What it is the taxes, and what it means? Essay
Taxes have been around since the dawn of recorded history.
You can find references to taxes in Greek and Roman civilizations. Throughout history, taxes and wars seem inextricably linked. Taxation, it seems, is a convenient way to pay for the high cost of going to war. To tax (from the Latin taxo; “I estimate”) is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities.Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour). A tax may be defined as a “pecuniary burden laid upon individuals or property owners to support the government a payment exacted by legislative authority. ” A tax “is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority” and is “any contribution imposed by government, whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.
1. A brief history of taxes around the world. Chronology.
Egypt During the various reins of the Egyptian Pharaohs tax collectors were known as scribes. During one period the scribes imposed a tax on cooking oil. To insure that citizens were not avoiding the cooking oil tax scribes would audit households to insure that appropriate amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for the taxed oil. Greece In times of war the Athenians imposed a tax referred to as eisphora.No one was exempt from the tax which was used to pay for special wartime expenditures. The Greeks are one of the few societies that were able to rescind the tax once the emergency was over.
When additional resources were gained by the war effort the resources were used to refund the tax. Athenians imposed a monthly poll tax on foreigners, people who did not have both an Athenian Mother and Father, of one drachma for men and a half drachma for women. The tax was referred to as metoikion Roman empire The earliest taxes in Rome were customs duties on imports and exports called portoria.Caesar Augustus was consider by many to be the most brilliant tax strategist of the Roman Empire. During his reign as “First Citizen” the publicani were virtually eliminated as tax collectors for the central government. During this period cities were given the responsibility for collecting taxes.
Caesar Augustus instituted an inheritance tax to provide retirement funds for the military. The tax was 5 percent on all inheritances except gifts to children and spouses. The English and Dutch referred to the inheritance tax of Augustus in developing their own inheritance taxes.During the time of Julius Caesar a 1 percent sales tax was imposed. During the time of Caesar Augustus the sales tax was 4 percent for slaves and 1 percent for everything else. Saint Matthew was a publican (tax collector) from Capernaum during Caesar Augustus reign. He was not of the old publicani but hired by the local government to collect taxes. In 60 A.
D. Boadicea, queen of East Anglia led a revolt that can be attributed to corrupt tax collectors in the British Isles. Her revolt allegedly killed all Roman soldiers within 100 miles; seized London; and it is said that over 80,000 people were killed during the revolt.The Queen was able to raise an army of 230,000. The revolt was crushed by Emperor Nero and resulted in the appointment of new administrators for the British Isles. Great Britan The first tax assessed in England was during occupation by the Roman Empire.
Lady Godiva Lady Godiva was an Anglo-Saxon woman who lived in England during the 11th century. According to legend, Lady Godiva’s husband Leofric, Earl of Mercia, promised to reduce the high taxes he levied on the residents of Coventry when she agreed to ride naked through the streets of the town.When Rome fell, the Saxon kings imposed taxes, referred to as Danegeld, on land and property.
The kings also imposed substantial customs duties. The 100 years War (the conflict between England and France) began in 1337 and ended in 1453. One of the key factors that renewed fighting in 1369 was the rebellion of the nobles of Aquitaine over the oppressive tax policies of Edward, The Black Prince. Taxes during 14th century were very progressive; The 1377 Poll tax noted that the tax on the Duke of Lancaster was 520 times the tax on the ommon peasant. Under the earliest taxing schemes an income tax was imposed on the wealthy, office holders, and the clergy. A tax on movable property was imposed on merchants. The poor paid little or no taxes. Charles I was ultimately charged with treason and beheaded.
However, his problems with Parliament came about because of a disagreement in 1629 about the rights of taxation afforded the King and the rights of taxation afforded the Parliament. The King’s Writ stated that individuals should be taxed according to status and means.Hence the idea of a progressive tax on those with the ability to pay was developed very early. Other prominent taxes imposed during this period were taxes on land and various excise taxes. To pay for the army commanded by Oliver Cromwell, Parliament, in 1643, imposed excise taxes on essential commodities.
