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FLAT TAX & TAX REFORM ACT OF 1986.
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Compares specifics, effects, benefits of 1995 Congressional flat tax proposals & 1986 tax format.... More...
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Paper Abstract:
Compares specifics, effects, benefits of 1995 Congressional flat tax proposals & 1986 tax format.

Paper Introduction:
This research compares, contrasts and critiques the U.S. Congress 1995 flat tax proposals with the 1986 tax format. The research also discusses the benefits and disadvantages of each for taxpayers. The Armey-Shelby flat tax, the most well known of the flat tax proposals, is based on the supply-side economics of former Housing and Urban Development Secretary Jack F. Kemp, who co-authored the Reagan tax cuts in 1981. Most of the flat tax proposals are similar in nature. All make major changes to the current tax code, which is based on the Tax Reform Act of 1986. The flat tax propositions are the first major proposed revisions of the Tax Code since that act. The Tax Reform Act of 1986 was the first significant revision of the tax code since World War II, when the tax code was converted into a broad-based tax (Snow, 1992, p. 139). It

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This means that a individual is able to earn a given amount of incomebefore beginning to pay income taxes. (1995). S. A major benefit to the flat tax rate is the reduction and simplicityof the income tax return. The losers would be people with manydeductions, people who count on the tax-sheltered income to pay theirmortgage, and people with large real estate holdings which are expected todecrease in value approximately 2 percent when the tax advantages ofowning real property disappear (Montero, 1995, p. The TRA of 1986 changed the tax code toreflect a more accurate definition of household income. If the flat tax proposals survive Congressional scrutiny, then thewinners at the individual level will be anyone who is currently payingincome taxes with income below the exemption rate for their family, anyonewithout many deductions, anyone with a significant income from savings,capital gains, and dividends. It was signed by then-President RonaldReagan on October 22, 1986. 14). 139). The proposed flat tax is also meant to stimulate the economy by fosteringmore productive effort from taxpayers, encouraging additional time at work,and by increasing capital investment (Fellows, 1995, p. The tax changes in 1986 were predicted to have widespread effects onthe economy. Fellows, J. 215). 21). The TRA shifted roughly 7 percentof the tax burden from households to business. The number of incomebrackets and tax rates would be one with only one type of exception. The flat tax,although until the bill is passed by Congress it can change, will eliminatedeductions further. Business will be required to paytax on all net income: gross income minus cash wages; salaries andpensions paid; purchases of good, services, and materials; and all capitalequipment, structures, and land (Bartlett, 1995, p. (1992). The Hall-Rabushka plan has aneven lower suggested rate of 19 percent with an exemption of $25,5 for afamily of four before taxation (Bartlett, 1995, p. The impact of the Tax ReformAct of 1986. The flat tax is progressive when a largeamount of income is allowed as a personal exemption (Fellows, 1995, p. The flat tax isalways progressive, unlike the TRA of 1986, which is progressive except inthe first decile. The taxrates were lowered for the second and third decile of the tax brackets atthe expense of the higher-income individuals (Wallace, Wasylenko, & Weiner,1991, p. The tax rates being discussed for theflat rate range from 15 percent to a high of 25 percent possible if somedeductions (the mortgage interest deduction and state and local taxdeductions) are left in the tax code (McNamee, 1995, p. A person in the lower brackets pays a smallerpercentage of income in taxes than does an individual in the top decile.The TRA is progressive in all but the first decile, where tax rates did notdecline. This in itself could increase tax revenues. The flat tax proposals are also similar to the TRA in that theyare also revenue-neutral and progressive. All of the tax forms in current use could bereplaced by a single form the size of the postcard (Montero, 1995, p. The TRA included taxation of full capital gains,elimination of the sales tax deduction, the two-earner deduction and thepersonal-loan deduction and limited the amount of passive losses and tax-deferred contributions to an IRA (Snow, 1992, p. 139). Aside from the lowest decile, the changes in the tax codewhich occurred as the result of TRA resulted in a more progressive taxcode. The flat tax proposals both relyon a constant marginal tax rate. (1995). 215). References Bartlett, B. (1995 December 4). A. Revenue-neutral means that the total expected collection of tax dollars is the sameif taxes are computed with or without the tax code changes. The projected increase in economic activity generated from increasedwork and increased capital formation and savings will be felt by allsegments of society. The Tax Reform Act of 1986 was the first significant revision of thetax code since World War II, when the tax code was converted into a broad-based tax (Snow, 1992, p. L. Wallace, S.,Wasylenko, M., and Weiner, D. CPAJournal, 65, 19-22. 