Module 7 TAXATION. Lecture (28 30) Topics

Transcription

1 Module 7 TAXATION Lecture (28 30) Topics 7.1 Types of Taxation 7.2 Computing the Tax Base-Definition 7.3 Measuring the Fairness of Tax Systems 7.4 Average and Marginal Tax Rates 7.5 Effective Versus Statutory Rates 7.6 Measuring the Fairness of Tax Systems 7.7 Defining Equity 7.8 Defining the Income Tax Base 7.9 Deviations Due to Ability-to-Pay Considerations 7.10 Deviations Due to the Costs of Earning Income 7.11 Externality/Public Goods Rationales for Deviating From Haig-Simons 7.12 Charitable Giving 7.13 Spending Crowd-Out Versus Tax Subsidy Crowd-In 7.14 The Equity Implications of Taxation: Tax Incidence 7.15 The Share of Taxes Paid by Corporations has Fallen by Roughly Two-Thirds 7.16 The Three Rules of Tax Incidence 1

2 7.17 Statutory Vs. Economic Incidence 7.18 Measuring Tax Burden 7.19 Tax Burden Calculation 7.20 Who Bears Statutory Tax does not Affect Tax Burden 2

3 Module 7 Lecture 28 Topics 7.1 TYPES OF TAXATION This lecture discusses the institutional and theoretical stage for understanding tax policy. The five most common types of taxes are those on: Direct Taxes Individual income Earnings (like capital gains) Corporate income Wealth Indirect tax Consumption 7.2 COMPUTING THE TAX BASE - DEFINITIONS Taxable income is the amount of income left after subtracting exemptions and deductions from AGI. The tax base is the net income on which taxes are paid. It is analogous to taxable income. 7.3 MEASURING THE FAIRNESS OF TAX SYSTEMS Tax fairness is an important concern to citizens worldwide. Yet, notions of what is fair vary across people. There are several common concepts used to measure fairness. 3

4 7.4 AVERAGE AND MARGINAL TAX RATES First, there are two key concepts to describe the set of tax rates on income. A marginal tax rate is the percentage that is paid in taxes on the additional rupee earned. An average tax rate is the percentage of total income is that is paid in taxes. 7.5 EFFECTIVE VERSUS STATUTORY RATES Another important distinction is between statutory and effective tax rates. Statutory tax rates are tax rates laid out in the legal tax schedule. Effective tax rates are tax rates an individual actually pays. The two diverge because of the host of exemptions and deductions from taxable income, which reduces the tax base. 7.6 MEASURING THE FAIRNESS OF TAX SYSTEMS Tax Systems: A progressive tax system is one in which effective average tax rates rise with income. A proportional tax system is one in which effective average rates do not change with income, so that everyone pays the same proportion of their income in taxes. A regressive tax system is one in which effective average tax rates fall with income. Most analysts would agree that to be (vertically) equitable, the tax system should be progressive. 7.7 DEFINING EQUITY Vertical equity is the principle that groups with more resources should pay higher taxes than groups with fewer resources. Horizontal equity is the principle that similar individuals who make different economic choices should be treated similarly by the tax system. 4

5 In reality, horizontal inequities are hard to define, because the person endogenously made a choice to earn more or less. We would refer to vertical equity, unless specified otherwise 7.8 DEFINING THE INCOME TAX BASE The Haig-Simons comprehensive income definition defines taxable resources as the change in an individual s ability to consume during the year. It is best viewed as a measure of ability to pay regardless of the actual choices in terms of consumption and savings. In terms of equity, those who have more resources (even through untaxed channels) have higher income. 7.9 DEVIATIONS DUE TO ABILITY-TO-PAY CONSIDERATIONS First, it is challenging to define an individual s ability to pay taxes. Various shocks affect ability to pay, and are used to justify deductions in the actual tax system: Property and casualty losses Medical expenditures State and local income taxes Although these affect ability to pay, they may be choices to some extent. Individuals have some control over medical expenditures, and some of this deduction may represent consumption. Higher state and local tax payments could reflect greater amenities and local public goods. Thus, full deductions for both are hard to justify with the Haig-Simons definition. 5

6 7.10 DEVIATIONS DUE TO THE COSTS OF EARNING INCOME The other key problem is that some expenditure is not for consumption but reflect the cost of earning a living. Yet, defining legitimate business expenses is difficult for example, part of a business lunch represents consumption, but how much? Some countries allows for 50% of the expenses of such a meal to be deducted EXTERNALITY/PUBLIC GOODS RATIONALES FOR DEVIATING FROM HAIG-SIMONS Some activities yield external benefits to society, which gives a rationale for deviating from the Haig-Simons income definition. Two major deviations that are justified on such grounds are Charitable giving Home ownership CHARITABLE GIVING The private market is likely to underprovide charitable support for many public goods because of the free-rider problem. Because charitable contributions are tax-deductible, the relative price of giving Re1 to charity is Re (1- % tax deduction). The tax treatment yields a benefit (providing a public good) by deviating from the H-S definition. 6