Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometric progression as they rise.
– T H O M A S J E F F E R S O N

Preface
American tax system would be revised per fifteen years. But it is twenty years from last revision of American tax laws in 1986 and the tax code has undergone more than 14,000 changes .The tax system turns out to be a huge monster that is very boring. In Nov.1, 2005, the new tax reform plan was submitted to John W.Snow, the Secretary of Treasury, by the President’s Advisory Panel on Tax Reform. The tax reform plans contain two parts, the Simplified Income Tax plan and the Growth and Investment tax plan. Though some other good plans have been recommended by the tax experts, huge disputes existing in the President’s Advisory Panel on Tax Reform block them. It’s no doubt that the bold tax reform plans will exert great impact on American economic development and the wealth distribution. This paper will give a review on the tax reform which has broad and deep influence and try to give some suggestions.

Current Tax System Problems
Unfairness, complexity and undermining opportunity and shared economic growth are the three major problems which are attacked by the public for a long time. These faults seriously violate the basic value developed in the U.S. society. As the President’s advisory panel admits: “Not only is our tax system maddeningly complex, it penalizes work, discourages saving and investment, and hinders the competitiveness of American businesses,” and “is riddled with tax provisions that treat similarly situated taxpayers differently and create perceptions of unfairness.”

UNFAIRNESS
Current tax policies have moved our system away from the basic principle of fairness. This can be clearly seen in two areas: first, the tax share has move more onto the middle class; second, Most of corporations have been able to avoid their obligation to pay taxes by shifting operations overseas. The result is that the government has to depend more on a regressive payroll tax, which at last comes from lower- and middle income taxpayers.
According to the statistical data, in 2004, households making more than $1 million received an average federal income tax cut of $123,592, while the average change for those in the middle 20 percent of income was only $647.2. At the time the new federal tax laws came into effect, many of those in the middle class saw increases in their state and local taxes. In addition, from 2000 to 2003, middle-class incomes fell by over twice the amount of the federal tax benefit. Therefore, the overall economic impact for middle-class Americans was negative.
At the same time, the current tax policies shifted the relative share of taxation onto work and onto the middle class. Some anti-tax advocates who are not responsible for the fiscal policy often justify large tax cuts for the wealthiest because they argue that the wealthy are the ones who earn the most income. However, by focusing many of the tax benefits on passive income from investments, American administration offered individuals in the top 1 percent income bracket a whopping 34 percent of the benefits from the irresponsible tax cuts. As a result, the tax changes reduced the share of federal taxes paid by the top 1 percent of earners, while increasing the share paid by the middle fifth of workers. These changes thus shifted the tax code to be back of rich man at the expense of common workers.
While the middle class is paying a larger share of federal taxes, major U.S. corporations are paying less and less. Though the corporate income tax rate structure maintains a degree of progressivity, it has a lot of loopholes. A recent study found that 82 of the nation’s largest corporations paid zero taxes in at least one of the last three years, and 28 corporations did not pay taxes in any of the years despite generating pre-tax profits of $44.9 billion over the period. Part of the increase in corporate tax avoidance is explained by an explosion in the shifting of investment and profits overseas. Profits of foreign subsidiaries of U.S. corporations in major tax havens soared from $88 billion in 1999 to $149 billion in 2002. Profits in zero-tax Bermuda tripled over this short period.
Increased avoidance—both overseas and domestically—has sent overall corporate tax revenue to historic lows. In 2003, corporate taxes were only 1.2 percent of GDP—their second lowest level as a share of our economy since 1934 (corporate taxes were 1.1 percent of GDP in1983). In addition, the role of corporate revenue in meeting our overall revenue needs has fallen in the past four years.
The trends mentioned above lead the tax system more reliant on the Social Security payroll tax, which will be shown in the following data. Beginning with the Social Security Act of 1935, the federal government has imposed a tax on workers’ wages to help finance Social Security benefits. From its initial rate of 2 percent—collected equally between employee and employer—the payroll tax has increased steadily over time to meet the growing cost of Social Security. Today, all workers pay a flat 6.2 percent tax on their earnings up to $90,000 to help finance Social Security, and their employers pay an additional 6.2 percent on their worker’s behalf as well. Similarly, workers pay a flat 1.45 percent Medicare payroll tax, which is matched by a 1.45 percent tax paid by their employers to help finance Medicare.

We can see the effective social insurance tax rate—the amount of taxes paid by each group as a percent of total income from the figure 2. The payroll tax is highly regressive, imposing an effective tax rate that is four times larger for middle-income workers than those in the top 1 percent. The payroll tax only accounted for 23 percent of federal revenue in 1970 but now makes up an astounding 40 percent. Unless we make structural changes to our tax system, we are going to enter the baby boom retirement years increasingly depending on the regressive payroll tax to cover the revenues our nation needs, thus further shifting the tax onto the middle class.