The taxes imposed by Parliament extracted even more funds than taxes imposed by Charles I, especially from the poor. The excise tax was very regressive, increasing the tax on the poor so much that the Smithfield riots occurred in 1647.The riots occurred because the new taxes lowered rural laborers ability to buy wheat to the point where a family of four would starve. In addition to the excise tax, the common lands used for hunting by the peasant class were enclosed and peasant hunting was banned (hooray for Robin Hood).
A precursor to the modern income tax we know today was invented by the British in 1800 to finance their engagement in the war with Napoleon. The tax was repealed in 1816 and opponents of the tax, who thought it should only be used to finance wars, wanted all records of the tax destroyed along with its repeal.Records were publicly burned by the Chancellor of the Exchequer but copies were retained in the basement of the tax court. 4 Colonial America Colonists were paying taxes under the Molasses Act which was modified in 1764 to include import duties on foreign molasses, sugar, wine and other commodities.
The new act was known as the Sugar Act. Because the Sugar Act did not raise substantial revenue amounts, the Stamp Act was added in 1765. The Stamp Act imposed a direct tax on all newspapers printed in the colonies and most commercial and legal documents.Post-revolution America In 1794 Settlers west of the Alleghenies, in opposition to Alexander Hamilton’s excise tax of 1791, started what is now known as the “Whiskey Rebellion” The excise tax was considered discriminatory and the settlers rioted against the tax collectors . President Washington eventually sent troops to quell the riots.
Although two settlers were eventually convicted of treason, the President granted each a pardon. In 1798 Congress enacted the Federal Property Tax to pay for the expansion of the Army and Navy in the event of possible war with France.In the same year, John Fries began what is referred to as the “Fries Rebellion,” in opposition to the new tax. No one was injured or killed in the insurrection and Fries was arrested for treason but eventually pardoned by President Adams in 1800. Surprisingly, Fries was the leader of a militia unit called out to suppress the “Whiskey Rebellion. “2 The first income tax suggested in the United States was during the War of 1812. The tax was based on the British Tax Act of 1798 and applied progressive rates to income. The rates were .
08% on income above ?60 and 10 percent on income above ?200.The tax was developed in 1814 but was never imposed because the treaty of Ghent was signed in 1815 ending hostilities and the need for additional revenue. The Tax Act of 1861 proposed that “there shall be levied, collected, and paid, upon annual income of every person residing in the U. S. whether derived from any kind of property, or from any professional trade, employment, or vocation carried on in the United States or elsewhere, or from any source whatever.
The 1861 Tax Act was passed but never put in force. Rates under the Act were 3% on income above $800 and 5% on income of individuals living outside the U.S. The Tax Act of 1862 was passed and signed by President Lincoln July 1 1862.
The rates were 3% on income above $600 and 5% on income above $10,000. The rent or rental value of your home could be deducted from income in determining the tax liability. The Commissioner of Revenue stated “The people of this country have accepted it with cheerfulness, to meet a temporary exigency, and it has excited no serious complaint in its administration. ” This acceptance was primarily due to the need for revenue to finance the Civil War.Although the people cheerfully accepted the tax, compliance was not high. Figures released after the Civil War indicated that 276,661 people actually filed tax returns in 1870 (the year of the highest returns filed) when the country’s population was approximately 38 million. The Tax Act of 1864 was passed to raise additional revenue to support the Civil War.
Senator Garret Davis, in discussing the guiding principle of taxation, stated “a recognition of the idea that taxes shall be paid according to the abilities of a person to pay. ” It’s the most famous facts. 2.The Main purposes and effects Money provided by taxation has been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.
), public works, social engineering, and the operation of government itself. Governments also use taxes to fund welfare and public services. A portion of taxes also go to pay off the state’s debt and the interest this debt accumulates.These services can include education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities.
