The Federal Income Tax System

The Federal Tax System

The federal tax system is one set of laws that is beset with problems. Specifically, the income tax regulation is one regulation that could use some improvements given its inability to create fair outcomes, raise enough revenue to finance government spending, and promote economic efficiency.

Widening the Tax Base

One way of increasing revenue would be to widen the tax base. It can be achieved by plummeting the number of particular credits and deductions in the tax code. For instance, based on the present regulations, well-paid families save around ¢39.6 for a given dollar worth of deductions. In contrast, a low-wage family saves merely ¢10 or even nothing. Setting the tax benefit of each dollar of listed deductions to ¢15 would mostly impact well-paid households and enable the government to raise, on average, approximately 0.6% of GDP annually over ten years, or about a cumulative $1.4 trillion for the same period.

The Existing Itemized Deductions

The existing itemized deductions are costly, regressive, and habitually unproductive in attaining their objectives. For example, the current mortgage interest deduction seems not to be helping in increasing homeownership rates. However, it was approximated that it cost the federal government close to $70 billion in 2017. Such a case is just one indication that the income tax regulation needs some enhancements.

Limiting the Benefits of Deductions

The government can improve the current law by limiting the benefits of deductions for high-income families. Doing so could go a long way in reducing the alterations brought about by the tax code, making income taxes more progressive and growing revenue. Instead, the government can improve the current regulation by capping the total amount of tax expenditures that a person can claim.