COMPLEXITY
The first problem of the current tax code is complex that makes the tax system much less efficient as well as fair. A joke comparing the tax code with the Bible says: “The Bible contains 773,000 words, The tax code contains 9 million.” It’s estimated that the cost of filing taxes is now between $100 and $200 billion annually . Our current tax code, with its maze of deductions and exemptions, is so complex that forces 60 percent of filers to look professional help.
The other particular problem that cannot be ignored is the rapidly growing reach of the alternative minimum tax (AMT)，which imposes a stealth tax system that is separate from, but parallel to, the regular income tax system. The AMT enacted in 1969, was attempt to ensure that rich people who benefited from various tax shelters paid at least some tax. Since then, changes to the AMT and the effect of inflation have transformed the AMT into a mass tax. The AMT will catch almost 4 million taxpayers this year and 20 million taxpayers next year. Some projections suggest that by 2015, as many as 50 million taxpayers, or about 45 percent of all taxpayers who pay income tax, will be paying AMT.
Should we care that the AMT is becoming a mass tax? The answer is that we should, because it is bad tax policy from virtually every perspective. From the point of view of fairness, the AMT exemption preference- personal exemptions, standard deduction, and itemized deductions for state taxes- are of greatest importance to middle income taxpayers. As the AMT grows in importance, these are the taxpayers who are adversely affected, not the very rich. From the point of view, the excess burden of an income tax varies with the square of the marginal tax rate. The minimum rate the under the AMT is 26 percent, considerably higher than the regular income tax rates of many families that will be thrown into the AMT. Finally, the AMT is notorious. One of the main problems is that the only way to find out if you have to pay the AMT is to go through the entire laborious AMT calculation. Thus even families that ultimately don’t have to pay the tax still have to fill out the AMT return, adding substantially to the burden of tax compliance.
Of course, problems go beyond these. In the area of business taxation, we heard how our tax code treats business income differently depending on the type of entity that earned it, treats capital invested in businesses differently depending on whether it is debt or equity, and treats mergers and acquisitions differently depending on whether the transaction satisfies certain arcane formalities. Our business tax code is full of special provisions such as special rates, deductions, or credits. These provisions also create complexity, volumes of new regulations, opportunities for tax shelters, and unfairness. Moreover, these provisions often do not have their intended effect on taxpayer behavior and motivate businesses to adopt governance structures that may not be consistent with business efficiency.

Undermining Opportunity and Shared Economic Growth
As we know, people make decisions on the basis on their marginal rates, but not on their average rates. Then high marginal tax rates discourage work, saving and investment and hence result in lower levels of employment and national income. The present system, by having marginal rates much higher than average rates, does much unnecessary economic damage by reducing productive incentives more than is required to produce the same amount of revenue.
If you turn your eyes to income, you will find our current tax system encourages people to consume instead of invest. “Savings are taxed twice—once as earnings, and once when they earn interest in a savings account,” says Ernest Christian, executive director of the Center for Strategic Tax Reform. “Corporate profits are likewise taxed twice, once as business income, once as personal income of shareholders. Capital gains are generally taxed at 15 percent. At the same time, interest payments on debt are a deductible expense.”
In Christian’s opinion, the result of our tax policies is to discourage savings and encourage debt. There is a trend that more and more corporation tends to borrow money rather than invest by itself, which will lead less and less innovative companies and makes it harder to improve productivity.
It is President Bush’s tax policies that are responsible for turning the record budget surpluses into record budget deficits. Deficits have a negative impact on the nation’s economic health. Deficits reduce national saving, which reduces the resources available for both public and private investments, thereby driving up interest rates, which directly affects us all.
Deficits also increase the amount of federal debt held outside the United States. At present, 43 percent of the public debt is now held outside the country, almost half of which is held by China and Japan. Specifically, of the $1.85 trillion of our debt held by foreigners, $174 billion is held by China and $720 billion by Japan. This raises the risk that if confidence in the U.S. economy erodes, foreign debt holders will withdraw their investments, causing the value of the dollar to fall and interest rates to rise, perhaps dramatically.

