Evaluate the U.S. federal tax system on the certainty and economy criteria.

Question

What will be an ideal response?

Answer 1

Certainty means that taxpayers should be able to determine when to pay the tax, where to pay the tax, and how to determine the tax. It is relatively easy to determine when and where to pay the federal income tax. For example, individual federal income tax returns and the remaining balance of taxes owed must be filed with the Internal Revenue Service each year on or before April 15th (or the first business day following April 15th). Thus, from this perspective, the federal income tax scores high.

However, the federal income tax is often criticized as being complex. What are taxable/nontaxable forms of income? What are deductible/nondeductible expenses? When should income or expense be reported? For many taxpayers (e.g., wage earners with few investments), the answers to these questions are straightforward. For other taxpayers (e.g., business owners, individuals with a lot of investments), the answers to these questions are nontrivial. Constant tax law changes enacted by Congress also add to the difficulty in determining the proper amount of income tax to pay. These changes can make it difficult to determine a taxpayer's current tax liability, much less plan for the future. From this perspective of "certainty," the federal income tax system does not fare so well.

Economy requires that a good tax system should minimize the compliance and administration costs associated with the tax system. Economy can be viewed from both the taxpayers' and government's perspectives. From the government's perspective, the federal tax system fares well with respect to economy. For example, the current IRS budget represents approximately ½ of a percent of every tax dollar collected. Compared to the typical costs of a collection agency, this is quite a low percentage cost.

From the taxpayer's perspective of economy, the federal income tax does not fare so well. The income tax is often criticized for the compliance costs imposed on the taxpayer. Indeed, for certain taxpayers, record-keeping costs, accountant fees, attorney fees, etc., can be quite substantial.