Attempts to reform state and local tax systems in the U.S. appear to be similar to a perpetual occasion. The tax systems of the country are in numerous cases the artifact of the old times, which are poor-designed in regards with the actualities of the current state economy. The last decades vividly demonstrate that state and local tax systems have specifically encountered elevating challenges, particularly in such spheres as the increase of attendances and online sales, elevated tax emulation, higher factor mobility across state boundaries, and other analogous evolvements, numerous of which have made it progressively complicated for state and local tax systems to create appropriate incomes in an effective and equitable manner. Taking into account all of these challenges, there have been regular and different attempts to reform state and local tax systems in the U.S. Numerous economists and policy makers assume that the U.S. state and local tax systems are in need of reform. The current paper will demonstrate why and how state and local tax systems should be reformed.
Problems with the U.S. Tax System
The facts demonstrate that the U.S. tax system is neither a genuine revenue tax system nor a genuine consumption tax system, but preferably a combination of the two systems (Devereux and Vella 450). Despite the fact that being formally grounded on revenue, the U.S. system eliminates essential parts of the income to retrenchments from the tax foundations (for instance, interest generated assets appearing in a 401(k) employment-grounded retirement project or an Individual Retirement Account) (Devereux and Vella 450). In addition, the U.S. system eliminates other types of revenue from the tax foundations with two major examples accounting for the rewards acquitted by employers for employee health insurance and the implied rental cost of owner-based housing (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 51). The modern U.S. corporate income tax system typically taxes corporate revenue at a ratio of 35 percent (Fleischer 3). The tax is employed to revenue generated domestically and overseas, despite the fact that taxes on particular revenue generated abroad can be degraded endlessly in case the revenue sustains abroad (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 51). In addition, the state corporate tax system incorporates numerous subtractions, indulgences, and deferments combined with specific tax credits frequently named as “tax expenditures” (Saez, Slemrod, and Giertz 34). Thus, all these conditions combined lower the efficient tax rate paid by numerous U.S. corporations becoming lower than the 35 percent statutory ratio. The analysis of 2014 demonstrates that the total sum of all corporate tax disbursement accounted for $154.4 billion (Fleischer 6). The facts demonstrate that the importance of the corporate tax as a state income source has decreased with time. The corporate tax encountered its peak during the post-WWII period (meaning 1952) when it created 32.1 percent of all state tax income (Saez, Slemrod, and Giertz 34). The analysis of 2014 demonstrates that the corporate tax was 9.9 percent of state tax income (Devereux and Vella 452). The decrease of the corporate incomes stands for a combination of decline of efficient tax ratios, an elevating fractioning of business operation, which is being implemented by passing-through organizations (specifically companies and specific corporations, which are not subjected to the corporate tax), and the abatement in corporate sphere efficiency (Saez, Slemrod, and Giertz 37). A peculiar facet of the corporate tax system, which obtains significant consideration, regards the 35 percent statutory corporate tax ratio. Despite the fact that the U.S. has globally the greatest statutory corporate tax rate, the country’s efficient corporate tax rate is analogous to the Organization for Economic Cooperation and Development medium (Fleischer 4). Moreover, the U.S. gathers less in corporate tax income as compared to the Gross Domestic Production, which accounts for 2.3 percent (on the contrary to other OECD states’ 3.0 percent) (Devereux and Vella 453). The Congressional Budget Office claims that if the tax systems do not change, the yearly federal budget deficiency will drop lower than $800 billion (Fleischer 13). Tax incomes will be capable of covering merely 80 percent of federal spending, which presupposes that the country will have to borrow 20 cents for every dollar used. In fact, nationwide held debt, which is measured as a share of the U.S. national economy, will elevate from approximately 73 percent to about 90 percent by the end of the decade (Fleischer 14).
One of major issues with the modern U.S. tax system regards the fact that it is so entangled that a highly limited number of people can understand it. The U.S. tax code is known to be over 70,000 pages long. It started with 400 pages in 1913 (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 51). Afterwards it was greatly stowed with tax gaps, substations, laws, etc., which make it impossible to comprehend the code for an average American (Saez, Slemrod, and Giertz 42). The facts demonstrate that the current tax system is equipped with tax gaps and deductions in order to benefit main donating components of institution politicians (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 51). Moreover, it makes it easier for a politician to indicate tax breaks and “free” costs to people so as to be elected and, on the contrary, indicate to elevate taxes so as to equip and enhance education (Gubert and Altshuler 7). The current state and local systems are the main factors, which causes the country’s economy suffering (Dubay 7). Exquisite reconstruction of the government spending and taxation can become a significant enhancement for the economy (Gubert and Altshuler 8). A limited amount of governmental spending in specific spheres (including allocation of particular prerogatives and benefits for non-citizens), elevation in taxes in specific spheres (incorporating millionaires and a limitation of different tax liberations, subtractions, and credits), higher quantity of governmental spending for manufacturing promotion and infrastructure, and lower taxes on the middle class can seriously enhance the U.S. economy (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 52). The U.S. national debt accounts for more than $18 trillion and continues to grow in 2015. This particularly depicts that the U.S. requires reforming of state and local tax systems. The facts demonstrate that the country has been spending more than $1 trillion annually that it obtains during the previous decade. In addition, the majority of American citizens do not like taxes, while hating the cuts to taxations programs they use (Saez, Slemrod, and Giertz 47). The major part of Americans are not eager to abandon tax subtractions, privileges, or credits, which account for $3 trillion (2010-2014), when the state deficits are increasing $1 trillion each year (Devereux and Vella 453).