Introduction of the Tax Reform Plans
In order to solve distortions created by the tax code, the consensus is that taxes should be applied to the broadest possible base at the lowest possible rate. They should be simple, understandable, and not unduly burdensome to any one group of individuals，which provides the economy with efficiency, simplicity, and ease of administration. The options we can choose are the two plans submitted to the Congress.
The Simplified Income Tax Plan would simplify the process of filing taxes and would make it easier to predict tax consequences when planning for the future. It would consolidate and streamline a number of major features of our current code – exemptions, deductions, and credits – that are subject to different definitions, limits, and eligibility rules. It would make the tax benefits for home ownership, charitable giving, and health coverage available to more taxpayers, simpler to calculate, and more efficient. It would repeal the AMT. It would lower tax rates, ensuring that individuals would not pay more than one-third of their income in federal income tax. And it would nearly eliminate taxes paid by individuals on income from corporate investments that are taxed in the United States.
The Simplified Income Tax Plan would be as progressive as the current income tax. Under the Simplified Income Tax Plan, most taxpayers would pay about the same in taxes as they are expected to pay under current law. Some specific taxpayers may pay a bit more or a bit less, but most taxpayers would find that their actual tax bill is about the same. The difference is that all taxpayers would face significantly less hassle and uncertainty.
So, it is no doubt that the Simplified Income Tax Plan would promote economic growth. First, the plan would provide simplified and expanded opportunities for tax-free saving. Second, the double tax on corporate profits would be nearly eliminated. Third, there would be simplified accounting and improved investment incentives for millions of small businesses. Lastly, there would be lower marginal tax rates on individuals and businesses.
The Growth and Investment Tax Plan is a blended structure. It would combine a progressive tax on labor income and a flat-rate tax on interest, dividends, and capital gains with a single-rate tax on business cash flow. Under this tax system, households would file tax returns and pay tax on their wages and compensation using three tax rates, ranging from 15 to 30 percent. Most households would face lower marginal tax rates than they do under the current income tax system. In addition, the individual tax structure would accommodate to the Work and Family Credits, the deduction for charitable gifts and health insurance, and the Home Credit. The Growth and Investment Tax Plan departs from a pure consumption tax
Under the Growth and Investment Tax Plan, businesses would file annual tax returns. They would pay tax at a single rate of 30 percent on their cash flow, which is defined as their total sales, less their purchases of goods and services from other businesses, fewer wages and other compensation paid to their workers. Thus, businesses would be allowed an immediate deduction for the cost of all new investment. Non-financial businesses would not be taxed on income from financial transactions, such as dividends and interest payments, and would not receive deductions for interest paid or other financial outflows.
Suggestions
The above proposed tax reform would be far less economically damaging, greatly simplify peoples‘ lives and reduce the ambiguity in the current system, but it is far from perfect.
Firstly, the panel should have been more aggressive with cuts to top marginal tax rates. Plan A has four rates for individuals topping out at 33 percent. Plan B has three rates topping out at 30 percent. By contrast, Congress enacted a tax reform plan in 1986 that created a low and simple two-rate structure of 15 and 28 percent. Today, policymakers should proceed with fundamental reforms and move to a low-rate flat tax system for individuals
Similarly, the panel‘s plans do not cut the 35 percent corporate tax rate enough. The rate is set at 31.5 percent under Plan A and 30 percent under Plan B. By contrast, the average corporate rate in Europe is just 27 percent, and Eastern Europe is enjoying a flat tax revolution with many nations having rates much lower than that. The Bush panel‘s corporate high tax rates don‘t cut muster in today‘s competitive global economy
President Bush and Congress should move forward with the many pro-savings and pro-investment ideas in the panel‘s report, but they also need to be more aggressive about responding to global tax competition and cutting marginal tax rates further than proposed
Then, taking the practice into consideration, the acceptance of the new income tax system would produce as much revenue as the current tax system. However, in the short run, it would cause some people to have higher tax bills. This is because they built their financial lives around the existing system -- for instance, perhaps having a much larger house and mortgage than they would have if there were no mortgage interest and property tax deduction. To mitigate the transitional hardships (and tone down the opposition from all the special interests), the new system could be compared in parallel with the existing tax system, whereby each taxpayer could choose the system that is best for him or her during a long transitional period.
The AICPA suggests the following indicators of good tax policy. These ten guiding principles should be the standards of the carrying-on tax reform. We hope the tax reform will achieve the goals that public are expecting.
1. Simplicity: The tax law should be simple so that taxpayers understand the rules and can comply with them correctly and in a cost-efficient manner.
2. Fairness: Similarly situated taxpayers should be taxed similarly.
3. Economic Growth and Efficiency: The tax system should not impede or reduce the productive capacity of the economy.
4. Neutrality: The effect of the tax law on a taxpayer‘s decisions as to how to carry out a particular transaction or whether to engage in a transaction should be kept to a minimum.
5. Transparency: Taxpayers should know that a tax exists and how and when it is imposed upon them and others.
6. Minimizing Noncompliance: A tax should be structured to minimize noncompliance.
7. Cost-Effective Collection: The costs to collect a tax should be kept to a minimum for both the government and taxpayers.
8. Impact on Government Revenues: The tax system should enable the government to determine how much tax revenue will likely be collected and when.
9. Certainty: The tax rules should clearly specify when the tax is to be paid, how it is to be paid, and how the amount to be paid is to be determined.
10. Payment Convenience: A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer
Ending
As U.S. Treasury Secretary John Snow announced that the Bush Administration has no set timetable for reform, the reform will be a long and dizzying process. Partly because the different interest groups will try to affect the congress on behalf of its interests and hot disputes will rise in the future. Despite the huge obstacles, I have much confidence with the tax reform plan. I believe the carrying-on tax reform will create a new tax system for U.S. which is fairer, less complex and more efficient