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 Tax policy is often a very complex system. Here are a few notes to help distinguish the different options involved with tax policy:

  • Collectibility
    • Gov must consider its ability to collect a tax and, even more important, the potential of the tax to yield enough revenue to justify the cost incurred by collecting it.
    • Two major tax “handles” are income taxes and expenditure taxes
    • The major tax handle for local governments is the property tax.
      • Its value is difficult to assess.
  • Fiscal Neutrality
    • The tax system should not give preference ot one kind of revenue or expenditure, unless there is a very good reason to do so.
      • If the tax system were to advantage certain types of economic activities , it could direct resources away from their most productive economic use and probably reduce the rate of economic growth.
    • Raising revenue is unpopular, so any tax that can produce additional rev w/o political activity is valuable for gov.
    • Buoyancy tax is one whose yield keeps pace with the economic growth or inflation.
      • Example is progressive income tax: as indiv make more money, they pay higher taxes as well as higher rate of taxes. Taxes that require reassessments or adjustments in rates to keep pace with inflation, such as property, are not buoyant.
      • As inflation increases the money of income for citizens w/o increasing real income, the income levels that are taxed first changed, so that tax rates change at the same rate as real imcome.
  • Distributive Effects
    • Taxes can alter the income distribution w/I society. Usually taxes are regressive, they take larger % from pooer than rich. (Sales and Social Secuirty) must be justified on other grounds, such as ease of collection or similarity to insurance premiums.
    • Finding that in US the poor and rich pay higher rates than large majority of citizens. (poor consume rather than save and unable to use loopholes.)
    • Tax changes have been progressive. Top rate reduced from 70 to 30%, shifts burden from income and toward excise and Social Security.
  • Visibility
    • Public officials must be concerned about the political acceptability of taxes. This is a function of their visibility. The less visible the tax, the more acceptable. Social Security is less visible than income. No annual reckoning that brings it to attention. The “Fiscal Illusion” create by taxing multiple units helps to make such tazes more palatable.
  • Politics
    • Different because it is something no one really wants and everyone seeks to avoid. Nature is to divert burden onto others to build special privledes. Tax code is extremely complex se of laws, make even more complex by IRS.
    • The real complexity of tax policymaking allows many special interests to have provisions they desire written into the tax code with little notice.
    • Adding loophoples to a tax law often is an exercise in coalition building through logrolling, as every member of congress adds in his or her perception in return for support of the legislation as whole.
  • Proposals for Further Fundamental Tax Reform
    • The flat tax â€" flat tax on all income, regardless of source, eliminating almost all deductions and loopholes. This would be fairer, treating all income and expernditure equally and citizens. Also eliminates # of jobs for IRS. OPPO: It would be regressive, with the affluent paying less. Also eliminates using taxees for public policy purposes.
    • National consumption tax: income à comsumption tax. Places burden on spending not earning.Everyone would have to pay burden.Makes business keep up with records.Roughly 30% on all purchases. Poor spends much more than affluent.

This Economics & Policy article was written by Colby Almond on 5/11/2010