Reforming the State Tax Systems
There are several steps, which should be implemented while reforming the U.S. state tax system. Firstly, it is important to decrease corporate tax rates. Regardless of cases when subtractions are taken into account, efficient state and federal corporate taxes in the country can be regarded as globally the highest (Gubert and Altshuler 13). These taxes have been politically and economically stable for a long period of time (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 49). The U.S. corporations are known to be the global jealousy, equipping products and services with a caliber and accessibility that few others can equip (Gubert and Altshuler 13). The U.S. organizations are also induced to perform close to well-founded customer bases (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 49). In addition, transportation infrastructure and shortage of a digital economy limit and restrict external investments. Nevertheless, the world exists in a state of globalizations, which makes competition much fiercer. On the one hand, it is good for American consumers (decreased prices resulting in more savings). On the other hand, the U.S. companies are under solid pressure. Thus, in order to relieve that pressure, the U.S. companies frequently relocate so as to lower costs (Saez, Slemrod, and Giertz 48). Numerous U.S. foreign competitors attract American businesses with decreased corporate ratios. Therefore, there is a requirement to lower the corporate income tax rate in the U.S. (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 50). For instance, the corporate tax ratio accounts for 20 percent in the United Kingdom and is forecasted to decrease to 18 percent during the following five years (Pollack 110). Therefore, high corporate tax rates make global competition for the U.S. companies even fierier (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 52). Nevertheless, even if the Congress fails to enact reform, states will do it on the local level (Gubert and Altshuler 16). The facts demonstrate that the discrepancy between the economic prosperity of California’s high-tax, high-regulations economy and Texas’s low-tax, low-regulations economy is circumstantial (Saez, Slemrod, and Giertz 52).
Secondly, it is significant to remove the state and local tax subtraction (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 51). The U.S. has to liquidate the majority of subtractions and gaps and thus lower state tax ratio. Such reforms should incorporate termination of state and local tax abatements. In fact, such abatements handle taxpayers from lower-tax states unrighteous as compared to taxpayers from higher-tax states. The facts demonstrate that states with the lowest state and local tax abatements (including South Dakota, Alaska, and Wyoming,) declare that the abatements amount to less than 2 percent of the adjusted gross revenue, while the highest tax states (including New Jersey and New York) state that they account for more than nine percent of the adapted gross revenue (Gubert and Altshuler 34). Such injustice is believed to be absurd by numerous economists and policy makers. These injustices also subsidize huge government liberalism at the state level (Saez, Slemrod, and Giertz 53).
Thirdly, it is crucial to introduce tax expenditure notices. A huge issue regarding the U.S. tax systems regards the fact that numerous taxpayers do not know where their money is going. People send their tax forms, but the deficit still sustains (Saez, Slemrod, and Giertz 53). This problem is solvable. If taxpayers were showed how the federal government consumes their money, civic inquiry of government spending would probably elevate (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 53). For instance, the U.K. can be used as a good example for this problem. The British government sent income taxpayers a letter demonstrating where their taxes had been spent in 2014 (Pollack 111).
Thus, the analysis of the current U.S. tax system depicts that major national priorities, including consolidation of the middle class, diminishing poverty, and creating a world-class infrastructure, remain unaddressed (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 52). Revenue inequality continues to elevate, while trust in the U.S. capability to govern financial affairs continues to decrease. Therefore, the tax systems reform should be based on two pillars. The first one accounts for a progressive, income-enhancing, effective, simplifying, and pragmatic tax reform (Gubert and Altshuler 46). The second one stands for pragmatic spending contractions, which do not disrupt the middle class, poor citizens, or senior population (Gubert and Altshu 46).
Reforming Local Tax Systems
In order to create endurable communities and preserve the local region economically emulative, local tax systems should stimulate efficient land usage, creation of good jobs, and stable economic activity (Dubay 3). Local tax policies should elude provoking of huge injustice between households, businesses, and local governments and should be limpid and anticipated by taxpayers (Dubay 4).
