Tax Reforms- What are they and why do they matter?

Tax reforms are basically reforms or improvements done in the existing tax laws for various purposes. But the main goal remains the betterment of the taxpaying society. Tax reforms are imposed only after a corresponding law is passed. The main law that allowed this provision of tax reformation is the Tax Reform Act of 1986.
The Tax Reform Act of 1986
The Tax Reform Act of 1986 is a law passed by the United States Congress to simplify the income tax code. Some salient features of the Tax Reform Act were-
1. To increase fairness and provide an incentive for growth in the economy, the passage of the Act reduced the maximum rate on ordinary income and raised the tax rate on long-term capital gains. 2. The Tax Reform Act of 1986 lowered the top tax rate for ordinary income from 50% to 28% and raised the bottom tax rate from 11% to 15% 3. The Tax Reform Act of 1986 also provided for the elimination of the distinction between long-term capital gains and ordinary income. 4. The act mandated that capital gains be taxed at the same rate as ordinary income, raising the maximum tax rate on long-term capital gains to 28% from 20%.
Importance of Tax Reforms
Though tax reforms may differ depending upon the type of tax that is affected, all tax reforms have these basic advantages at their core-
1. Tax reform is generally undertaken to improve the efficiency of tax administration and to maximise the economic and social benefits that can be achieved through the tax system.
2. Tax reform can reduce tax evasion and avoidance, and allow for more efficient and fair tax collection that can finance public goods and services.
3.It can make revenue levels more sustainable, and promote future independence from foreign aid and natural resource revenues.
4. It can improve economic growth and address issues of inequality through redistribution and behaviour change.
Examples of Tax Reforms
Various Tax Reforms have been imposed throughout the decades and many more will be imposed still with changing times. Some examples of Tax Reforms would be-
1. Consumption taxes:
One major reform would replace the current income tax system with one that taxes consumption. There are many forms that a consumption tax could take. Most proposals exempt income used for savings and investment. To protect lower-income taxpayers, some proposals would exempt income used for housing, food, medical care, and other defined purposes up to a specified level. Other proposals would tax the consumption by lower-income families at reduced rates.
2. Carbon taxes:
Some have suggested introducing a carbon tax to achieve two goals: raising revenues and discouraging the use of carbon-intensive energy, which would ultimately have positive environmental effects. A carbon tax could also enable the government to reduce other taxes while still generating additional revenue for deficit reduction
Changes in the tax laws in the form of tax reforms are often seen in the legislature. Their direct impact is felt by the common tax payers. It is hence necessary to deal with these ever changing laws with professional tact. Our tax experts at the National Tax Preparers of America (NTPA) are at your disposal to understand and implement the changes in your annual tax returns.