- Federalism & the Tax System………………………………………...4
- Federal Taxes and Intergovernmental Revenues. Tax Reform……7
- The Progressivity of the Tax System. Political Influences on the Tax System………………………………….……………………………..12
The purpose of our research - to characterize US tax system. First we shall tell about main principles of US tax system. In chapter 1 we cover principles of federalism in tax system.
In chapter 2 we shall discuss the basic federal taxes and intergovernmental revenues. Also chapter 2 covers main US tax reforms and their influences on a tax policy as a whole. After examining some basic facts about the tax system, the remainder of tile chapter turns to matters dealing with tax policy.
One issue that has surfaced with regard to individuals taxes is the degree of progressivity of particular taxes, but a more relevant consideration is the degree of progressive of the tax system as a whole. It is a subject of chapter 3. If some taxes are regressive while others are progressive, their effects can offset one another, and a very regressive tax might be acceptable, or even desirable, within the context of the entire, tax system. After all we shall tell about political influences on the tax system.
Federalism & the Tax System
Let's tell some words about a tax policy all over again. One important aspect of tax policy is that the optimal provisions for one type of tax will often depend on the way in which other taxes are levied. A tax should be efficient and equitable when analyzed on its own, but often the efficiency and equity of a tax depend upon how it fits in with the whole system of taxes. So, taxes must be viewed as individual components of an overall tax system to really understand their effects.
The United States has a federal system of government, and, followings that model, the tax system can be divided into the three major categories of federal, state, and local taxes. Federal, taxes make up about 56 percent of total taxes, although federal expenditures are: only about half of total expenditures. The difference occurs because a substantial fraction of state and local government expenditures are, financed by federal government grants. Intergovernmental grants make up nearly one-third of local government revenues. One of the goals of this chapter is to examine how the various levels of government raise revenues to finance their expenditures.
The federal government collects more in revenues than all other governments in the United States combined. Table 1 lists the percentage breakdown of all government own-source revenues and own-source revenues from major tax bases. Own-source revenues excludes intergovernmental grants, which are discussed in a separate section later, but includes revenues collected from fees and user charges, which might ordinarily not be considered as tax revenue. As table 1 shows, the federal Government collects 56.4 percent of total government revenues, with states collecting 24.3 percent and local 19.3 percent. [1, p.305]
Although all levels of government tend to collect revenues from a variety of sources, more taxes than all table 1 shows that the different levels of government rely on different tax bases to state and local different degrees. Most income taxes are collected by the federal government, which collects 81 percent of all individual income taxes and 81.5 percent of all corporate income taxes. States collect about 17 percent of both individual and corporate income tax payments, and local governments collect less than 2 percent. Thus, while states rely to a significant degree on income tax collections, the income tax is primarily a federal tax. When considering the income tax from an equity standpoint, this is even more true because most states base their income tax structures on the federal income tax structure, so changes in federal tax laws can have a significant effect on state income tax collections, both in terms of the amount of tax collected and in terms of the distribution of income tax payments among taxpayers.
The tax that is most clearly assigned to one level of Government is the property tax. More than 96 percent of property taxes are collected by local governments. Sales and gross receipts taxes, taxes are collected primarily by state governments. Although 62.9 percent of sales and gross receipts taxes are collected by states, both the federal government and local governments collect a significant amount. The federal government collects 24 local governments 24 percent of sales and gross receipts taxes, mostly through federal excise taxes on motor fuel, alcohol, and tobacco. [1, p.307] Local governments collect 13. 1 percent of sates and gross receipts taxes, coming from a combination of local general sales taxes, excise taxes on gasoline, and other less significant excise taxes.
Stepping back to examine the overall tax system, we see that the federal government relies primarily on income taxes, state governments on sales taxes, and local governments on property taxes. This division makes some sense when one considers the mobility of tax bases.
Although the property tax has remained a local tax, the income tax is becoming, increasingly important at the state level, as will be discussed later, so states might be viewed as encroaching on a traditionally federal tax base. Likewise, the federal government collects a significant amount of sales and gross receipts taxes, primarily as excise taxes, which might be viewed as taxing a state tax base. One factor relevant to the discussion of a federal value added tax is that, as a consumption tax, it would be placed on a tax base that has traditionally been used by state governments. This was less of an issue when the value added tax was adopted by European governments because tax systems in Europe tend to be more centralized than the tax system in the United States.
So, we can divide US tax system into the three major categories of federal, state, and local taxes. Intergovernmental grants make up nearly one-third of local government revenues. The federal government collects more in revenues than all other governments in the United States combined.
Most income taxes are collected by the federal government, which collects 81 percent of all individual income taxes and 81.5 percent of all corporate income taxes. Thus, while states rely to a significant degree on income tax collections, the income tax is primarily a federal tax.
We see that the federal government relies primarily on income taxes, state governments on sales taxes, and local governments on property taxes. This division makes some sense when one considers the mobility of tax bases.
Federal Taxes and Intergovernmental Revenues. Tax Reform
The federal government relies on income and payroll taxes for the vast majority of its revenues. Table 2 shows the percentage breakdown for four categories of federal tax revenues and shows that the personal income tax is by far the most significant source of federal government revenue. Social insurance payroll taxes, which consist mostly of Social Security and Medicare taxes, make up the second-largest category, and this category is the only one that increased its percentage contribution from 1990 to 1999. Both corporate income taxes and excise taxes have fallen slightly in importance over that period.
The increased importance of Social Security taxes is worth considering from an equity standpoint. Although the income tax structure is designed to be progressive, the Social Security tax structure is regressive because it taxes income at a flat rate up to t maximum amount and is not collected on income above the maximum. [2, p.122]
When Social Security taxes were relatively low, the regressive nature of the tax might not have been much of an issue, but with rising Social Security tax rates and uncertain future benefits, the issue is worth considering. The progressivity of the tax system is reduced when social insurance taxes replace income taxes. Although the expected future benefits are a relevant and offsetting factor, normally the progressivity of the tax structure is analyzed independently of the distribution of tax benefits.
One of the important points to note from the numbers in table 2 is that income and payroll taxes make up about 90 percent of federal government revenues. The bulk of those taxes are levied on individuals in the form of the individual income tax and social insurance taxes. [1, p.320]
One of the major sources of revenues for lower-level governments is intergovernmental revenue. Revenues collected by the federal government are distributed through grants to state and local governments, and state governments also provide financial assistance to local governments. Intergovernmental revenues make up about 22 percent of total state government revenues and 33 percent of local government revenues. [1, p.320] There is some double counting here be