US Tax

4 Key excerpts on "US Tax"

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  eBook - ePub

  Microeconomics in Context

  • Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Pratistha Joshi Rajkarnikar, Brian Roach, Mariano Torras(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Fortunately, one need not comprehend the imposing complexity of tax laws to understand the crucial role of taxes in modern societies. Taxation is an important topic for students of economics. Tax policies have important economic consequences, both for a national economy and for particular groups within the economy. Tax policies are often designed with the intention of stimulating economic growth—although economists differ significantly about which tax policies are most effective at achieving this. Taxes can create incentives promoting desirable behavior and disincentives for unwanted behavior. Taxation provides a means to redistribute economic resources toward those with low income or special needs. Taxes provide the revenue needed for important public services such as social security, health care, national defense, and education.

  Taxation is as much a political issue as an economic issue. Political leaders have used tax policy to promote their agendas by initiating varioUS Tax reforms: decreasing or increasing tax rates, changing the definition of taxable income, creating new taxes on specific products, and so forth. Of course, no one particularly wants to pay taxes. Specific groups, such as corporations, farmers, or retired individuals, exert significant political effort to reduce their share of the tax burden. Tax codes are packed with rules that benefit certain groups of taxpayers while inevitably shifting more of the burden to others.

  In this chapter, we take a look at taxes and tax policy. First, we consider taxes from a theoretical perspective based on the economic models from earlier chapters. Second, we summarize the different types of taxes, with an emphasis on the United States. Third, we present an international comparison of tax policies. Finally, we address current tax debates, including the distribution of the tax burden among different groups.

  1 . Economic Theory and Taxes

  1.1 Taxes in the Supply-and-Demand Model

  The supply-and-demand model we presented in Chapter 3 can be used to gain insights into the effects of taxation on consumers and producers. To incorporate taxes into our model, we consider a per-unit tax on a product or service, referred to as an excise tax

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  eBook - PDF

  Principles of Economics in Context

  • Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, Mariano Torras, Jonathan Harris, Julie Nelson(Authors)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  For example, the United States tends to rely on individual income taxes more than most countries do. Income taxes comprised about 40 percent of all tax revenue in the United States in 2015, compared to an OECD average of 25 percent. 22 Several other types of taxes are relied on more in other countries than in the United States. For more on these other types of taxes, see Box 12.2. 3.3 C URRENT T AX P OLICY I SSUES Taxation and Economic Growth Although this section of the book is concerned primarily with microeconomics, any discussion of tax policy should consider the debate over the relationship between taxation and macroeconomic growth. In addition to raising revenues, taxes generally create a disincentive to engage in certain activities. For example, high taxes on investment are expected to reduce overall investment. One theory is that a high overall rate of taxation creates a disincentive for people to work hard and invest, because they will keep less of their money after taxes. This theory implies that rates of mac-roeconomic growth will be higher when tax rates are low. Many proponents of this theory focus in particular on the marginal tax rates of high-income earners. According to supply-side economics , low marginal tax rates encourage entrepreneurs and investors to increase their economic efforts, leading to more employment and, ultimately, benefits that “trickle down” to workers and the broader economy. Does the evidence support the view that taxes represent a drag on economic growth? We can ana-lyze the relationship between economic growth and taxes by comparing data across countries and by looking at data over time within a single country.

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  eBook - ePub

  Taxation by Political Inertia

  Financing the Growth of Government in Britain

  • Richard Rose, Terence Karran(Authors)
  • 2018(Publication Date)
  • Taylor & Francis

    (Publisher)

  It is attractive for politicians averse to raising tax rates and broadening the tax base to rely upon economic growth rather than increased tax effort to produce more tax revenue. Each increase in tax effort induces a disproportionate decrease in take-home pay. If a government claims 40 per cent of the national product in taxation, an increase in tax effort to 45 per cent will reduce the private-sector share by 8.3 per cent (that is, from 60 to 55 per cent).

  The reasons why government favours economic growth are multiple: in a booming economy there is a lot more money to spend, and fewer political difficulties. Moreover, as economic growth is cumulative, in the course of a five-year Parliament an annual growth rate of 2.5 per cent will, by a process of compounding, increase the national product by 16 per cent, and total tax revenue with it.

  Viewing the economy as a source of tax revenue imposes a one-dimensional perspective upon a multi-dimensional set of activities. Models of the economy designed to illustrate processes important in economic theory often give very little attention to taxation. From a broad economic perspective, issues of prices and wages, investment and growth and foreign exchange rates appear of pervasive importance. Taxation appears only as an intervening variable in the economic system as a whole (Wallis et al., 1984). In many contexts, taxation can be seen as a fiscal instrument used for ulterior, non-revenue ends. Economic activities are reduced by tax laws to such categories as taxable income, or goods liable to value added tax. The flow of income and expenditure through the economy is not the concern of tax authorities, whose primary job is to divert a portion of that flow to the fisc through appropriate administrative means.

  Certainty and Predictability

  Government is concerned with the certainty of revenue and, because budgets are statements about future taxing and spending, about the predictability of revenue. A good tax is not only easy to collect but also will yield an amount of revenue that can be predicted when forecasts are required for the budget in the year ahead. Otherwise the Treasury may make policies based upon misleading assumptions about the public-sector borrowing requirement, the difference between the forecast total expenditure and total revenue.

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  eBook - ePub

  Guide to U.S. Economic Policy

  • Robert E. Wright, Thomas W. Zeiler, Robert E. Wright, Thomas W. Zeiler(Authors)
  • 2014(Publication Date)
  • CQ Press

    (Publisher)

  Lost in this discussion, however, have been concerns about simplicity and revenue sufficiency, as the tax system has grown ever more complex since 1986 and the amount of tax revenue collected has fallen well short of government expenditures in recent years. These two factors will no doubt set the stage for the debates that are yet to come.

  SOURCES OF FEDERAL TAX REVENUE

  The federal government in the United States relies on six major types of taxes: the individual income tax, payroll taxes, the corporate income tax, the estate tax, excise taxes, and customs duties and fees.

  The individual income tax is levied on all sources of income, including wages and salaries; farm, business, and rental income; investment income (including interest, dividends, and capital gains); and other sources. In figuring income tax liability, taxpayers add up all of their sources of income, then subtract a number of adjustments to income (including some education, moving, retirement, and health-related expenses), to yield their adjusted gross income. Taxpayers then subtract either a standard deduction or the total amount of itemized deductions (including medical expenses, state and local income taxes, mortgage interest, charitable donations, and a number of other deductions) and subtract a dollar amount for each exemption that they claim. The result is the taxable income. Finally, taxpayers use a graduated tax schedule in which the marginal tax rate, the tax rate on an additional dollar of income, increases in steps as taxable income increases, to calculate their regular income tax liability. The range of incomes to which a particular marginal tax rate applies is called a tax bracket.

  Higher income taxpayers must also calculate tax liability in an alternative way by adding back some of the deductions and exemptions and by applying a different rate schedule. If the result of this calculation is higher than their regular income tax liability, they must pay the difference in the form of the Alternative Minimum Tax.

  Finally, a number of credits are allowed against an individual’s tax liability, including the foreign tax credit, credit for child and dependent care expenses, Child Tax Credit, and the Earned Income Tax Credit (EITC). Some of these credits are payable even if the credit exceeds the taxpayer’s income tax liability.2

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