Yu Jun Pei

Thursday 3:30-5:20pm
Group 3
ACC 366P-02650
Modified flat consumption tax is a way out of the hectic income tax.
Nothing is certain but death and taxes. In the United States of America we currently have
in place a hybrid income tax, where it covers credits and deductions and separates people in
different tax brackets. This requires a lot of time to sort out the complexity of this tax code.
Although the current income system taxes people progressively and is a good way to fulfill the
amount of money the IRS needs to recover from the current deficit, I believe a modified flat
consumption tax with assistance of tax breaks on necessities will be superior due to its
simplicity, efficiency, and fairness.
The first issue that arises with our current tax code is its complexity. There are over
90,000 people employed by the IRS just to deal with collection of taxes and any issues that could
potentially slow down tax returns. This complexity influences the systems ability to generate
revenues (Milliron), I think that due to all the lines of tax code there is inevitably
inconsistencies with the tax system. It allows rich people to pay professionals to look for ways to
twist the tax code in their favor so they can escape high amounts of taxes. For example Warren
Buffet in an interview with Tom Brokaw said his total taxes came to 17.7% and no one in the
office but the receptionist paid a rate as low as that. The amount of time and money spent to get
around this complexity is completely inefficient way to use generate revenue. It may seem like
we are generating sufficient amount of revenue, but there are many costs to running the IRS. In
an experiment that tested professional accountants to interrupt tax law, it showed that below 50%
of these subjects could correctly answer the technical questions (Martindale). If these
professional accounts whose job is to know the tax code, could not fully understand it when
given time to analysis the technical language. How can we expect the reasonable person to
Yu Jun Pei
Thursday 3:30-5:20pm
Group 3
ACC 366P-02650
understand how the current tax code functions? Moreover, if the complexity of the tax code
affects the compliance then what does it take to enforce the tax laws? The IRS has to hire agents
to investigate money laundering and tax evasions. This creates a situation where it is very
difficult to monitor and enforce laws onto everyone that should be paying taxes. There isnt a
solution to enforcing tax code.
However, if the modified flat consumption tax was implemented, it will be easier for
people to understand. Even those who that dont have the ability to get to get access to the tax
laws should be able to understand the flat consumption tax. Also the flat tax will reduce tax fraud
and errors because professionals and lawmakers cannot create tax loopholes for those that have
enough money to pay for their services. There will no longer be a long list of different
deductions and credits that people can abuse. From what Ive seen in the community tax centers,
there are some people that know how to turn the system in their favor. By implementing this
modified flat tax rate, .it will help the tax code go in a direction where there is more fairness in
the system. According to Milliron, if tax laws want to be equal, they have to be complex. I
disagree with this argument to an extent, because the modified flat consumption tax code does
not have to be very complex to create a tax break for those who need it. It will require some
adjustments to the complete flat tax because there needs to be a way to supplement those who
need to buy necessities that dont have the money to pay a high tax rate on food, water, and
clothes. I suggest doing a tax rebate system where people can apply for tax exemptions on
necessities if they are under the poverty line, this will help with the problem of low income
families paying proportionate tax rates instead of a progressive tax rate. This will give
individuals a better chance to understand where their money is going and how the government
Yu Jun Pei
Thursday 3:30-5:20pm
Group 3
ACC 366P-02650
will potentially help them if they are in need of assistance.
In addition, there is a big debate on how the current tax credits and deductions influence
the behavior of the public. The current tax code makes people try to adjust their consumption
based on where they can get credits and sometimes look for more loopholes to get a bigger
deduction or tax refund. I think this isnt a good way to incentivize people because it could
potentially make people commit fraud, and it can cause inequity to those that dont have a good
understanding of the credits and exemptions that they are missing out on. It can be difficult to
measure the between two different tax provisions (Carroll) because a change in one line of code
will create a dramatic effect on how the tax can be measured. For example, does giving first time
home buyers credit stimulate the economy? How can we measure this? Many of the credits given
to help influence the economy cannot be accurately measured. The tax payers will aggressively
look for more deductions in order to benefit themselves. Another example is charitable
contributions, if you are giving to charity and then you deduct that amount. Are you really trying
to help the community or are you just looking for a lower taxable income. This is why adding on
more provisions isnt an ideal way to stimulate the economy, because consumer spending will
only react to permanent tax changes rather than temporary tax relief (Steindel). I think when
the government pushes these stimulus packages to try boost the current economy, it only puts
itself in a worse position in the future. There is no remedy to change the economy in an instant.
