Ðåôåðàò: The Tax System of the United States
Ðåôåðàò: The Tax System of the United States
Contents
Introduction…………………………………………………………………3
1.
Federalism
& the Tax System………………………………………...4
2.
Federal
Taxes and Intergovernmental Revenues. Tax Reform……7
3.
The
Progressivity of the Tax System. Political Influences on the Tax
System………………………………….……………………………..12
Conclusion…………………………………………………………………16
Bibliography……………………………………………………………….18
Introduction
The purpose of our research - to characterize US tax system. First we
shall tell about main principles of US tax system. In chapter 1 we cover
principles of federalism in tax system.
In chapter 2
we shall discuss the basic federal taxes and intergovernmental revenues. Also chapter 2 covers main US tax reforms and their
influences on a tax policy as a whole. After examining some basic facts about
the tax system, the remainder of tile chapter turns to matters dealing with tax
policy.
One issue that
has surfaced with regard to individuals taxes is the degree of progressivity of
particular taxes, but a more relevant consideration is the degree of
progressive of the tax system as a whole. It is a subject of chapter 3. If some
taxes are regressive while others are progressive, their effects can offset one
another, and a very regressive tax might be acceptable, or even desirable,
within the context of the entire, tax system. After all we shall tell about
political influences on the tax system.
Chapter 1
Federalism & the Tax
System
Let's tell some words
about a tax policy all over again. One important aspect of tax policy is that
the optimal provisions for one type of tax will often depend on the way in
which other taxes are levied. A tax should be efficient and equitable when
analyzed on its own, but often the efficiency and equity of a tax depend upon
how it fits in with the whole system of taxes. So, taxes must be viewed as individual
components of an overall tax system to really understand their effects.
The United States has a
federal system of government, and, followings that model, the tax system can be
divided into the three major categories of federal, state, and local taxes.
Federal, taxes make up about 56 percent of total taxes, although federal
expenditures are: only about half of total expenditures. The difference occurs
because a substantial fraction of state and local government expenditures are,
financed by federal government grants. Intergovernmental grants make up nearly
one-third of local government revenues. One of the goals of this chapter is to
examine how the various levels of government raise revenues to finance their
expenditures.
The federal government
collects more in revenues than all other governments in the United States
combined. Table 1 lists the percentage breakdown of all government own-source
revenues and own-source revenues from major tax bases. Own-source revenues
excludes intergovernmental grants, which are discussed in a separate section
later, but includes revenues collected from fees and user charges, which might
ordinarily not be considered as tax revenue. As table 1 shows, the federal
Government collects 56.4 percent of total government revenues, with states
collecting 24.3 percent and local 19.3 percent. [1, p.305]
Although all
levels of government tend to collect revenues from a variety of sources, more
taxes than all table 1 shows that the different levels of government rely on
different tax bases to state and local different degrees. Most income taxes
are collected by the federal government, which collects 81 percent of all
individual income taxes and 81.5 percent of all corporate income taxes. States
collect about 17 percent of both individual and corporate income tax payments,
and local governments collect less than 2 percent. Thus, while states rely to a
significant degree on income tax collections, the income tax is primarily a
federal tax. When considering the income tax from an equity standpoint, this
is even more true because most states base their income tax structures on the
federal income tax structure, so changes in federal tax laws can have a
significant effect on state income tax collections, both in terms of the amount
of tax collected and in terms of the distribution of income tax payments among
taxpayers.
The tax that
is most clearly assigned to one level of Government is the property tax. More
than 96 percent of property taxes are collected by local governments. Sales
and gross receipts taxes, taxes are collected primarily by state governments.
Although 62.9 percent of sales and gross receipts taxes are collected by
states, both the federal government and local governments collect a significant
amount. The federal government collects 24 local governments 24 percent of
sales and gross receipts taxes, mostly through federal excise taxes on motor
fuel, alcohol, and tobacco. [1, p.307] Local governments collect 13. 1
percent of sates and gross receipts taxes, coming from a combination of local
general sales taxes, excise taxes on gasoline, and other less significant
excise taxes.