Colonial and modernizing states have also used cash taxes to draw or force reluctant subsistence producers into cash economies. Governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as business, or to redistribute resources between individuals or classes in the population.Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund foreign aid and military ventures, to influence the macroeconomic performance of the economy (the government’s strategy for doing this is called its fiscal policy; see also tax exemption), or to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive.A nation’s tax system is often a reflection of its communal values or/and the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent.
In democratic nations where the public elects those in charge of establishing the tax system, these choices reflect the type of community that the public and/or government wishes to create. In countries where the public does not ave a significant amount of influence over the system of taxation, that system may be more of a reflection on the values of those in power. All large businesses incur administrative costs in the process of delivering revenue collected from customers to the suppliers of the goods or services being purchased. Taxation is no different, the resource collected from the public through taxation is always greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labour cost and other expenses incurred in complying with tax laws and rules.
The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is called hypothecation. This practice is often disliked by finance ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since, in reality, money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund.In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls. Some economists, especially neo-classical economists, argue that all taxation creates market distortion and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimize this distortion.
Since governments also resolve commercial disputes, especially in countries with common law, similar arguments are sometimes used to justify a sales tax or value added tax. Others (e. g.
ibertarians) argue that most or all forms of taxes are immoral due to their involuntary (and therefore eventually coercive/violent) nature. 3. Kinds of taxes The Organisation for Economic Co-operation and Development (OECD) publishes an analysis of tax systems of member countries. As part of such analysis, OECD developed a definition and system of classification of internal taxes, generally followed below. In addition, many countries impose taxes (tariffs) on the import of goods. Income tax Many jurisdictions tax the income of individuals and business entities, including corporations.Generally the tax is imposed on net profits from business, net gains, and other income. Computation of income subject to tax may be determined under accounting principles used in the jurisdiction, which may be modified or replaced by tax law principles in the jurisdiction.
The incidence of taxation varies by system, and some systems may be viewed as progressive or regressive. Rates of tax may vary or be constant (flat) by income level. Many systems allow individuals certain personal allowances and other nonbusiness reductions to taxable income.Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government, for taxpayers who have not paid enough during the tax year; and tax refunds from the government for those who have overpaid.
Income tax systems will often have deductions available that lessen the total tax liability by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages.Other tax systems may isolate the loss, such that business losses can only be deducted against business tax by carrying forward the loss to later tax years. Capital gains tax Most jurisdictions imposing an income tax treat capital gains as part of income subject to tax. Capital gain is generally gain on sale of capital assets, i. e.
, those assets not held for sale in the ordinary course of business. Capital assets include personal assets in many jurisdictions. Some jurisdictions provide preferential rates of tax or only partial taxation for capital gains.Some jurisdictions impose different rates or levels of capital gains taxation based on the length of time the asset was held. Corporate tax Main article: Corporate tax Corporate tax refers to income, capital, net worth, or other taxes imposed on corporations.
Rates of tax and the taxable base for corporations may differ from those for individuals or other taxable persons. Social security contributions Many countries provide publicly funded retirement or health care systems. In connection with these systems, the country typically requires employers and/or employees to make compulsory payments.These payments are often computed by reference to wages or earnings from self employment. Tax rates are generally fixed, but a different rate may be imposed on employers than on employees.
Some systems provide an upper limit on earnings subject to the tax. A few systems provide that the tax is payable only on wages above a particular amount. Such upper or lower limits may apply for retirement but not health care components of the tax. Taxes on payroll or workforce Unemployment and similar taxes are often imposed on employers based on total payroll. These taxes may be imposed at both the country and sub-country levels.  Taxes on propertyRecurrent [property taxes] may be imposed on immovable property (real property) and some classes of movable property.
In addition, recurrent taxes may be imposed on net wealth of individuals or corporations. Many jurisdictions impose estate tax, gift tax or other inheritance taxes on property at death or gift transfer. Some jurisdictions impose taxes on financial or capital transactions. Property tax A property tax (or millage tax) is an ad valorem tax levy on the value of property that the owner of the property is required to pay to a government in which the property is situated. Multiple jurisdictions may tax the same property.