If there were one, someone would have thought of it. Therefore, a bigger change needs to be
made before it is too late to affect the behavioral patterns of the population. However, I believe
that absence of these over lapping provisions will create a steady and fair tax code for people to
react to. Many consumers will reach a rate where they feel they can keep up for a long period of
time. There is no point trying to create temporary quick fixes for the economy if they do not
Yu Jun Pei
Thursday 3:30-5:20pm
Group 3
ACC 366P-02650
make a big difference for the economy. It will help people in the long run if we explain how the
tax code works and how it can help them.
Many people support the idea of the flat consumption tax system because it eliminates the
disadvantages of double taxation. It eliminates the death tax, capital gains tax and double
taxation of savings and dividends (Meehan), which takes away from the unnecessary payments
on interest and dividends for individuals. This make people want to save and invest. Also this
will allow the IRS to keep the tax code within the national border because there are cases where
people will try to escape the United States to evade certain tax laws. By doing so, it reduces the
brain drain (those with high earning potential, usually more talented) from leaving the country
due to unhappiness of tax law. Likewise, this will reduce the substitution effect, people who will
make less per hour if they work more, because every dollar they make will be taxed in the same
way. There will be a better incentive to working more and saving more. Moreover, people will
know there is no way to evade paying taxes on items you buy, and it comes back to the sense that
it is so simple to do that people understand how they will be taxed. This will give them the relief
of knowing other people will be taxed the same amount. For example, it will reduce the idea that
people think, they are the only ones reporting their taxes correctly, and they feel like they are
being robbed because they tell the truth. This system will not discriminate those who have the
ability to make a lot of money. Since it is possible that our current tax system is border line
unconstitutional because it can potentially help one group of people a lot more than another. The
flat consumption tax does not punish you for being in a capitalistic society like the income tax
does. Hopefully this will incentivize people to innovate and come up with new ideas to help
stimulate the economy.
Yu Jun Pei
Thursday 3:30-5:20pm
Group 3
ACC 366P-02650
Furthermore the flat consumption tax creates more incentive to save and invest in capital
assets. Tax on consumption is source-neutral therefore it doesnt mislead our investment
judgments (CLIPICI). This supports the point of eliminating double taxation. With our current
income tax rate personal savings are taxed twice and the system does not account for capital
gains and interest income inflation. Taking the flat tax route is a fix because all capital income
is exempted from the household-level tax (Gale). I think this will be crucial when we are in
need of money to stimulate the economy. Since there is less incentive to save money in our
current tax codes due to the fact we get taxed on savings and investments we make. I think this
will allow the economy to really push itself pass the recession points. People will have to take
risks, but they have more money to take these risks under the flat tax. If the immediate business
investment is tax deductible then many people will be more likely to invest even if the economy
isnt looking super strong. Although this will be a big change, and with change comes a lot of
controversy. The flat tax will help stabilize the economy once it is given time to settle in. There
will be fewer fluctuations in how the economy will move in the future because investments will
be more frequent and disruptions in the economy will be rarer.
An additional problem that is occurring in the current tax law is the high amounts of
unreported income in the United States. This is an issue because the (GAO) indicates that the
self-employed report only 36 percent of their income (Kaplow). If there are that many people
not paying taxes, we will never get out of this deficit without changing the tax codes. I believe
the forms of tax evasion used in the system now, cannot be enforced in a timely matter. This may
be due to the lack of technology, time, and resources but if we shift to the flat tax, it is much
harder for people to find loopholes. If we want to keep our current tax code we will have to
Yu Jun Pei
Thursday 3:30-5:20pm
Group 3
ACC 366P-02650
allow these to slip by but we will have to adjust in other ways. For example we could increase
the tax rates, which nobody likes the sound of that idea. Another idea is we could give more
funding to the IRS to hire agents to deal with people who try to evade taxes, but yet another cost
that will add to the deficit we are facing. These examples also make it pretty unequal to those
who abide by the law and try their best to contribute fairly. People have always found a way to
use foreign bank accounts and secret offshore techniques to hide income from the government. It
becomes a real problem when we as a country do not have the resources to directly enforce all
the tax laws. When there is the inability to enforce these laws, the efficiency of the systems will
began to take a hit. Thats why with the flat consumption tax, efficiency will be measured in
multiple ways. After all that has been said, there isnt a clear solution on how we can compensate
the lost in unreported income under the current income tax law, but the change to a flat tax
system could potentially eliminate the large sums of money that is being evaded.