Stepping back
to examine the overall tax system, we see that the federal government relies
primarily on income taxes, state governments on sales taxes, and local
governments on property taxes. This division makes some sense when one
considers the mobility of tax bases.
Although the
property tax has remained a local tax, the income tax is becoming, increasingly
important at the state level, as will be discussed later, so states might be
viewed as encroaching on a traditionally federal tax base. Likewise, the
federal government collects a significant amount of sales and gross receipts
taxes, primarily as excise taxes, which might be viewed as taxing a state tax
base. One factor relevant to the discussion of a federal value added tax is
that, as a consumption tax, it would be placed on a tax base that has
traditionally been used by state governments. This was less of an issue when
the value added tax was adopted by European governments because tax systems in
Europe tend to be more centralized than the tax system in the United States.
So, we can
divide US tax system into the three major categories of federal, state, and
local taxes. Intergovernmental grants make up nearly one-third of local
government revenues. The federal government collects more in revenues than all
other governments in the United States combined.
Most income
taxes are collected by the federal government, which collects 81 percent of all
individual income taxes and 81.5 percent of all corporate income taxes. Thus,
while states rely to a significant degree on income tax collections, the income
tax is primarily a federal tax.
We see that
the federal government relies primarily on income taxes, state governments on
sales taxes, and local governments on property taxes. This division makes some
sense when one considers the mobility of tax bases.
Chapter 2
Federal Taxes and
Intergovernmental Revenues. Tax Reform
The federal
government relies on income and payroll taxes for the vast majority of its
revenues. Table 2 shows the percentage breakdown for four categories of
federal tax revenues and shows that the personal income tax is by far the most
significant source of federal government revenue. Social insurance payroll
taxes, which consist mostly of Social Security and Medicare taxes, make up the
second-largest category, and this category is the only one that increased its
percentage contribution from 1990 to 1999. Both corporate income taxes and
excise taxes have fallen slightly in importance over that period.
The increased
importance of Social Security taxes is worth considering from an equity
standpoint. Although the income tax structure is designed to be progressive,
the Social Security tax structure is regressive because it taxes income at a
flat rate up to t maximum amount and is not collected on income above the
maximum. [2, p.122]
When Social
Security taxes were relatively low, the regressive nature of the tax might not
have been much of an issue, but with rising Social Security tax rates and
uncertain future benefits, the issue is worth considering. The progressivity
of the tax system is reduced when social insurance taxes replace income taxes.
Although the expected future benefits are a relevant and offsetting factor,
normally the progressivity of the tax structure is analyzed independently of
the distribution of tax benefits.
One of the
important points to note from the numbers in table 2 is that income and payroll
taxes make up about 90 percent of federal government revenues. The bulk of
those taxes are levied on individuals in the form of the individual income tax
and social insurance taxes. [1, p.320]
One of the
major sources of revenues for lower-level governments is intergovernmental
revenue. Revenues collected by the federal government are distributed through
grants to state and local governments, and state governments also provide
financial assistance to local governments. Intergovernmental revenues make up
about 22 percent of total state government revenues and 33 percent of local
government revenues. [1, p.320] There is some double counting here because the
federal government can provide revenues to states, who then distribute revenues
to localities. Also, local governments sometimes borrow from state governments
and repay loans, so intergovernmental revenues to state governments can come
from both federal and local governments. However, the most significant
intergovernmental revenues consist of federal aid to state and local
governments.
As a percent
of state and local government spending, federal aid peaked in the late 1980s at
about 24 percent of state and local government expenditures and has since
declined to about 17 percent. Although they have been declining slowly in
importance, intergovernmental revenues are still large and can have significant
effects on government finance.
Although each
individual intergovernmental transfer program will have its own motivation,
there are three basic reasons why intergovernmental transfer programs might be
established: (1) higher-level governments provide money to encourage certain types
of programs by lower-level governments; (2) taxation for lower-level
governments can be shifted to higher-level governments, where taxes are harder
to avoid; and (3) programs are established for equity reasons, to give poorer
states or localities parity with richer states or localities in funding
government programs. [2, p.158]
But state
governments rely mainly on sales and income taxes for their revenues, while
local governments rely mainly on property taxes.
