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Should we lump the income tax and payroll taxes together or discuss them separately? ... Use portfolio of taxes -- income, wealth, consumption. Avoid different tax rates on goods, ...

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MAKING TAXES LESS NASTY

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Make them transparent make them fair minimize efficiency losses and leaks minimize collection cost l.jpg

Make them Transparent

Make them Fair

Minimize Efficiency Losses and Leaks

Minimize Collection Cost

MAKING TAXES LESS NASTY


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The American Federal Structure

A system of assigned responsibilities and revenue sources with three primary levels:


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The American Federal Structure

A system of assigned responsibilities and revenue sources with three primary levels of government:

  • Federal

  • State

  • Local


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The Main revenue sources of the federal level of government are?


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The Main revenue sources of the federal level of government are?

Income Tax

Payroll tax


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The Main revenue sources of the state level of government are?


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The Main revenue sources of the state level of government are?

Sales Tax

Income Tax


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The Main revenue sources of the local level of government are?


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The Main revenue sources of the local level of government are?

Property Tax

User Fees


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TRANSPARENCY?


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TRANSPARENCY I

  • Adoption

    • Open legislative process

    • Open hearings

    • Non-retroactive

    • Consistency between elements of tax system

    • Certainty about how change in tax law will change tax burdens


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TRANSPARENCY II

  • Administration

    • Payments based on fair and explicit, uniform and impersonal criteria

    • Access to tax procedures and those who administer them

    • Opportunity for appeal and right to fair and impartial judgment

  • Compliance steps clearly communicated

  • Taxpayers should know HOW MUCH they are obligated to pay


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TAX FAIRNESS?


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TAX FAIRNESS

  • Tax burdens should always be proportional to benefits received -- at least, they should appear to be to the average guy [median voter]

  • Where it isn’t feasible to match burdens to benefits on the basis of usage, ability to pay is usually the best available proxy for benefits received


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TWO ASPECTS

Horizontal Equity

i.e., treating equals equally

Vertical Equity has to do with the relative tax burdens imposed on individuals with different abilities to pay taxes

TWO PROBLEMS

Assessing ability to pay

Pursuit of horizontal and especially vertical tax equity is further complicated by shifts in the incidence of taxes. Laws define obligation, but markets determine incidence.

ABILITY TO PAY


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VERTICAL INCIDENCE


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DECREMENTAL or FLAT TAX

Zero percent on income (Y) < 70K;

20 percent on all Y > $70K

= avg. rate of 0% on $20K and 12% on $180K

PROGRESSIVE TAX

Zero percent on Y < $30K;

10% on Y > $30K and < $80K;

15% on Y > $80K and < $200K;

30% n all Y > $200K

= avg. rate of 0% on $20K and 12% on $180K

The Same Average Tax Rates Can be Produced TWO Ways


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How To Measure Tax Equity

For a Random Sample of citizens, estimate:

lnT = a + b(lnY) + e

Where:

T = the TAX BURDEN on each individual (i)

Y = the AFFLUENCE level of each i

Using Ordinary Least Squares Regression analysis.

bmeasures Vertical Equity,

r-square Horizontal Equity


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Problem #1 with Ability to Pay

Measuring AFFLUENCE

  • Economists would like to use PERMANENT INCOME or NET WORTH, but those measures are unobtainable

  • So we use a proxy


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Problem #1 with Ability to Pay

Measuring AFFLUENCE

  • Haig-Simons definition of Income = algebraic sum of (1) market value of rights exercised in consumption + (2) the change in the store of property rights between beginning and end of period. Major differences between AGI and HSY are unrealized capital gains and imputed incomes.

  • So we use a proxy

    • Current Income AGI

    • Property

    • Some combination thereof

  • These proxies are not entirely satisfactory


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Problem #2 with Ability to Pay

Vertical Equity cannot be deduced simply from Rates specified in Tax Law

  • Tax payments are not the same as TAX BURDEN

  • Tax payments can be avoided and evaded, which also affects tax efficiency and compliance costs (avoidance is legal, evasion is not)


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Tax Shifting

Note: All taxes are ultimately imposed on people; paying higher prices

for things is the same as have less money income


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EFFICIENCY?


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Tax Avoidance I


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Tax Avoidance II

Excess Burden of Taxation, SUBSTITUTION:

The Triangular Portion of tax wedge is deadweight loss


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Tax Avoidance III

TAX EVASION INCREASES WHEN TAX RATES ARE INCREASED, INCREASING ADMINSTRATIVE COSTS AND COST TO TAX PAYERS -- BOTH TAX AVOIDERS AND NON-AVOIDERS


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Tax wedges


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The calculation of deadweight losses is central to a number of policy questions including:

  • which tax measures impose the least burdens or costs on the community to finance a public program or project?

  • how valuable do public projects have to be to cover the full costs of the revenue needed to finance them? and

  • how much redistribution from rich to poor can society afford?


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How Much?

  • Studies have typically found that the deadweight losses associated with raising taxation revenue range from a minimum of 10 cents for each additional dollar of revenue raised to well in excess of $1 for each additional dollar of revenue raised.


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Depends on?

  • The size of deadweight losses is influenced by a range of factors but deadweight losses are likely to be greatest where the actions of producers and consumers are highly responsive to after-tax prices, where existing marginal tax rates are high and where savings are highly responsive to after-tax returns.


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The Marginal Cost of Public Funds


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Which is more transparent?

  • Income Tax

  • Payroll Tax


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Which is fairer?

  • Income Tax

  • Payroll Tax


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Which is more efficient?

  • Income Tax

  • Payroll Tax


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Which has the lower compliance cost?

  • Income Tax

  • Payroll Tax


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Are they adequate?

  • Income Tax

  • Payroll Tax


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When we assess federal tax policy

  • Should we lump the income tax and payroll taxes together or discuss them separately?

  • Should we consider spending simultaneously?


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EFFICIENCY

  • Keep Tax Rates low

    a. Broadest possible tax base

    b. Use portfolio of taxes -- income, wealth, consumption

  • Avoid different tax rates on goods, services, and factors, especially where they are close substitutes (except where you are more concerned about reducing consumption than raising revenue -- tax bsd things not good things)

  • Avoid taxes in markets where buyers & sellers react substantially to changes in price


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