Transcript MAKING TAXES LESS NASTY Make them Transparent Make them Fair Minimize Efficiency Losses and Leaks Minimize Collection Cost Next page.

MAKING TAXES
LESS NASTY
Make them Transparent
Make them Fair
Minimize Efficiency Losses and
Leaks
Minimize Collection Cost
Next page
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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ABILITY TO PAY
TWO ASPECTS
TWO PROBLEMS
• Horizontal Equity • Assessing ability to pay
i.e., treating equals
• Pursuit of horizontal and
equally
especially vertical tax
• Vertical Equity has to equity is further
do with the relative tax complicated by shifts in
burdens imposed on the incidence of taxes.
Laws define obligation,
individuals with
but markets determine
different abilities to
incidence.
pay taxes
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VERTICAL INCIDENCE
TAX DESIGNS
Equal burden
Proportional but
regressive
Strictly proportional
Proportional but
progressive
INCOMES
($)
INCOME
SHARES
TAX
PAID ($)
Avg. TAX
RATE (%)
20 K
180 K
10%
90%
10 K
10 K
50 %
5.6 %
Same
same
4K
16 K
20 %
8.9 %
Same
Same
2K
18 K
10 %
10 %
Same
Same
0
20 K
0
12 %
Assume: Government services cost $20K
VERTICAL INCIDENCE
TAX DESIGNS
Equal burden
Proportional but
regressive
Strictly proportional
Proportional but
progressive
INCOMES
($)
INCOME
SHARES
Pre Post
TAX
PAID ($)
Avg. TAX
RATE (%)
20 K
180 K
10%
90%
5.9%
96%
10 K
10 K
50 %
5.6 %
Same
same
9.8%
90.2%
4K
16 K
20 %
8.9 %
Same
Same
10%
90%
2K
18 K
10 %
10 %
Same
Same
11%
89%
0
20 K
0
12 %
VERTICAL INCIDENCE
TAX DESIGNS
Equal burden
Proportional but
regressive
Strictly proportional
Proportional but
progressive
Swedish Model
INCOMES
($)
INCOME
SHARES
Pre Post
TAX
PAID ($)
Avg. TAX
RATE (%)
20 K
180 K
10%
90%
5.9%
96%
10 K
10 K
50 %
5.6 %
Same
same
9.8%
90.2%
4K
16 K
20 %
8.9 %
Same
Same
10%
90%
2K
18 K
10 %
10 %
Same
Same
11%
89%
0
20 K
O
12 %
20K 42k
180K 138K
10%
90%
24%
76%
8K
72 K
40 %
40 %
The Same Average
Tax Rates Can be
Produced TWO Ways
DECREMENTAL
or FLAT TAX
Zero percent on
income (Y) <
90K;
20 percent on all Y
> $90K
= avg. rate of 0%
on $20K and
11% 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 11% on
$180K
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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.
b measures 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
Impact
Response and
Adjustment to
Taxes
Forward Shifting:
Incidence
Higher prices to customers
for product
Business: Makes
Absorption: Lower
Individuals: pay
payment to State
return to owners of
business
higher purchase price or
have lower money
incomes
Backward Shifting:
Lower payments to
suppliers and employees
Note: All taxes are ultimately imposed on people; paying higher prices
for things is the same as have less money income
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 NONAVOIDERS
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Tax wedges
w
D
S
E
w( t )
w1
B
w0
A
(1 t1 ) w1
C
(1 t )w(t )
F
D
S
O
L 
t L
L
1
L
0
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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
Table 2.1: The Marginal Cost of Public Funds Estimated by Brow ning
Marginal deadweight cost as
a percent of tax revenue
Marginal cost of one dollar
of public expenditure
Proportional Tax
8
Degressive Tax
13
Progressive Tax
16
1.08
1.13
1.16
Source: Browning (1976)
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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
1. Keep Tax Rates low
a. Broadest possible tax base
b. Use portfolio of taxes -- income, wealth,
consumption
2. 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)
3. Avoid taxes in markets where buyers & sellers
react substantially to changes in price
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