Who Imposes U.S. Taxes and Why?
Most discussion of taxation involves the economic incentives and impacts that will come from changes in the tax code, but taxes are primarily levied to fund government programs, not to influence the economy. Taxes are one part of the more general issue of Public Finance.
Taxes come at three levels: federal, state, and local. Taxes that go to the federal government generally fund projects and programs that affect the entire country, block grants to states (often to support federal mandates), enforcement of federal (or interstate) law, and specific project-oriented handouts to states and localities (commonly referred to as pork). State taxes go to regionally important items such as infrastructure and enforcement of in-state violations of the law. Local taxes go into things such as city projects, schools, zoning, and garbage collection.
Most taxes include loopholes which give people tax breaks which look a whole lot like spending programs juxtaposed with otherwise fairly neutral tax rules. These loopholes are called Tax Expenditures and many consider these tax expenditures to be a form of Corporate Welfare.
Aggregate Tax Burdens
Large public sectors with generous service provision and redistribution of wealth from the wealthy to the less wealthy is characteristic of highly developed countries. Underdeveloped countries exhibit the opposite. Although it has the largest national economy the United States hasthe second lowest tax burden as a percentage of GDP, of the thirty OECD countries. It is about half the tax burdened of the highest tax countries in the OECD. Americans are deprived of many of the services that other governments provide for their citizens, such as universal medical care, paid vacations and paid maternity leave.
Country..........Tax Revenue as % of GDP
Here are the 5 lowest tax countries: Country..........Tax Revenue as % of GDP
New Tax Legislation
Six major tax bills have been passed during the Bush Administration. These bills, described in detail in the links below, have resulted in a massive reduction in federal revenue. By one estimate, about half of the record setting deficits during the Bush administration are due to these tax cuts, and they are set to balloon into even greater revenue losses if not repealed or trimmed. There is also no convincing evidence that these tax cuts have significantly improved the U.S. economy. The flaws of these tax cuts from a tax policy perspective, when taken as a whole, are explained here by the Urban Institute.
Most of the breaks go to those with high incomes and great wealth. The focus is on investments in plant and equipment and not people. There are modest, but real tax breaks for working and middle class Americans, but they are a small part of the total package.
- Tax Increase Prevention and Reconciliation Act of 2005
- American Jobs Creation Act of 2004
- Working Families Tax Relief Act of 2004
- Jobs and Growth Tax Relief Reconciliation Act of 2003
- Job Creation and Worker Assistance Act of 2002
- Economic Growth and Tax Relief Reconciliation Act of 2001
(Note that despite four bills containing the words "Jobs" or "Growth" that the Bush Administration is the first to have a net loss of jobs on its watch since Herbert Hoover). See also Economic Impact of Bush Tax Cuts.
George W. Bush initially made a major overhaul of the tax code a priority in his second term. But, this was abandoned when the recommendations of the commission he established for that purpose were not well received by either party in Congress.
Plans for Tax Reform
Generally, see discussions of particular taxes. Reforms not neatly within any particular existing tax are discussed here:
- Unearned v. Earned Income Tax Reform
- Flat Tax Proposals
- Consumption Tax Proposals
- Taxing the Internet
- Expatriating Corporation Taxation
- Closing Corporate Tax Loopholes
- The Carbon Tax Debate
- Tax Simplification
- Small Business Tax Relief
- Comprehensive Business Income Tax
- Automated Payment Transaction Tax Progressive Flat Tax
- Against Investment Tax Breaks
Particular U.S. Federal Taxes
- Federal Individual and Corporate Income Tax
- Federal Payroll Taxes
- Federal Gift and Estate Taxation
- Federal Excise Taxes
Particular State and Local Tax Issues
- Property Taxation
- Sales Taxation
- State and Local Excise Taxes
- Users Fees
- State Income Taxes
- Miscellaneous State and Local Business Taxes
- Tax Incentives To Lure Businesses
- Value Added Taxes
- Poll Taxes
- Church Taxes
- Foreign Social Insurance Taxes
- Foreign Corporate Taxation
- Net Worth Taxes
- International Taxation Regimes
- Inheritance Taxes
- OECD Country Experience With Tax Reform
Progressive v. Regressive Taxes
Taxes are variously described as either progressive or regressive. Progressive means that people that have more income (or wealth) pay a higher percentage in taxes than people who are less well-to-do. Regressive is any tax where there is not a significant increase in the percent taken from richer rather than poorer people. The rationale behind progressive taxation is equity and fairness, while the rationale behind flat taxation is equality.
It is equally accurate to say that progressive taxation tends to tax wealth, while regressive taxation tends to tax consumption. Taxes which are neither progressive nor regressive are said to be neutral.
Examples of progressive taxes:
- income tax
- alternative minimum tax
- estate tax
- capital gains tax
- windfall profits tax
- dividend tax
- luxury tax
- tourism taxes (airline, hotel, etc.)
Examples of regressive taxes:
- sales tax
- value-added tax
- tariffs and duties
- payroll tax
- gas tax
- tobacco tax
- taxes on gambling (including lotteries)
- road tolls
- poll tax
- most fees (e.g. parking tickets)
- loan tax
Examples of taxes that may be progressive or regressive, depending on design:
- property tax
- vehicle tax
Assigning each type of a tax to a particular category is difficult, and the full impact of each particular tax may make it more or less progressive. For example, while a tax on high-priced yachts (a luxury tax) would tend to fall on the wealthy, lower-paid workers who manufacture yachts would also feel the effects. In other words, taxes vary in terms of how easily people of different means can avoid them and in the full range of their effects.
As an example of a severely regressive, consider the Window Tax imposed by King George III sometime between 1600 and 1800AD. Large numbers of families attempting to reduce tax-burden bricked up windows in their houses, resulting in reduced air-supply, dampness, disease and general ill-health. There have been other examples of severely damaging tax, such as a "wheel tax", which caused peasants to remove wheels and replace with skids or runners - which tore up the roads worse than wheels did.
Can increased tax rates reduce tax collections?
Arthur Laffer (b. 1940) proposed a theory which relates REVENUE FROM TAXES to TAXATION RATE. The shape of the curve he proposed has point at which increased tax-rates actually result in *reduced* revenues gathered. The basis of the theory is that beyond a certain tax-rate, people will lose incentive to work or to pay taxes as required by the government. Few economists believe that current federal income taxes are anywhere close to the point where tax increases would reduce revenues. The evidence showing that this doesn't happen in real life scenarios is presented here.