There are three general varieties of property: land, improvements to land (immovable man-made things, e. g. buildings) and personal property (movable things). Real estate or realty is the combination of land and improvements to land. Property taxes are usually charged on a recurrent basis (e.
g. , yearly). A common type of property tax is an annual charge on the ownership of real estate, where the tax base is the estimated value of the property.
For a period of over 150 years from 1695 a window tax was levied in England, with the result that one can still see listed buildings with windows bricked up in order to save their owners money.A similar tax on hearths existed in France and elsewhere, with similar results. The two most common type of event driven property taxes are stamp duty, charged upon change of ownership, and inheritance tax, which is imposed in many countries on the estates of the deceased. In contrast with a tax on real estate (land and buildings), a land value tax is levied only on the unimproved value of the land (“land” in this instance may mean either the economic term, i.
e. , all natural resources, or the natural resources associated with specific areas of the Earth’s surface: “lots” or “land parcels”).Proponents of land value tax argue that it is economically justified, as it will not deter production, distort market mechanisms or otherwise create deadweight losses the way other taxes do.
When real estate is held by a higher government unit or some other entity not subject to taxation by the local government, the taxing authority may receive a payment in lieu of taxes to compensate it for some or all of the foregone tax revenue. In many jurisdictions (including many American states), there is a general tax levied periodically on residents who own personal property (personalty) within the jurisdiction.Vehicle and boat registration fees are subsets of this kind of tax.
The tax is often designed with blanket coverage and large exceptions for things like food and clothing. Household goods are often exempt when kept or used within the household. Any otherwise non-exempt object can lose its exemption if regularly kept outside the household. Thus, tax collectors often monitor newspaper articles for stories about wealthy people who have lent art to museums for public display, because the artworks have then become subject to personal property tax.If an artwork had to be sent to another state for some touch-ups, it may have become subject to personal property tax in that state as well. Inheritance tax Inheritance tax, estate tax, and death tax or duty are the names given to various taxes which arise on the death of an individual. In United States tax law, there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the beneficiaries of the estate. However, this distinction does not apply in other jurisdictions; for example, if using this terminology UK inheritance tax would be an estate tax.
Expatriation Tax An Expatriation Tax is a tax on individuals who renounce their citizenship or residence. The tax is often imposed based on a deemed disposition of all the individual’s property. One example is the United States under the American Jobs Creation Act, where any individual who has a net worth of $2 million or an average income-tax liability of $127,000 who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons and is subject to a higher tax rate. Transfer taxHistorically, in many countries, a contract needed to have a stamp affixed to make it valid. The charge for the stamp was either a fixed amount or a percentage of the value of the transaction. In most countries the stamp has been abolished but stamp duty remains. Stamp duty is levied in the UK on the purchase of shares and securities, the issue of bearer instruments, and certain partnership transactions.
Its modern derivatives, stamp duty reserve tax and stamp duty land tax, are respectively charged on transactions involving securities and land.Stamp duty has the effect of discouraging speculative purchases of assets by decreasing liquidity. In the United States transfer tax is often charged by the state or local government and (in the case of real property transfers) can be tied to the recording of the deed or other transfer documents. Wealth (net worth) tax Some countries’ governments will require declaration of the tax payers’ balance sheet (assets and liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the net worth, or a percentage of the net worth exceeding a certain level.The tax may be levied on “natural” or legal “persons”.
An example is France’s ISF. Value added tax / Goods and Services Tax A value added tax (VAT), also known as Goods and Services Tax (G. S. T), Single Business Tax, or Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that creates value. To give an example, sheet steel is imported by a machine manufacturer. That manufacturer will pay the VAT on the purchase price, remitting that amount to the government. The manufacturer will then transform the steel into a machine, selling the machine for a higher price to a wholesale distributor.The manufacturer will collect the VAT on the higher price, but will remit to the government only the excess related to the “value added” (the price over the cost of the sheet steel).
