The purpose of the Tax Code is to provide income for the operation of the government. The Tax Code is found in Title 26 of the U.S. Code of Federal Regulations (CFR).
Any U.S. citizen who has filled out a federal tax return knows how confusing the current U.S. Tax Code is. Additional layers of complexity appear if the taxpayer itemizes deductions, deducts home business expenses, or has a profit or loss due to investments.
When the convolutions of corporate tax law are considered, it is no wonder that companies hire teams of accountants to prepare their income tax returns.
What Is The Fair Tax?
The Fair Tax is a proposed income tax system intended by its founders to replace the current Tax Code. The Fair Tax Bill was proposed by Representative John Linder (R-GA) in July 1999 to the 106th Congress.
One definition of the Fair Tax is "a proposed change in United States tax laws to replace all federal personal income taxes, payroll taxes, corporate taxes, capital gains taxes, self-employment taxes, gift taxes and inheritance taxes with a national retail sales tax and monthly tax rebate to all households."
At the time of this writing, the Fair Tax proposes to apply a tax of about 23% on purchases. This purchase tax would replace the current income tax paid by Americans. Generally, those who spend or purchase more would pay more taxes. Conversely, those who spend less would pay less or even nothing.
Differences Between The Tax Codes
The current Tax Code is based on the income of a person or corporation. The proposed Fair Tax would be based on the purchases of a person or corporation. The expectation of the proposed Fair Tax is that those who are more wealthy generally purchase more, and will therefore would likely pay higher taxes than they do now.
Another major difference is the complexity of the two Tax Codes. As the Fair Tax Bill sponsor Representative Linder states on his website:
"I would also encourage everyone to review the Fair Tax, as it is only 132 pages, which stands in stark contrast to the more than 50,000 pages of tax code laws and regulations currently in effect."
Furthermore, the proposed Fair Tax Code would be administered by the States. Most states already enact a state income tax, and therefore have the infrastructure in place to collect the Fair Tax revenues. This would also mean greatly reducing, or even eliminating, the Internal Revenue Service (IRS)!
Monthly Tax Rebate Checks
Under the Fair Tax plan, each household would receive a monthly tax rebate check, paid in advance. The amount of the check would be estimated as the amount of Fair Tax owed on poverty level spending. The goal of the monthly rebate check is to prevent anyone from being taxed on household necessities, especially those under the poverty level.
Will The Fair Tax Provide Enough Government Income?
The feasibility of the proposed Fair Tax is the topic of endless discussion. On one hand, the entire taxation process would be greatly simplified. Wealthy persons and corporations would pay a greater share of taxes.
On the other hand, a Tax Code change of this magnitude will require massive reeducation of the public. People are resistant to change, and would no doubt cry foul at being denied many of their usual tax deductions.
Finally, the only way to accurately assess the effectiveness of the proposed Fair Tax Code is to see it in action over a period of years. That does not look likely in the very near future, although the Fair Tax proposal is gaining support.
Tax Your Brain
Whether you are for it or against it, you must agree that the proposed Fair Tax would represent a dramatic shift in U.S. taxation policy if enacted. Proponents and opponents of the Fair Tax Bill will no doubt continue to generate tax estimates that are supportive of their arguments.
It is up to you as an American taxpayer to become educated on the Fair Tax Bill. Determine whether the proposed changes and tax payment methods would benefit you and the country more than the current system.
Once you've made a decision about the proposed Fair Tax, contact your Senators and Representatives and tell them how you feel about it. Regardless of the tax system in place, you are still paying their salary.
The website below provides free information about income tax preparation tips and tax assistance articles and resources.
To reduce our payments to tax collecting agencies such as state or federal government we need to reduce our taxable income and the method or methods that enable us to do so is known as tax shelter or shelters. Tax shelter methods can be different depending upon local or international tax laws and hence jurisdictions should be properly studied before opting for any such method.
For example in North America it 4 years to recover $1 spent on taxes. Some of these methods which are used by individuals or corporations alike to save on taxes may raise questions or can also be considered as illegal. Sometimes offshore companies transfer company funds to another country to lower taxable income and the laws or treaties governing such countries can make it difficult for tax agencies to levy taxes on such incomes thus diverted.
Certain financial practices resorted to by individuals or corporations give them adequate tax shelter even if it amounts to financial cheating on their part. Practices such as paying high interest rates on investment can actually reduce income on investments but when the same investment is withdrawn a substantial capital gain can be made. This is because taxes on capital gains are much lower when compared to the taxes on investment income.
From the above it is clear that certain tax shelter methods do raise questions because such transactions are considered as unethical. Apart from serving the purpose of lowering tax liabilities such transactions has no economic value.
Tax agencies may at times try to neutralize such tax benefits being enjoyed by clients but steps taken are seldom effective. However other tax shelter methods are legal and legitimate. These include flow through shares/limited partnerships with the facility of distributing production costs of a company among shareholders as tax deductions.
This is quite in vogue with oil exploration companies in countries like USA. This typical shelter from taxes is provided to such oil companies because their gestation period is longer with common investors shying away from investing in such companies.
With media reporting that now banks in Europe have to disclose bank account owner information to tax authorities of their respective countries it has led to a term popularly known as euro tax haven threat. It is known to all that European countries like Gibraltar, Monaco, Malta and Andorra are easy on taxes and people flock to these countries to get maximum benefit on their incomes.
Certain property specialists say that this news has been blown out of proportion by the media and actually such a directive if any has been given aiming primarily at those who hold illegal funds for example drug dealers. Countries like Monaco and Andorra are known for their zero percent income and inheritance taxes and have long been considered as one of the most favored destinations of the well to do class.
With property prices doubling in such locations and real estate dealers raking in profits a euro tax haven threat would definitely not augur well for investments.
Both Doug Smith & Ramapati Singhania are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Doug Smith has sinced written about articles on various topics from Personal Desktop, Site Promotion and Home Management. Doug Smith provides free and other income tax preparation assistance at. Doug Smith's top article generates over 18100 views. to your Favourites.
Ramapati Singhania has sinced written about articles on various topics from Setting Up Company, tax and Business and Finance. Ramapati Singhania specializes in creating and managing web businesses. His latest website focu. Ramapati Singhania's top article generates over 8100 views. to your Favourites.