Tax

Interest Group Theory

-The interplay of interest groups in policymaking is often praised as pluralism

Public Policy is portrayed as the equilibrium in the struggle between interest groups(though, not the same as the majority preference)

Considered to be best possible approximation of the public interest and diverse society(if you subsrcibe to ideas of pluralism)

But what if the interest group system leaves out many or even a majority of americans?

Tax system

Public interest is best served by a universal, simple, and fair tax system

Federal tax system is complex, unfair, and not universal

One half of personal income in the United States escapse taxation through exemptions and deductions

Treat different types of income differently

Unfairness, complexity, and inefficiency can be attributed to interest

The Federal Tax SYstem

Individual Income Tax

-came about through the sixteenth ammendment

-federal income tax had a top rate of 7%

-automatically deducted from paychecks; witholding system is the backbone of the tax system

-no with holding for nonwage income, must file and pay declartion of estimated taxes before April 15 of each year

-taxable income should re reported from 1040

-half of personal income is not taxed: tax revenue lost to government through exemption, deduction, exclusion, credits

struggle between proponents of loopholes and those who want a simplfied code

alternative mimumum tax: ensures that higher income taxpayers with many exclusions pay a minimum tax

tax evasion: underground economy, cash transactions, etc to hide from income(illegal); independent estimate of underground economy places loss at 15 percent of all tax dues

Federal Income Tax- The first largest source of federal income

Social Security Tax- The second largest source of federal income

-second largest source of federal income

-social insurance payroll taxes include social securtiy and medicare

-employers half of these taxes directly and with hold half from employees wages

-social securit taxes rose incrementally in two ways

-self employed must pay the full 15.3 percent

OASDI(Old Age, Survivors, and Disability Insurance) tax is regressive

Captures a large share of income of lower income Americans than higher income

Taxes collected under social security are earmarked for the account of each taxpayer

Workers feel they are recieving benefits as right rather than a gift

of government

Corporate income taxes

Small portion of taxes

US has reduced corporate income tax rates, now slightly below OECD average

lots of loopholes

evidence regarding incidence is inonclusive

Estate and gift taxes

-taxes on property left to heirs

-for 2025, the exemption is 13.99 million per person; in 2026 this is set to rise to $15 million per person

Excise Taxes

-liquor, gasoline, telephones, air travel, other luxury items

Taxation, Fairness, and Growth

Deciding what’s fair

-Taxes that take a larger percentage of high-income groups are called progressive

-Taxes that take a larger percentage of low-income groups are called regressive

-Taxes that require all to pay the same percentage of their income are called proportional or flat taxes.

-The percentage of income paid in taxes is the determining factor

The argument for progressivity

-higher incomes have more ability to pay; lower-income people undergo smaller percentage of income

-declining marginalized utility of money: $1 for someone making 1,000,000 is worth less than it is for someone making 16,000

The argument for proportionality

-equity can be achieved only by taxpaying everyone at the same percentage

-progressivity penalizes intiative, enterprises, and risk; governments are taking money that would simulate economic growth

-highly progressives curtain growth and make everyone poorer

Universailty: all types of income should be subject to same tax rates

-federal tax laws distinguish ordinary income and capital gains is 20 percent

-top marginal rate on capital gains is 20 percent

-income earned from working

-principle of universality violated by the thousands of exemptions deductions and special treatments

-most people wish to retain many widely used tax breaks

-proponents argue they

Ecpnpmic growth and tax rates

Tax Battles: Regan through Bush

Tax reform act of 1986: one of the most heavily lobbied pieces of legislation in history in the US

-reformed tax code reducing tax rates in exchange for elimation of some tax breaks; reduced brackets from 14 to 2

-interest group lobbied heavily to maintain their deductions/exemptions: real estate industry wanted to preserve deducations for property taces, investment firms joined with banks in arguing for rention of tax deferred IRAs, etc; lobbiyist convinced congress to retain deductibility

Obama promised to lower taxes on middleo clas and raise taxes on upper income americans

Obama wanted congress to pass a phase out of deducations

Additional 0.9% medicare tax on high income families

Set new top rate for estate tax; issues surrounding AMT arose

Compromise: Bush tax cuts extended for two years for all income levels, child tax credit kept, marriage pentalty elimated

Then GOP took control of House and PResident and Congress entered gridlock: house refused obama’s proposed tax hikes, senate opposed house

Sequestions kicked in and forced reductions in spending, led to government shutdown

16 day shutdown, republican opposition collapsed, obamacare funded

Capital gains and Divedend Taxation

-indivduals pay taxes on earned income and also capital gains

-looses from these sales may be used to offest gains

-net gain is taxed rate is lower than ordinary earned income

-divdedns from stocks are also taxed at a lower rate than earned income

-accumulation of capital needed for economic growth

-warren buffett observed that his effective tax rate was well above that of his secretary

The flat tax

-recommended by some economists: would elimate all exemptions, exclusions, deductions, and special treatments; lower rate would produce just as much revenue as the current complicated system

-removing progressive rates may create incentives work, save, and invest; may lead to more rapid economic growth and improve efficiency

-would eliminate current incentives and avoid and evade taxation

-including a generouse personal and family allowance would make the flat tax more fair

-lobbiyist for special tax treatments would continue to pressure congress

-over time

National Sales Tax

-tax consumption instead of production

-would encourage people to save money and would also get the underground economy

-biggest problem: sales tax is regressive! low income groups spend almost all of their income, saving very little

-a single national sales tax would violate the principle of progressivity

-interest groups would engaged in a continuing frenzy of legislative activity

Reigning in the IRS

-the internal revenue code contains about 70,000 pages and IRS added 100,000 pages

-result in a quagmire of confusion over compliance

-irs isunable to provide accurage consistent answers to tax questions

Simplifying the Tax Code

-tax reformers have dreamed for decades of tax filing through a simple web site

-tax laws remain complex

-power interests have a stake in maintaining the thousands of exemptions

-accountatns and tax lawyers live off complexity of the tax code

-complexity keeps the special interests coming to capitol hill

-seeiking to again