Now we shall
tell about tax reforms. Tax laws are continually being modified at all levels
of government. Indeed, most changes in tax law tend to be small changes that
directly affect only a few taxpayers, and with good reason. Changes in any
laws tend to be initiated as a result of a demand for the change, and special
interests will consistently demand changes that will benefit them, while the
general public will remain on the sidelines of most policy debates. Thus, the
tax laws change as one small provision after another is added to the tax code
as a result of requests from special interests.
Although each
change by itself may have a plausible rationale, changes in the tax code tend
to be in the form of loopholes that allow some taxpayers to reduce their tax
payments. This was the general idea that drove the federal income tax reform in
1996. The tax code had so many loopholes in it that much income was escaping
taxation, making everyone’s tax rates higher. If all the loopholes and special
interest benefits could be done away with, everyone could have lower tax rates
but the tax system could still raise the same amount of revenue.
Thus, the idea
of that tax reform was to broaden the tax base by closing loopholes and making
more income subject to taxation and lowering rates to raise the same amount of
revenue. That effort at reform was mostly successful for two reasons. It
considered the tax system as a whole rather than piecemeal, and the reform
proposals were revenue neutral, which meant that they all proposed a more
efficient tax structure that would raise the same amount of revenue. [1, p.356]
When tax reform takes
place by examining one small tax issue after another, special interests can
have undue influence over the reform process, and the resulting reform will
tend to favor special interests rather than the general public interest. Small
changes to the tax code will not affect most people very much one way or the
other, so it will not pay them to get involved in the debate, whereas special
interests can benefit substantially from small changes in the tax code. Thus,
when the tax code is changed a little at a time, special interests will tend to
benefit, and the tax code will become increasingly complex as loopholes are
added to the tax system one at a time.
This problem of an overly
complex tax code ridden with loopholes may be overcome by proposing a complete
overhaul of the tax system that does away with all the loopholes in exchange
for lower tax rates for everyone. Everyone tends to lose some special interest
benefits with such a reform, but, overall, the more efficient tax code with
lower rates can more than make up for the loss of these special interest
benefits. Thus, a comprehensive tax reform has the potential to be a Pareto
superior move, and all citizens can agree to give up their loopholes in
exchange for a more efficient tax system that improves the welfare of all.
This was the philosophy underlying federal tax reform in 1996.
Since the 1996 tax reform,
changes in the tax code have been small ones, and this type of change is likely
to benefit special interests rather than further the general public interest.
Cynics might even suggest that by 1996, Congress had created just about all the
special interest loopholes that it could fit into the tax code and that to
create any more would have required taking away someone else’s. Therefore,
Congress moved to eliminate as many of the special interest provisions as it
could so that it could start giving them out again, one at a time, in exchange
for renewed political support from the favored special interests. An optimist
can hope that once a better tax system has been enacted, Congress and the
general public will resist tampering and might even improve upon it.
For special interests in
the private sector, the tax code provides a method by which they might be able
to produce benefits for themselves. For governments, the tax system is a
method of raising revenues. With the federal government running a substantial
deficit and states and localities also finding themselves strapped for
revenues, many people see tax reform as an opportunity to generate more
revenues for cash-strapped governments. This view is not universal, however,
and others think that governments spend too much and that taxes should be cut.
Inevitably, when tax matters enter the political debate, there will be tension
between those who think the government needs to increase taxes and those who
think taxes need to be cut.
Both groups should agree
that however much revenue the government raises, it should do so as efficiently
as possible. Thus, there is a possibility to get agreement among all parties
to create a more efficient tax structure if they can lay aside differences
regarding whether the government should increase or decrease its revenues.
