Theoretical Issues / base “Ideal” Why do we have a tax on income? economic power as a proxy for ability to pay Do we have a pure, H-S economic income tax? no What are some of the fundamental deviations from H-S? - the treatment of carve-outs - the FUNDAMENTAL deviation: distinction between realized and unrealized if true H-S system, – then we should tax on a mark-to-market -we don’t do this b/c: may create a disincentive to save - imputed income - we don’t do this b/c: administrability issue - treatment of gifts - we don’t do this b/c: policy don’t want to tax giving – - employer provided fringe benefits - we don’t do this b/c: hard to define - income on state/local bonds - we don’t do this b/c: assist state and local gov’t in raising capital We have an income tax: income = consumption + savings -what would a Consumption tax look like? Consumption = Income Savings – - we do this sometime: - IRA / college saving plans can deduct savings to certain accounts – - We actually have a hybrid income tax system b/c we have all these carve outs: - 401K employer provided retirement accounts money is subtracted from taxable – income - Benefits of taxing only consumption ? -Simplicity if we had a consumption tax on sales tax, then much simpler – - It would encourage savings income tax system kind of double taxes savings b/c your – taxed on the income, then you’re taxed again on the interest in your savings - Drawbacks of taxing only consumption ? - can be highly Regressive: - lower income people have to devote larger percentages of income to consumption are going to pay a much higher percentage of tax - Examples of Consumption Tax? - Retail Sales Tax - Tax (VAT) - ex: each stage in the making of bread, someone is adding value they would – be taxed on that portion of value added Why the commitment to progressivity? - Commitment to pay” based on economic status “ability - diminishing marginal utility: - each extra dollar brings less happiness than the last dollar - the last dollar is valued less by a wealthy person than a poor person - Revenue - you raise a lot more money - address concentrations of wealth - egalitarian even out distribution of income – - economic stagnation
Theoretical Issues / “Ideal” base Why do we have a tax on income? economic power as a proxy for ability to pay Do we have a pure, H-S economic income tax? no What are some of the fundamental deviations from H-S? - the treatment of carve-outs - the FUNDAMENTAL deviation: distinction between realized and unrealized – if true H-S system, then we should tax on a mark-to-market -we don’t do this b/c: may create a disincentive to save - imputed income - we don’t do this b/c: administrability issue - treatment of gifts - we don’t do this b/c: policy – don’t want to tax giving - employer provided fringe benefits - we don’t do this b/c: hard to define - income on state/local bonds - we don’t do this b/c: assist state and local gov’t in raising capital We have an income tax: income = consumption + savings -what would a Consumption tax look like? Consumption = Income – Savings - we do this sometime: - IRA / college saving plans – can deduct savings to certain accounts - We actually have a hybrid income tax system b/c we have all these carve outs: - 401K employer provided retirement accounts – money is subtracted from taxable income - Benefits of taxing only consumption ? -Simplicity – if we had a consumption tax on sales tax, then much simpler - It would encourage savings – income tax system kind of double taxes savings b/c your taxed on the income, then you’re taxed again on the interest in your savings - Drawbacks of taxing only consumption ? - can be highly Regressive: - lower income people have to devote larger percentages of income to consumption are going to pay a much higher percentage of tax - Examples of Consumption Tax? - Retail Sales Tax - Tax (VAT) - ex: each stage in the making of bread, someone is adding value – they would be taxed on that portion of value added Why the commitment to progressivity? - Commitment “ability to pay” based on economic status - diminishing marginal utility: - each extra dollar brings less happiness than the last dollar - the last dollar is valued less by a wealthy person than a poor person - Revenue - you raise a lot more money - address concentrations of wealth - egalitarian – even out distribution of income - economic stagnation
Income-Tax_Mehrotra_Spring-2012_2.docx