Contents
Federalism& The Tax FederalTaxes and Intergovernmental Revenues. Tax Reform ...... 7 3. TheProgressivity of the Tax System. Political Influences on the Tax
The purpose of our research - to characterize US tax system. First weshall tell about main principles of US tax system. In chapter 1 we coverprinciples of federalism in tax system.
In chapter 2we shall discuss the basic federal taxes and intergovernmental revenues. Also chapter 2 covers main US tax reforms and theirinfluences on a tax policy as a whole. After examining some basic facts aboutthe tax system, the remainder of tile chapter turns to matters dealing with taxpolicy.
One issue thathas surfaced with regard to individuals taxes is the degree of progressivity ofparticular taxes, but a more relevant consideration is the degree ofprogressive of the tax system as a whole. It is a subject of chapter 3. If sometaxes are regressive while others are progressive, their effects can offset oneanother, and a very regressive tax might be acceptable, or even desirable,within the context of the entire, tax system. After all we shall tell aboutpolitical influences on the tax system.
Chapter 1
Federalism & the TaxSystem
Let's tell some wordsabout a tax policy all over again. One important aspect of tax policy is thatthe optimal provisions for one type of tax will often depend on the way inwhich other taxes are levied. A tax should be efficient and equitable whenanalyzed on its own, but often the efficiency and equity of a tax depend uponhow it fits in with the whole system of taxes. So, taxes must be viewed as individualcomponents of an overall tax system to really understand their effects.
The United States has afederal system of government, and, followings that model, the tax system can bedivided into the three major categories of federal, state, and local taxes.Federal, taxes make up about 56 percent of total taxes, although federalexpenditures are: only about half of total expenditures. The difference occursbecause a substantial fraction of state and local government expenditures are,financed by federal government grants. Intergovernmental grants make up nearlyone-third of local government revenues. One of the goals of this chapter is toexamine how the various levels of government raise revenues to finance theirexpenditures.
The federal governmentcollects more in revenues than all other governments in the United Statescombined. Table 1 lists the percentage breakdown of all government own-sourcerevenues and own-source revenues from major tax bases. Own-source revenuesexcludes intergovernmental grants, which are discussed in a separate sectionlater, but includes revenues collected from fees and user charges, which mightordinarily not be considered as tax revenue. As table 1 shows, the federalGovernment collects 56.4 percent of total government revenues, with statescollecting 24.3 percent and local 19.3 percent. [1, p.305]
Although alllevels of government tend to collect revenues from a variety of sources, moretaxes than all table 1 shows that the different levels of government rely ondifferent tax bases to state and local different degrees. Most income taxesare collected by the federal government, which collects 81 percent of allindividual income taxes and 81.5 percent of all corporate income taxes. Statescollect about 17 percent of both individual and corporate income tax payments,and local governments collect less than 2 percent. Thus, while states rely to asignificant degree on income tax collections, the income tax is primarily afederal tax. When considering the income tax from an equity standpoint, thisis even more true because most states base their income tax structures on thefederal income tax structure, so changes in federal tax laws can have asignificant effect on state income tax collections, both in terms of the amountof tax collected and in terms of the distribution of income tax payments amongtaxpayers.
The tax thatis most clearly assigned to one level of Government is the property tax. Morethan 96 percent of property taxes are collected by local governments. Salesand gross receipts taxes, taxes are collected primarily by state governments.Although 62.9 percent of sales and gross receipts taxes are collected bystates, both the federal government and local governments collect a significantamount. The federal government collects 24 local governments 24 percent ofsales and gross receipts taxes, mostly through federal excise taxes on motorfuel, alcohol, and tobacco. [1, p.307] Local governments collect 13. 1percent of sates and gross receipts taxes, coming from a combination of localgeneral sales taxes, excise taxes on gasoline, and other less significantexcise taxes.
Stepping backto examine the overall tax system, we see that the federal government reliesprimarily on income taxes, state governments on sales taxes, and localgovernments on property taxes. This division makes some sense when oneconsiders the mobility of tax bases.
Although theproperty tax has remained a local tax, the income tax is becoming, increasinglyimportant at the state level, as will be discussed later, so states might beviewed as encroaching on a traditionally federal tax base. Likewise, thefederal government collects a significant amount of sales and gross receiptstaxes, primarily as excise taxes, which might be viewed as taxing a state taxbase. One factor relevant to the discussion of a federal value added tax isthat, as a consumption tax, it would be placed on a tax base that hastraditionally been used by state governments. This was less of an issue whenthe value added tax was adopted by European governments because tax systems inEurope tend to be more centralized than the tax system in the United States.
So, we candivide US tax system into the three major categories of federal, state, andlocal taxes. Intergovernmental grants make up nearly one-third of localgovernment revenues. The federal government collects more in revenues than allother governments in the United States combined.
Most incometaxes are collected by the federal government, which collects 81 percent of allindividual income taxes and 81.5 percent of all corporate income taxes. Thus,while states rely to a significant degree on income tax collections, the incometax is primarily a federal tax.
We see thatthe federal government relies primarily on income taxes, state governments onsales taxes, and local governments on property taxes. This division makes somesense when one considers the mobility of tax bases.
Chapter 2
Federal Taxes andIntergovernmental Revenues. Tax Reform
The federalgovernment relies on income and payroll taxes for the vast majority of itsrevenues. Table 2 shows the percentage breakdown for four categories offederal tax revenues and shows that the personal income tax is by far the mostsignificant source of federal government revenue. Social insurance payrolltaxes, which consist mostly of Social Security and Medicare taxes, make up thesecond-largest category, and this category is the only one that increased itspercentage contribution from 1990 to 1999. Both corporate income taxes andexcise taxes have fallen slightly in importance over that period.
The increasedimportance of Social Security taxes is worth considering from an equitystandpoint. Although the income tax structure is designed to be progressive,the Social Security tax structure is regressive because it taxes income at aflat rate up to t maximum amount and is not collected on income above themaximum. [2, p.122]
When SocialSecurity taxes were relatively low, the regressive nature of the tax might nothave been much of an issue, but with rising Social Security tax rates anduncertain future b...