The wholesale distributor will then continue the process, charging the retail distributor the VAT on the entire price to the retailer, but remitting only the amount related to the distribution mark-up to the government. The last VAT amount is paid by the eventual retail customer who cannot recover any of the previously paid VAT. For a VAT and sales tax of identical rates, the total tax paid is the same, but it is paid at differing points in the process.VAT is usually administrated by requiring the company to complete a VAT return, giving details of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to as output tax). The difference between output tax and input tax is payable to the Local Tax Authority.
If input tax is greater than output tax the company can claim back money from the Local Tax Authority. Sales taxes Sales taxes are levied when a commodity is sold to its final consumer. Retail organizations contend that such taxes discourage retail sales.
The question of whether they are generally progressive or regressive is a subject of much current debate. People with higher incomes spend a lower proportion of them, so a flat-rate sales tax will tend to be regressive. It is therefore common to exempt food, utilities and other necessities from sales taxes, since poor people spend a higher proportion of their incomes on these commodities, so such exemptions make the tax more progressive. This is the classic “You pay for what you spend” tax, as only those who spend money on non-exempt (luxury) items pay the tax. A small number of U. S. tates rely entirely on sales taxes for state revenue, as those states do not levy a state income tax. Such states tend to have a moderate to large amount of tourism or inter-state travel that occurs within their borders, allowing the state to benefit from taxes from people the state would otherwise not tax.
In this way, the state is able to reduce the tax burden on its citizens. The U. S. states that do not levy a state income tax are Alaska, Tennessee, Florida, Nevada, South Dakota, Texas, Washington state, and Wyoming. Additionally, New Hampshire and Tennessee levy state income taxes only on dividends and interest income.Of the above states, only Alaska and New Hampshire do not levy a state sales tax. Additional information can be obtained at the Federation of Tax Administrators website.
In the United States, there is a growing movement for the replacement of all federal payroll and income taxes (both corporate and personal) with a national retail sales tax and monthly tax rebate to households of citizens and legal resident aliens. The tax proposal is named FairTax. In Canada, the federal sales tax is called the Goods and Services tax (GST) and now stands at 5%.The provinces of British Columbia, Saskatchewan, Manitoba, and Prince Edward Island also have a provincial sales tax [PST]. The provinces of Nova Scotia, New Brunswick, Newfoundland & Labrador, and Ontario have harmonized their provincial sales taxes with the GST—Harmonized Sales Tax [HST], and thus is a full VAT.
The province of Quebec collects the Quebec Sales Tax [QST] which is based on the GST with certain differences. Most businesses can claim back the GST, HST and QST they pay, and so effectively it is the final consumer who pays the tax. ExcisesUnlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes are based on the quantity, not the value, of product purchased. For example, in the United States, the Federal government imposes an excise tax of 18. 4 cents per U.
S. gallon (4. 86?/L) of gasoline, while state governments levy an additional 8 to 28 cents per U. S.
gallon. Excises on particular commodities are frequently hypothecated. For example, a fuel excise (use tax) is often used to pay for public transportation, especially roads and bridges and for the protection of the environment.A special form of hypothecation arises where an excise is used to compensate a party to a transaction for alleged uncontrollable abuse; for example, a blank media tax is a tax on recordable media such as CD-Rs, whose proceeds are typically allocated to copyright holders. Critics charge that such taxes blindly tax those who make legitimate and illegitimate usages of the products; for instance, a person or corporation using CD-R’s for data archival should not have to subsidize the producers of popular music.
Excises (or exemptions from them) are also used to modify consumption patterns (social engineering). For example, a high excise is used to discourage alcohol consumption, relative to other goods. This may be combined with hypothecation if the proceeds are then used to pay for the costs of treating illness caused by alcohol abuse.
