposing income taxes, soleproprietors are subjected to a tax which is at the rate of 12% forprofits exceeding RO 30,000. Also, citizens are required to pay 6.5%of their monthly earnings towards the social security benefits. Onthe other hand, Oman does not levy estate taxes, gift taxes, networth taxes, and value added taxes.
Alternatively,Bahrain relies majorly on oil for its revenues. In 2012, theproduction of petroleum as well as refining contributed toapproximately 77% of the Bahrain’s receipts in exports. This was a19% of GDP and 87% of the revenues to the government. In Bahrain,there are no income taxes imposed on individuals however, there areindirect taxes in form of stamp duty which is on real estate (Askariet al, 2013). There are no taxes on sales royalties, dividends,estates, capital gains, or estates. Also, there is no withholding taximposed in Bahrain nevertheless, citizens of the country have tocontribute 7% of their monthly salaries towards the social securitybenefits.
Thetax system that a given country adopts is usually determined bydifferent factors such as the public service needs of the country,the ability to administer taxes, and the economic structure of thecountry among other factors (Caldewell, 2008). It would beexceedingly difficult for the United States to adopt the tax systemmodels of Bahrain and Oman. One of the chief reasons why the UnitedStates cannot be in a position to adopt the tax model of eitherBahrain or Oman is because it does not have large masses of naturalresources, which it can utilize in generating a lot of revenues thatwould be adequate in providing services to the citizens that aresocially desired. Even if the government of the United States decidedto generate revenues from its natural resources, it would still beinsufficient to cover the expenditure of the government. Therefore,in case the U.S. adopts the tax systems of the two countries, it willnot be in a position to generate revenues that are equivalent to therevenues it generates from personal income taxes. This would resultin a vast budget deficit, which implies the move is not appropriate.
Incase the U.S. government was to adopt a zero income tax model,revenues may become generated through the sales tax. Sinceconsumption is a must, a sales tax would ensure that individuals paysales tax according to their incomes (Murray, 1997). This impliesthat there would be no need of tax exemption. The federal governmentshould design the VAT that is to be adopted at federal level thisshould be based on the broadest consumption base. The tax base inthis case would be the quantity of goods and services that anindividual buys. In order to ensure that the same level of taxrevenue is collected, the IRS should ensure that the sales tax rateis sufficiently high to be capable of collecting the same level ofrevenue. The sales tax should have a uniform rate. Through uniformtaxation, equity will be ensured.
Incase, the federal government realizes that there are shortfalls whenit fails to collect its targeted revenue from personal income taxes,the government may borrow domestically through issuing of bonds. Therevenue collected from the issuance of the bonds can be used infacilitating the shortfall in the revenues. When issuing the bonds,the government will adhere to the fiscal and monetary policies sinceit will have to follow the interest rates that are provided for inthe policies.
Askari,H., Cummings, J. T., & Glover, M. (2013). Taxationand tax policies in the Middle East.Burlington: Elsevier Science.
Caldewell,T. B. (2008). Taxation:21st century issues and challenges.New York: Nova Science Publishers.
Murray,M. N. (1997). Thesales tax in the 21st century.Westport, Conn.: Praeger.
Robert,W. M. G. (2003). ThePhilosophy of Taxation and Public Finance.Dordrecht: Kluwer Academic Publishers Group.