For example, the facts demonstrate that the Illinois government depends more on sales and property taxes than other states, which can provoke ineffectiveness (including high local tax ratios, a host of abatements and restrictions, or counter-productive emulations for residential and commercial evolvement) and unfairness (including significantly differentiating local government tax grounds across the region and the inverse character of the tax system). Such taxes impacts frequently distort land usage decisions, which might be better figured by market powers (Fleischer 59). Thus, the current sales tax system of Illinois forces communities to encounter intense emulation in order to appeal to retail businesses, which generate sales (Dubay 6). In fact, such evolvements, including “big box” stores and auto dealerships, propose a smaller quantity of economic benefits on the contrary to high-salary jobs and economical influences of office evolvement and industry development (Devereux and Vella 460). In addition, over-dependence on sales taxes can make municipalities suffer from funds shortages if retail sales downturn during economic crises (Pollack 108). Despite the fact that property taxes are the most crucial income source for local governments, they differ solidly from community to community. In case they are designed properly, they can counterpart local service requirements with the cost of residential and commercial ownerships and provide a solid source of local income, which does not drastically alter from year to year (Fleischer 59). In other cases, ownership taxes can generate confusions for taxpayers and local governments (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 51). For instance, evaluation levels frequently vary by districts; particular abatements appertain only to some property kinds, while state-applied local tax caps create arbitrary restrictions on yearly local tax imposts, creating unreliability and volatility (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 53). Moreover, local reliance on the property tax for public education gives rise to great discrepancies in school funding throughout the state (Fleischer 61). Reforming the local tax policies can enhance the livability of the state and improve the local business atmosphere by widening the tax ground, restricting land usage yielding, and making the system more anticipated, limpid, and upright (Devereux and Vella 472). Thus, the first recommendation regards the fact that local governments should not intentionally concentrate on elevating tax rates or raising overall incomes for state and local governments. Local tax reforms can be structured to sustain overall taxes levels (Fleischer 61). The facts demonstrates that even without supplementing new income the reforming of local tax policies can assist Illinois in sustaining economically emulative policies in the long run (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 52).
Firstly, reforming of the local tax system should address existing local revenue sharing systems. The facts demonstrate that more than $5 billion in state tax income is spent on a yearly basis by the Illinois local government (Devereux and Vella 456). Such system of local sales tax sharing generates a stimulus for local governments to underscore retail land usage (including auto dealerships and huge stores) at the expense of utilization, which might be feasibly more advantageous to the regional economy (for instance, industrial or offices evolvement) (Pollack 111). Therefore, such income sharing incentives have to be adapted in order to sustain economic effectiveness and equity and to lower emulation among local governments for tax costs (Dubay 7). Secondly, the reform should address property tax caps, classifications, and abatements. Ownership taxes concern incomes crucial to local government services; however, their complications and inducements frequently deform economic decision-making and put excessive pressure on households, companies, and local governments. Ownership tax incentives should be simplified and be made more limpid and equal via the liquidation of numerous specific abatements, discrepant evaluation classifications, and state-inflicted caps on the ownership tax. Thirdly, it is significant to consider expanding sales tax to services (Pollack 113). Despite the fact that services stand for a much greater and increasing part of the economy, Illinois taxes numerous goods and merely a few services (Dubay 7). The current statistics demonstrate that services account for 70 percent of all individual spendings, while when products account for merely 30 percent as compared to an equal rupture approximately 30 years ago (Devereux and Vella 460). The extension of the sales tax to a few services might broad the tax foundation, allowing to reach decreased sales tax ratios without lowering the total income (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 53). It can also make the sales tax more onward as low-revenue employees acquit more products with account for their revenues than higher-paid employees (Pollack 113). Finally, the reform should address local tax capability. Numerous spheres of the region demonstrate a much greater economic ground of ownership and retail sales than others, which provides them with a higher “tax capability” (Pollack 113). Exceptional discordances make it more difficult for numerous local governments to equip basic services and appeal to new residents and companies (Feldstein, Blinder, Ryan, Penner, Boskin, Glassman, Fieldhouse, and Bloomfield 53). Moreover, such gap has a tendency to elevate with time due to the fact that municipalities with solid incomes may keep ownership tax ratios lower, while providing high-caliber services and infrastructure (Dubay 8). Therefore, Illinois should address how tax policies preclude economic prosperity of its numerous communities.
The current paper demonstrates that before reforming the tax systems the U.S. should recognize its revenue issues. Continuous tax abatements have performed an oversized function in generating budget deficiencies during the previous decade, which definitely negatively affects the country. The current federal incomes levels are known to have been at the lowest level since the 1950s. Moreover, the current supposition that all tax abatements will continue to exist is the single-greatest cause why budget experts bargain federal deficiencies to sustain at a far too high level during the following 10 years. It is obvious that the U.S. tax systems are progressive. Nevertheless, the last several decades have demonstrated that the U.S. citizens show a tendency to ask less and less regarding taxes from the state and local governments. The highest-revenue households enjoy tax abatements even regardless of the fact that their revenues elevate. Therefore, the analysis of the current U.S. tax system vividly demonstrates that major national priorities, including consolidation of the middle class, diminishing of poverty, and creation of a world-class infrastructure, remain unaddressed. Revenue inequality continues to elevate, while trust in the U.S. capability to govern financial affairs decreases. Thus, the analysis demonstrates that the U.S. tax systems should be reformed. The tax systems reform has to be based on two pillars. The first one accounts for a progressive, income-enhancing, effective, simplifying, and pragmatic tax reforming. The second one should stand for pragmatic spending contractions, which do not disrupt the middle class, senior citizens, or indigenous population.