74). The TRA reduced marginal tax rates from ashigh as 5 percent to 28 percent in the top bracket. It also for the most part was a progressive tax. Reduction of rateswithout a corresponding increase in income subject to taxation would notgive a revenue-neutral position. The TRA wasdesigned to be revenue-neutral and progressive in structure. The flat tax appeals to the voters because they canunderstand and see how their taxes are computed. The reason that both tax reform movements require a broadening of thedefinition of taxable income is that, with the reduction in tax rates, theamount taxed has to increase. A flat tax would continue the trend begun in 1986 to reduce thenumber of income brackets and marginal tax rates. The taxable business incomebase was increased by eliminating the 1 percent investment tax credit andslower depreciation schedules for equipment and business structures (Snow,1992, p. Don't cut taxes--flatten them.Fortune, 131, 215. The concept of the flat tax is theoretically sound and is based onsupply-side economics. A simple tax system with a low marginal rateencourages individuals to stop practicing antisocial tax avoidancebehaviors and seeking legal methods to lower their tax bill (Fellows, 1995,p. Everyone, individuals and businesses,will lose deductions and increase taxable income but will gain a lower taxrate. 195). The supply-side economists believe it willhappen. The business tax rate fell from 46 percent to 34 percent. The flat tax plans--Armey-Shelby or the Hall-Rabushka proposals--aresimilar. The flat tax proposals also change the method by which corporationsand businesses are taxed. Southern Economic Journal, 59, 139-141. The TRA did shift the tax burden slightly to businesses and away fromthe household. (1995 April 17). McNamee, M. Businesses will also be taxed at a constant ratebut will also lose the ability to deduct many business expenses which arecurrently used to limit their tax burden. 2 ). The overall taxburden will shift but will not be changed if a revenue-neutral tax reformbill is passed. National Tax Journal, 44, 181-198.----------------------- 1 The benefits tothe Republicans in government of being able to keep their promise ofcutting taxes and balancing the budget are important. 14).Flat tax advocates use the argument that the simplicity of the tax form andlower tax rates will encourage individuals who have been avoiding their taxresponsibility to accept it. The Armeyplan features a set rate of 17 percent and no deductions except for thepersonal exemptions (Montero, 1995, p. On the list of probable deductions to be abolished arethose cherished by the homeowner--the mortgage interest and property taxdeductions, charitable contributions, and state and local taxes (Bartlett,1995, p. Do taxes matter? The flat tax proposals will continue to increase the progressivenessof the tax code, including the lowest income levels. 51). The prediction (from Harvard University) for nationalwealth if the Hall-Rabushka proposal or one similar is enacted is for animmediate increase of $2 trillion (Bartlett, 1995, p. All make major changes to thecurrent tax code, which is based on the Tax Reform Act of 1986. A flat tax could boomerang on theRepublicans. The Armey-Shelby flat tax. That the TRAis generally progressive means that the tax burden increases as the levelof income increases. (1991). 139). Whether thiswill occur is undetermined. The economic behaviors which didchange were related to the timing of economic transactions and to changesin the individual composition of financial portfolios (Snow, 1992, p. Theflat tax would also continue the trend to shift some of the burden offinancing the treasury onto businesses. The difficulty is in predicting the actualoutcome of the economic impacts. This research compares, contrasts and critiques the U.S. People will have to give up their favorite taxdeductions of mortgage interest and state and local taxes. The distributional implications ofthe 1986 tax reform. 181). 74). Montero, A. The general conclusion was that real economic behavior isunresponsive to changes in tax rates. Business Week, 51, 51. CPA Journal,65, 14+. Others who have studied the elasticity of investment decisions andadditional work effort have found them not very responsive to tax rates(Fellows, 1995, p. When income increases beyond thepersonal exemption, then it is taxed at the set rate. The second and third deciles had an augmented reduction in thetax percentage because of a reduction in tax rate and the tax base burden(Wallace, Wasylenko & Weiner, 1991, p. 215). Both tax reform movements include broadening the definition oftaxable income. 215). Losers would alsoinclude people in the Northeast portion of the country with high state andlocal taxes who would lose their deduction. Snow, S. 19). Congress1995 flat tax proposals with the 1986 tax format. The flattax propositions are the first major proposed revisions of the Tax Codesince that act. Estimates from the Hall-Rabushka plan show the taxbase expansion and simplification would approximately triple federalrevenues from businesses and halve individual income tax revenue (Bartlett,1995, p. A conceptual analysis of the flat tax. 139). Businesses wouldlose the ability to deduct employees' fringe benefits, interest, orpayments to owners (Montero, 1995, p. 215). The research alsodiscusses the benefits and disadvantages of each for taxpayers. Most of theflat tax proposals are similar in nature. Kemp, who co-authored the Reagan tax cuts in 1981. The flat tax continuesthe work begun with the TRA, in 1986, on eliminating deductions andsimplifying the tax structure. 19). The Armey-Shelby flat tax, the most well known of the flat tax proposals, is based onthe supply-side economics of former Housing and Urban Development SecretaryJack F.

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