16 chapter the tax system in the united states public sector economics: the role of government in...

16CHAPTER

The Tax System in the United States

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

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PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe

U.S. Tax SystemU.S. Tax System

Effects of tax depend upon how it Effects of tax depend upon how it interacts with other taxesinteracts with other taxes

U.S. has federal tax systemU.S. has federal tax system 3 major categories of U.S. tax 3 major categories of U.S. tax

system:system: Federal taxesFederal taxes State taxesState taxes Local taxesLocal taxes

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Federalism and the Tax Federalism and the Tax SystemSystem

Federal government collects more in Federal government collects more in revenues than all other U.S. revenues than all other U.S. governments combinedgovernments combined

Income tax primarily a federal taxIncome tax primarily a federal tax Property tax primarily a local taxProperty tax primarily a local tax Sales taxes primarily state taxesSales taxes primarily state taxes

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Federalism and the Tax Federalism and the Tax SystemSystem

Federal State Local

All taxes 61.8% 21.7% 16.5%

Individual income and payroll 88.7% 10.4% 1.0%

Corporate Income 85.2% 13.4% 1.5%

Sales and gross receipts 18.2% 66.7% 15.1%

Property NA 4.4% 95.6%

Tax BaseGovernment Level

Table 16.1 The Distribution of Government Revenue Sources Among Levels of Governments, 2000

Source: Calculated from data in the Statistical Abstract of the United States, 2003 edition.

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Federal TaxesFederal Taxes

Personal income tax most significant Personal income tax most significant source of federal government source of federal government revenuerevenue

Social insurance payroll taxesSocial insurance payroll taxes Social security tax structure is Social security tax structure is

regressiveregressive

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Federal TaxesFederal Taxes

Revenue Source 1980 1990 2000

Individual income taxes 47.2% 45.2% 49.6%

Corporate income taxes 12.5% 9.1% 10.2%

Social insurance payroll taxes 30.5% 36.8% 32.2%

Excise taxes 4.7% 3.4% 3.4%

Table 16.2 The Distribution of Federal Government Revenue, 1980, 1990, 2000

Source: Statistical Abstract of the United States, various issues

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Intergovernmental Intergovernmental RevenuesRevenues

Major revenue source for lower-level Major revenue source for lower-level governmentsgovernments

Most significant intergovernmental Most significant intergovernmental revenues consist of federal aid to revenues consist of federal aid to state/local governmentsstate/local governments

State governments provide State governments provide assistance to local governmentsassistance to local governments

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Can have significant effects on Can have significant effects on government financegovernment finance

Can substitute for own-government Can substitute for own-government taxationtaxation

Most come from higher-level Most come from higher-level governments to lower-level governments to lower-level governmentsgovernments

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Reasons to establish Reasons to establish intergovernmental programs:intergovernmental programs: Higher-level governments provide Higher-level governments provide

money to encourage certain programs money to encourage certain programs by lower-level governmentsby lower-level governments

Taxation for lower-level governments Taxation for lower-level governments can be shifted to higher-level can be shifted to higher-level governmentsgovernments

Equity Equity

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State and Local TaxesState and Local Taxes

States rely on sales and income States rely on sales and income taxestaxes

Local governments rely on property Local governments rely on property taxestaxes

Sales and income taxes have risen Sales and income taxes have risen faster than property taxesfaster than property taxes

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State and Local TaxesState and Local Taxes

Tax Base 1950 1960 1970 1980 1990 2000

Individual income 0.28% 0.49% 1.08% 2.08% 2.51% 2.20%

Sales and gross receipts 1.81% 2.36% 3.13% 3.06% 3.32% 3.22%

Property 2.39% 3.52% 3.63% 2.54% 2.81% 2.49%

Source: Statistical Abstract of the United States, various issues.

Table 16.3 Revenues from Three Major State and Local Tax Bases as a Percentage of GDP

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Progressivity of Tax Progressivity of Tax SystemSystem

Important to consider lifetime income Important to consider lifetime income as well as income in a particular yearas well as income in a particular year

Progressivity of tax system as a Progressivity of tax system as a whole more important than whole more important than progressivity of any particular taxprogressivity of any particular tax

Importance of nonmonetary incomeImportance of nonmonetary income

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Tax system is slightly progressive Tax system is slightly progressive overalloverall

Most progressive tax is income tax Most progressive tax is income tax Sales and excise taxes generally Sales and excise taxes generally

regressiveregressive Property tax exhibits U-shaped Property tax exhibits U-shaped

pattern with respect to incomepattern with respect to income

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Problems with considering Problems with considering progressivity of tax system over a progressivity of tax system over a lifetime:lifetime: People do not have lifetime income People do not have lifetime income

available to pay tax at any one point in available to pay tax at any one point in timetime

Tax structure can change substantially Tax structure can change substantially over timeover time

Does not consider how tax money is Does not consider how tax money is spentspent

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Political Influences on Political Influences on Tax SystemTax System

Tax policy made through political Tax policy made through political processprocess

Economic analysis:Economic analysis: Provides arguments both sides useProvides arguments both sides use Estimates effects of tax changesEstimates effects of tax changes

Special interests tend to dominate Special interests tend to dominate political debatepolitical debate

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Tax ReformTax Reform

Most changes in tax law small and Most changes in tax law small and affect few taxpayersaffect few taxpayers

Many changes in the form of Many changes in the form of loopholesloopholes Allow some taxpayers to reduce tax Allow some taxpayers to reduce tax

paymentspayments 1986 tax reform1986 tax reform

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Comprehensive Versus Comprehensive Versus Piecemeal Tax ReformPiecemeal Tax Reform

Piecemeal tax reformPiecemeal tax reform Benefit special interestsBenefit special interests Tax code becomes more complexTax code becomes more complex

Comprehensive tax reformComprehensive tax reform More efficient tax codeMore efficient tax code Lower overall tax ratesLower overall tax rates

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Revenue-Neutral Tax Revenue-Neutral Tax ReformReform

Change tax system in some ways Change tax system in some ways Leave amount of tax revenues to be Leave amount of tax revenues to be

collected unchanged collected unchanged Allows efficiency and equity issues to Allows efficiency and equity issues to

be considered separately from be considered separately from amount of tax revenuesamount of tax revenues

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Taxes in Isolation and Taxes in Isolation and the Tax Systemthe Tax System

Optimal provision of one tax depend Optimal provision of one tax depend on other taxeson other taxes

Taxes must be viewed as individual Taxes must be viewed as individual components of overall tax systemcomponents of overall tax system

16 chapter the tax system in the united states public sector economics: the role of government in...

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