The flat tax will solve the liquidity issues with trying to collect an amount of tax
accumulated over one year (Vladimirova). I think this option will help the public who get taken
by surprise by the amount they owe to the IRS. It pains me to see people who dont know what
they are going to with a 1000 debt when they are making fewer than 20,000 dollars, while trying
to support kids. The flat tax system will give the families a better estimate on what they will be
paying for such as their necessities. Furthermore, they will be less inclined to get stuck in the
payday loan sham. Many uninformed tax payers do not understand the situation they are getting
into if they borrow from a payday shark. The payday loan will never benefit people who are
surviving paycheck to paycheck. The feasibility of this tax system will allow the government to
attain real time collections and discontinue the need for strong enforcement laws. They will be
able to essentially make everyone in the U.S border pay regardless of their race, age, gender, or
Yu Jun Pei
Thursday 3:30-5:20pm
Group 3
ACC 366P-02650
immigration status. Also this step will help bring equality among all classes of people in
America.
Finally, I think the flat consumption tax rate will be the closest thing we will come to
being equal on paying taxes. Many argue that people in the top 1% percentage should pay a lot
more taxes but I believe if everyone pays the same percentage of taxes on good then the system
can generate the amount of money it needs, we do not need focus on a certain tax bracket to get
the sufficient funds. If the wealthy are in a situation where they used their skills to get into a
position of wealth, I believe they should also be treated like everyone else. This also goes for
corrupt people of authority. It will make it much harder for people to manipulate the tax code in
their favor because there wont be lines and lines of tax law to abide by. Therefore by using the
flat consumption tax, it is easier not to discriminate against a certain type of person (Jones). This
will take away the ambiguity of the current income tax if we are able to collect from every single
person, because when anyone buys products they will be taxed. There will be no escaping their
tax responsibilities as a member of society.
In conclusion, we have so many problems that occur with our current income tax, it is
hard to balance all the flaws while trying to generate revenue. The modified flat consumption tax
is superior to the current income tax because it will be much simpler, more efficient, and equal
for everyone. I believe having these three characteristics will supplement for the big change that
needs to be done to switch from the current tax code. Although it is unlikely this will happen
overnight I think it will be a big topic in the years to come, because we are currently facing
trillions of dollars in national debt. If we are in this debt the whole time, something needs to be
changed. The flat consumption tax will create a way to make money while being able to cut costs
in the IRS. The IRS would no longer have to hire as many people to organize documents, and
Yu Jun Pei
Thursday 3:30-5:20pm
Group 3
ACC 366P-02650
then they wouldnt need as many criminal enforcement agents. The agency would no longer be
as hectic as it is now on April 15
th
. The current tax code changes so often, you never are sure if
there is an exception or a loophole to every rule. The flat consumption tax rate can be easily
understood by just your everyday person and it will change the lives of millions of people.

Yu Jun Pei
Thursday 3:30-5:20pm
Group 3
ACC 366P-02650
Works Cited
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CLIPICI, Emilia. "Pros And Cons Related To Flat Tax." Annals Of Eftimie Murgu University
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Kaplow, Louis. How Tax Complexity And Enforcement Affect The Equity And Efficiency Of
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Yu Jun Pei
Thursday 3:30-5:20pm
Group 3
ACC 366P-02650
Martindale, Bobbie, Cook, Bruce C. Koch, and Stewart S. Karlinsky. Tax Law Complexity: The
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Vladimirova, Iana. "Solving The Realization Problem With A Consumption Tax: Reconsidering
Andrews' Proposal." Fordham Journal Of Corporate & Financial Law 18.2 (2013): 489-
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