Agreeing to adhere to the
principle of revenue neutrality when changing the tax structure partitions the
policy debate so that issues regarding how much revenue the government should
raise can be considered separately from efficiency and equity issues. On one
side of the partition, legislators can debate how to create a fair and
efficient tax structure, leaving the amount of revenues unchanged, and, on the
other side of the partition, they can debate whether tax rates should be raised
or lowered to collect the right amount of revenue.
So, the
federal government relies on income and payroll taxes for the vast majority of
its revenues. Social insurance payroll taxes, which consist mostly of Social
Security and Medicare taxes, make up the second-largest category. When Social
Security taxes were relatively low, the regressive nature of the tax might not
have been much of an issue, but with rising Social Security tax rates and
uncertain future benefits, the issue is worth considering.
One of the
major sources of revenues for lower-level governments is intergovernmental
revenue. Revenues collected by the federal government are distributed through
grants to state and local governments, and state governments also provide
financial assistance to local governments.
But tax laws
are continually being modified at all levels of government. Although each
change by itself may have a plausible rationale, changes in the tax code tend
to be in the form of loopholes that allow some taxpayers to reduce their tax
payments. Thus, the idea of tax reform was to broaden the tax base by closing
loopholes and making more income subject to taxation and lowering rates to
raise the same amount of revenue.
Chapter 3
The Progressivity of the
Tax System. Political Influences on the Tax System
One of the
important issues in the analysis of individual taxes in the previous chapters
was the progressivity of taxes. 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. [2, p.165]
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. [1, p.309] 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. [2, p.183]
Yet another problem with
this approach is that it does not consider how the tax 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 interests 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. [1, p.387] 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.
Conclusion
The tax system
in the United States is a composite of federal, state, and local taxes. The
federal government raises more than half the tax revenues in the United States,
with state governments raising about a quarter, and local governments a little
less than that. Although there is not an absolute division among tax bases
used by the various levels of government, the federal government relies mostly
on income taxes, state governments rely most heavily on sales taxes (but also
get significant revenues from income taxation), and local governments rely most
heavily on property taxes.
Intergovernmental
revenues make up a substantial amount of state and local government revenues,
mostly in the form of federal government grants. The use of intergovernmental
revenues helps equalize expenditures across the nation, so that lower-income areas
are not as disadvantaged because of smaller tax bases. These revenues also
have the effect of lowering the state or local government tax price for
government spending, which encourages more state and local spending. This is
often the intention, as federal grants are made to entice lower-level
governments to spend more in certain areas. Because federal government
programs spread across the nation, intergovernmental revenues also make
different jurisdictions more similar and therefore lower intergovernmental
competition.
One of the significant
issues with regard to any tax, and especially with regard to the overall tax
system, is its degree of progressivity. The tax system in the United States
is, overall, progressive, with people at the extreme lower end of the income
distribution paying much less in taxes as a percentage of their incomes, and
people at the extreme upper end paying much more, than average. For people who
are not at the extremes of the income distribution, however, the tax system is roughly
proportional. Income taxes are the most progressive taxes as a group, while
sales and excise taxes are the most regressive, but the progressivity of income
taxes more than offsets the regressivity of sales taxes.
With regard to both
equity and efficiency issues, taxes are best considered within the context of
the overall tax system. Some taxes, such as cigarette taxes, may be very
regressive, yet they are a small part of the total tax payments of any group
and therefore are not viewed as unfair because of their regressiveness.
Similarly, the efficient tax treatment of dividends, capital gains,
inheritances, and most kinds of property depends upon how related tax bases are
treated throughout the tax system, so one cannot get a complete understanding of
any individual tax without seeing how it works as a part of the entire system
of taxes.
Ultimately,
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. The federal tax reform of 1996 serves as a model in this regard.
Bibliography
1. Dr. Randall G. Holcombe. The
Tax System in the United States. New York: Academic Press, 2000.
2. John Leslie Livingstone. The
portable MBA in Finance and Accounting. New
Jersey: John Wiley & Sons, Inc., 2002.
E-resources:
1. www.aimr.org/knowledge
2. www.afajof.org
3. www.mrc.twsu.edu