Similar taxes may exist on tobacco, pornography, etc. , and they may be collectively referred to as “sin taxes”. A carbon tax is a tax on the consumption of carbon-based non-renewable fuels, such as petrol, diesel-fuel, jet fuels, and natural gas.The object is to reduce the release of carbon into the atmosphere. In the United Kingdom, vehicle excise duty is an annual tax on vehicle ownership. Tariff An import or export tariff (also called customs duty or impost) is a charge for the movement of goods through a political border. Tariffs discourage trade, and they may be used by governments to protect domestic industries. A proportion of tariff revenues is often hypothecated to pay government to maintain a navy or border police.
The classic ways of cheating a tariff are smuggling or declaring a false value of goods.Tax, tariff and trade rules in modern times are usually set together because of their common impact on industrial policy, investment policy, and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or eliminate tariffs against trade with each other, and possibly to impose protective tariffs on imports from outside the bloc. A customs union has a common external tariff, and the participating countries share the revenues from tariffs on goods entering the customs union. 4. The Progressivity of the Tax System.And Political Influences on the Tax System.
The progressivity of individual taxes is of minor importance, however, when compared with the progressivity of the tax system as a whole. For example, taxes on cigarettes are widely viewed as regressive taxes because lower-income people spend a larger percentage of their incomes on tobacco than do higher-income people. In general, regressive taxes are viewed as inequitable, yet there is minimal resistance to increases in this regressive tax because it is a sumptuary tax on a product that is increasingly viewed as harmful to consume.There is not necessarily an inconsistency in calling for an increase in a regressive tax and favoring a proportional or progressive tax system if that one tax is a small part of the total system. Thus, the progressivity of the tax system as a whole is more important than the progressivity of any particular tax.
Analyzing the entire tax system is not an easy task, for several reasons. If one simply examines the amount of taxes paid in one year when compared with people’s incomes for that year, the degree of regressivity of the tax system is sure to be overstated.Many people at the low and high ends of the income distribution in a particular year are there because of temporary circumstances. People who are temporarily unemployed, or college students who expect to have higher-paying jobs in a few years, will have relatively high consumption and taxes when compared with their incomes, and, at the other end of the income distribution, some people have annual income may be especially high incomes in a year because they have realized capital gains, such as might occur if one sold a business or even a house that one has owned a long time.Thus, it may be more reasonable to look at the progressivity of the tax system compared with lifetime income rather than with income in a particular year. It is very progressive at the extreme ends of the income distribution, with the lower 2 percent of individuals paying much less in taxes as a percentage of their incomes and the upper 2 percent paying much more, relative to the rest of the population. But, for most people, the tax system works out to be roughly proportional with respect to income. The most progressive tax in the tax system is the income tax.
This should not be surprising because it is designed to be progressive with respect to income. But sales and excise taxes are consistently regressive with respect to income, which partially offsets the progressivity of the income tax. States that do not tax food or rent remove a substantial amount of the general sales tax burden from low-income individuals, but included in excise taxes are taxes on gasoline, tobacco and alcohol products, electricity, and phone service that obviously take a larger percentage of income from lower-income individuals.The overall progressivity of the tax system is driven mainly by income taxes and by sales and excise taxes, which make up the biggest share of the total tax burden.
Sales and excise taxes are slightly regressive overall, while income taxes are progressive enough to more than offset the regressive effects of other taxes, making the tax system progressive as a whole. This suggests that if the tax system were to start relying more on consumption taxes, such as a value added tax, the progressivity of the tax system might be reduced, and this is a concern for policymakers who are examining such alternatives.A consumption tax structured like the current income tax, on the other hand, could be designed to retain the current progressivity of the tax system, so it would be less controversial from a policy standpoint.
One can draw some general conclusions about the progressivity of the tax system by looking at the lifetime tax burden in this way, but the approach still has some possible problems. Most obvious is accurately estimating who actually is paying taxes, but there may be deeper problems with this way of looking at things as well.For one thing, people do not have their entire lifetime incomes available for them to pay taxes at any point in their lives.
