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Chapter 12

Chapter 12 - The Design of the Tax System.pdf

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Enrico Moretti

Chapter 12: The Design of the Tax System I. AFinancial Overview of the US Government • as nation gets richer, government typically takes larger share of income in taxes A. The Federal Government • US federal government collects about 2/3 of taxes in our economy 1. Receipts • largest source of revenue for government is individual income tax • tax liability: how much one owes to the government • taxable income = total income - am’t based on number of dependents (usually kids) - certain expenses policymakers have deemed “deductible” (mortgage interest payments, state/local tax payments) • then tax liability calculated from taxable income using schedule • payroll tax: tax on wages that a firm pays its workers • social insurances taxes: the government earned revenue from the payroll tax • these taxes earmarked to pay for Social Security and Medicare • corporative income tax: the tax on corporations (business set up to have its own legal existence, distinct and separate from its owners) • taxes each corporation based on profit • corporations are essentially taxed twice • once by corporate income tax • second by individual income tax when corporation uses its profits to pay dividends to its shareholders • excise taxes: taxes on specific goods e.g. gasoline, cigarettes, alcohol, etc. 2. Spending • transfer payment: government payment not made in exchange for a good or service • made up 19% of government spending in 2009 • e.g. Social Security • largest expenditures from largest to smallest: • Social Security (19%) • national defense (17-19%) • income security • e.g. TemporaryAssistance for Needy Families (TANF) i.e. “welfare,” Food Stamp program, unemployment compensation, etc. • health spending • Medicare • Medicaid: federal health program for the poor • net interest • interest accumulated from government borrowing from public • other • federal court system, space program, farm-support programs, housing credit programs • budget deficit: when receipts fall short of total spending • finances budget deficit by borrowing from public • sells government debt to private sector, including both investors in US and abroad • budget spending: when receipts exceed spending • uses extra receipts to reduce outstanding debt B. State and Local Government • state and local governments collect about 40% of all taxes paid 1. Receipts • two most important taxes for state/local governments are sales tax and property tax • sales tax: levied as percentage of total amount spent at retail stores • some states exclude certain items considered necessities e.g. food and clothing • property taxes: levied as percentage of the estimated value of land and structures and are paid by property owners • these two taxes make up more than 1/3 of all receipts of state and local governments • state/local governments also receive substantial funds from federal government • federal government’s policy of sharing its revenue with state governments redistributes funds from high-income states to low-income states • also receive much receipts from various taxes such as fishing/hunting licenses, tolls, fares for public transportation 2. Spending • largest expenditures from largest to smallest: • education • public welfare • includes transfer payments to poor • highways • other • libraries, police, garbage removal, fire protection, park maintenance, snow removal II. Taxes and Efficiency • tax is more efficient than another when raises same revenue with less cost to taxpayers • costs to tax payers • tax itself • DWL • admin. burdens that taxpayers bear as comply with tax laws • efficient tax system: small DWL and small admin. burden A. Deadweight Loss • DWL: when total surplus decreases and is less than gov’t revenue made from tax • taxes may increase prices to point that some buyers no longer buy • those who no longer buy are worse off and there is no offsetting revenue to the government • those who can still buy have their surpluses reduced but this reduction is offset by the amount of revenue the government collects B.Administrative Burden • administrative burden: the inefficient method of paying taxes (e.g. filling out tax forms) • burden includes time spent throughout year keeping records for tax purposes, etc. • some high tax bracket people hire tax lawyers and accountants to help with taxes • some say they help clients avoid taxes by using “loopholes” • “loopholes:” ambiguities or omissions in the tax laws • resources devoted to complying with tax laws are a type of DWL • government gets only amount of taxes paid • in contrast, taxpayer loses not onl
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