Transcript Overview of U.S. Federal Taxes with emphasis on the Personal Income Tax Public Econ Seminar, Econ 398 Joseph Guse.

Overview of U.S. Federal Taxes
with emphasis on the Personal
Income Tax
Public Econ Seminar, Econ 398
Joseph Guse
History of Federal Budget
source: www.whitehouse.gov/omb/budget/Historicals (Table 1.2)
Most Common Types of Taxes
• Individual Income Taxes. Progressive structure. Levied
on all income – labor and capital.
• Payroll Taxes. Finance SS, Unemp Ins, Medicare. Levied
only on labor income. Regressive structure.
• Corporate Income Taxes.
• Wealth Taxes. Federal Estate Tax and Gift Taxes. Local
Property Taxes.
• Consumption Taxes. Federal excise taxes (e.g. gas and
cigs) and import tarriffs. Local sales and excise taxes.
• Other Revenue Sources.
Revenue and Shares by Type Federal Tax 2005
Source: BEA via Slemrod and Bakija
Receipts
($Billions)
Share of Federal
Revenue
Share of GDP
Personal Inc. Tax
928
41.3%
(7.4%)
Payroll Taxes (Soc Ins)
855
38.1%
(6.9%)
Corporate Inc.Tax
326
14.5%
(2.6%)
Excise Tax,Customs
101
4.5%
(.8%)
Estate and Gift Tax
25
1.1%
(.2%)
Total
2247
100%
(18%)
Total State and Local
1185
(9.5%)
Revenue Composition History
Source: www.whitehouse.gov/omb/budget/Historicals (Table 2.2)
History of Personal Income Tax
Summarized from Bakija and Slemrod
• Civil War Era Income Tax 1861-1871.
• 1894. Income Tax Enacted but Overruled by Supreme
Court.
• 1913. 16th Amendment. Start of modern Income Tax.
• 1914. Graduated Rates (1-7%). Large Personal Exemption:
only 0.5% of population has income high enough to have
any liability. Still only 6% on eve of WWII.
• 1917 Deductions for mortgage interest, local taxes and
charitable giving already in place.
• WWII. Receipts goes from 1 to 8% of GDP. Percent filing
goes from 6% to 34% of population. Employer withholding
introduced.
Top Marginal Rate History
Source: www.taxpolicycenter.org/taxfacts
Definition of “Income”
• Haig-Simon: “The increase in person’s ability to consume over a
given period of time”
Income = Consumption + Net Change in Wealth
Would include…
• Wages
• Value of all Employer and Govt benefits
• Capital Income (rent, dividends)
• Capital Gains/Losses (whether realized or not) in real terms.
(appreciate and depreciation).
• Domestic production
• Value of services from owned durable good. (Rental value of own
home, cars, etc)
• Subtract cost of earnings (inputs, interest, maintenance costs, etc)
Further Discussion of Haig-Simon definition
• Problem with measurement.
– Timing problems. Lotteries and annuities.
Retained corporate earnings.
– Uncertainty Problems. E.g. Intellectual property.
• Why we care
– Taxing only some forms of income lead to
distortions and fairness issues.
Federal Tax Definition of Income
• Tax code “lays out transactions and events
that trigger tax liability”
• Adjusted Gross Income (AGI)
– Wages and Salaries (73%)
– Returns to Capital (dividends, interest, cap gains,
rent, royalties)
– Small Business Income (mixture of the two)
Capital Issues
• MOST Interest and Dividend Income is exempt (pension plans, tax-free
bonds, etc), though some dividend income excluded from AGI may have
taxed by corporate income tax.
• Only Realized Nominal Gains/Losses counted
• Exemptions
– Gains held until death
– Gains on owner-occupied housing up to $500K
• Cap gains are taxed at special rates (15%)
• In general cap gains can be taxed once, twice (because of interaction with
Corporate Tax) or not at all!
– The amount of cap gain included in AGI over 1980 – 2004 is roughly equal to
Haig-Simon definition, but that just reflects rough balance of huge “errors” in
both directions.
• Interpretation: Because of generally lower rates on returns to savings (via
exemptions from 401ks, IRAs, and special cap gains rate), our system is
really a hybrid of an income tax and a consumption tax.
Other Exclusions from Taxable Income
• $1 trillion (2004) excluded from AGI due to
evasion.
• $363B (2004) State and Local Tax Deduction
• $340B (2004) Mortgage/Home Equity Loan
Interest Deduction.
• $166 (2004) Charitable Contributions
• $62 (2004) Medical Dental Deductions
• Standard Deduction
• Personal Exemptions
2012 Marginal Rates (Single)
Source: IRS
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10% on taxable income $0 to $8,700, plus
15% on taxable income $8,700 to $35,350
25% on taxable income $35,350 to $85,650
28% on taxable income $85,650 to $178,650
33% on taxable income $178,650 to $388,350
35% on taxable income $388,350.
Marginal Rates, 2012, Married Jointly
•
•
•
•
•
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10% on taxable income $0 to $17,400
15% on taxable income $17,400 to $70,700
25% on taxable income $70,700 to $142,700
28% on taxable income $142,700 to $217,450
33% on taxable income $217,450 to $388,350
35% on taxable income $388,350.
Tax Credits – Welfare Through the Tax Code
• EITC and Child Credit are Refundable
• EITC is a wage subsidy that eventually get
phased out as income increases. Ramp-up,
plateau, phase-out structure.
– 2007 example. Married with 2 children. 40% up
to $11,790. plateau to $17,390. phase out at 21%
rate. EITC is zero above $39,783.
• Child Credits. $1000 per kid!