Someone who will have a much higher income in twenty, years cannot use that future income to pay today’s taxes, so, for purposes of fairness, we should be concerned about taxing people with low incomes heavily now even if their incomes will be substantially higher in the future. This has led some economists to back away from the concept of lifetime income and instead examine the burden of taxes over a shorter period, such as five years.By examining a period like five years, a temporary spell of unemployment would have a smaller effect than if annual income were used as a benchmark, but, at the same time, one would not place heavy tax burdens on people with low incomes today who might have high lifetime incomes.
Another reason for examining the progressivity of the tax system over a shorter period of time than an entire lifetime is that the tax structure can change substantially over time, and any estimate made now of a young person’s lifetime tax burden is sure to be in error because of unforeseen changes in the future tax structure.From an academic standpoint, it is interesting to estimate what the lifetime tax burdens of various groups of people would be under the current tax structure, but, if one is really interested in designing an equitable tax structure, there is a great deal of uncertainty involved in forecasting future taxes. The Social Security payroll tax provides a good example of a tax that had to rise faster than originally forecast to provide sufficient revenues to maintain the program. Yet another problem with this approach is that it does not consider how the ax money is spent. If taxes are the price we pay for government goods and services, then we should be concerned with how well the burden of taxation matches up with the flow of government services rather than just looking at taxes in isolation. The Social Security payroll tax was explicitly designed to have some (but not complete) correspondence with the expected benefits received. Although other taxes do not match up so exactly with benefits received, a complete accounting from an equity standpoint should include both government taxes and government benefits.
It is still worthwhile to examine the issue of the progressivity of the tax structure, these caveats notwithstanding. But, at the same time, we must recognize that any measure of the progressivity of the tax system will be imperfect and must be considered in the context of what it does and does not measure. One can analyze the tax system at length in an academic framework, yet real-world tax policy is made through the political process rather than as a result of economic analysis. Thus, the actual tax system will be the product of compromise among various interests in the political arena.In this setting, economic analysis serves two roles.
First, it provides arguments that both sides use in the political debate on taxes. No one says that he favors a particular tax, or a particular tax reduction, because it will make him richer. Rather, political interests argue that the tax changes they favor are in the public interest for a variety of reasons. They argue that changes will make the tax system more fair or more efficient, but, to make such arguments, they need to know enough about the economics of the situation that they can use economic analysis to present their cases in the most favorable light.But economic analysis is also used to estimate what the effects of tax changes will be so that interests actually will know which changes will benefit them, and by about how much. There is no sense arguing for a change if it will provide little in the way of real benefits. If the democratic political system truly were representative, everyone’s interests would be given equal weight in designing the tax system. In reality, special interests tend to dominate political debate because they are the ones who have the most to gain, and nterests with more wealth will be in a better position to use their resources to steer the course of political decision making.
This has the potential for pushing the tax system toward a complex set of special interest benefits giving loopholes to those who have political influence, while leaving those who do not have much influence to bear increased tax burdens. One problem is that when special interests seek tax advantages, they will care little whether those advantages enhance overall efficiency as long as they benefit the special interests.Tax reforms that actually do enhance economic efficiency probably will have a better chance of passing through Congress because they will have less opposition than inefficient tax reforms, but this may not be enough to produce an efficient tax system. This is especially true when one considers the tax system as a whole. One change in the tax laws may have a plausible rationale but may be counterproductive when considered within the context of the rest of the tax system. ConclusionUltimately, the tax structure is a product of the political system, so understanding the political forces involved in changing the tax laws goes a long way toward understanding the nature of the actual tax system, especially when the actual system seems to deviate from what appears to be fair and efficient.
Special interests tend to have an undue influence over tax changes, as they do over legislation in general, with the result that if tax reform takes place on a piecemeal basis, the tax structure is likely to be increasingly riddled with special interest benefits that erode the tax base and make the tax code inefficient.More comprehensive tax reform has the chance of creating greater potential gains for the general public, which increases the likelihood that reform will take place in the general public interest rather than for the benefit of special interests.Bibliography1. Dr.
Randall G. Holcombe. The Tax System in the United States. New York: Academic Press, 2000. 2. John Leslie Livingstone.
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