Design of Appropriate Tax Systems
Jay K. Rosengard Kennedy School of Government
Harvard University 1
ααα±αα¬αα α‘ααΌαα αα αα¬αΈ ααααΈ
Jay K. Rosengard Kennedy School of Government
Harvard University
Please note: this is an unofficial translation 2
Terminology (1) Tax β’ Compulsory contribution to government without reference to a
particular benefit β’ Goes to treasury/general funds for allocation via expenditure
policies/budgetary processes β’ Diverts control of economic resources from taxpayers to state
for own use/transfer to others β’ Usually paid in money, sometimes in kind β’ Not user fee
β Voluntary payment for a specific good or service β Benefits received directly related to amount paid β Consumption based (usage or permission) β Best for private goods and services (rival and excludable) β Characterized by user pays principle 3
α‘ααΈα‘ααααΈαα¬αΈ (αΏ)
α‘ααΌα
β’ ααα±ααα¬α±αα¬ α‘ααΈαα α¬αΈααΌα ααα«α α‘α αΈαα‘α¬αΈ αα»αα αα±α α±ααΈα±αα¬ααααα ααααα
β’ α‘ααΌααα¬αΈαα α‘α αΈαα α±ααΌαααα¬αα α‘α±ααΌα±ααΌαααα±ααΌαα¬αΈ α‘ααΌααΈα α±αα¬αααα¬α α‘ααΈα αααααα¬ αα«ααα¬αΈα αααααααααΈα α₯αα¬αΈα αα αα α»αααα ααΌα±ααααα±ααΈααα
β’ α‘ααΌααααΈα»ααααα¬αΈαα α αΈααΌα¬αΈα±ααΈαααα¬αααΈα»αα αα¬αΈα αααα±αα¬α‘α±αα»αα ααΈα αΌααα»αα α±α α α‘α»αα¬αΈ (αααα¬αΈα α‘αα αα¬αΈα α‘ααα¬αα¬αΈ α αααα) α ααα±α»αα¬ααΈα±ααΈααα»αα α±α α α±α»αα¬ααΈααααΈααα»αααΈα»αα ααα
β’ αα¬αΈα±αα¬α‘α¬αΈα»αα α±ααΌα±αΎααΈα»αα α±ααΈα±αα¬ααα»ααΈα αα αα«αα αααΌα α±ααΌα±αΎααΈααα¬ααα αα αα¬αΈα»αααααΈ α±ααΈα±αα¬ααααα
β’ ααΈα αΌααα¬αΈα α±ααΈα±αα¬ααα±αα¬ ααΈα αΌαα±αΎααΈααΈααα¬ααα«α
β αααααα¬αΈα±αα¬ αααα α₯ααΈαα¬αΈ α ααα¬α αα±αα¬ααααα¬αΈα‘ααΌα (ααα΅α‘α±αα¬α ααα»αααΈ /ααΈα αΌα»αααΈα‘ααΌα) α±ααΈαα»αααΈ ααΈα»αα ααα
β α±ααΈαααα±ααΈα±ααΌααα¬ααα α»αααααα‘ααΈααααα¬ ααααααα ααα«ααα
β α α¬αΈααΈααα‘α±α»ααα»αα ααα (α‘ααΈα»αα»αααΈ ααααα¬α α‘ααΈα»ααα ααΌαα»αα»αααΈ)
β ααα’αααααα¬ αααα α₯ααΈαα¬αΈ αα αα±αα¬ααααα¬αΈα‘ααΌα α‘α±αα¬ααΈααΈα»αα ααα (α‘αΏααααΈα αΌαααα¬αΈ αα αααααα¬αΈαααα¬αΈ)
β ααΈα αΌαα±ααΈαα ααΈα»αα αα 4
Terminology (2) Appropriate β’ There is no single perfect or ideal tax system β’ The theory of optimal taxation is more of a metric against
which to evaluate relative strengths and weaknesses of tax policy alternatives: β Will the tax system be more economically efficient? β Will the tax system be more socially equitable? β Will the tax system generate more net revenue?
β’ While evaluation criteria remain constant, what is best will change over time depending on a countryβs fiscal architecture - tax systems are dynamic, not static
β’ The objectives of this session are to: β Review the most important factors determining the design of an
appropriate tax system β Develop a conceptual framework with which to evaluate specific tax
alternatives 5
α‘ααΈα‘ααααΈαα¬αΈ (α) ααα±αα¬α±αα¬ β’ α»ααΈα»ααα α α‘α±αα¬ααΈααΈαα¬ ααααααα±αα¬ α‘ααΌαα αα αα¬α ααα±ααα«α
β’ Theory of optimal taxation ααααα¬ α‘ααΌααα«α α‘ααΈααΈα ααΌα αα«αααααα α‘α¬αΈαααΈααα α‘α¬αΈαα¬αααα¬αΈα ααααΈαα₯αααΈαα¬αα α αα ααα»αα ααα
β α‘ααΌαα αα αα α αΈααΌα¬αΈα±ααΈα‘α α±αααα αΌααΈα±αα¬α ααααααα«ααα¬αΈα
β α‘ααΌαα αα αα αααα±ααΈα‘α αα αα¬ααααα ααα«ααα¬αΈα
β α‘ααΌαα αα αα α‘αα¬αΈαα α‘ααΌαααα¬α±ααΌα ααα±α αα«ααα¬αΈα
β’ α‘ααΌαα αα α‘α¬αΈ α‘αα»ααααΈααα±αα¬ α αααααααα¬αΈαα ααααααααΈα»αα α±αααα±αα¬αααΈα α‘α±αα¬ααΈααΈα αα αα¬αααα¬ αααα ααα¬α±ααΈα αα ααα±αα¬αααα‘α±ααααΌα αααα α‘ααααα‘α α±α»αα¬ααΈαα±αααα»αα ααα α‘ααΌα α αα αα¬αΈαα α‘α α₯α‘α»α αααα±ααα ααα¬αα α±α»αα¬ααΈαα±αα±αα¬αα±αα¬ααα«ααα
β’ α€ αααααΈα α¬α ααααΌααααα¬αΈαα¬-
β αααα α‘α±α»αα‘α±α α‘ααα‘α α αα α±αα¬ααααα»ααααααα α‘ααΌαα αα αα αα αα ααΌααα αααααα¬ααΌααα«αα±αα¬ α‘α±ααΈα‘αΎααΈααΈα»αα αα α‘α±αΎαα¬ααΈαααΈαα¬αΈα α»ααααααΈααααα
β α‘ααΌαα αα α‘ααΈααΈα α‘α¬αΈ α‘αα»ααααΈαααα¬ααΌα α‘ααΈα»ααααα α±ααΌαΈα±ααααΈαααααααα¬ αα±αα¬ααα α α‘α¬αΈ α±ααΈααΌα±αα¬ααααα 6
Fiscal Architecture β’ Structure of the economy
β Rural (subsistence) or urban (disposable income) β Formal (salaried) or non-formal (self-employed) β Complexity of transactions (barter, cash, or electronic) β Open (significant trade) or closed (protected) β Resource endowment (curse of natural resources)
β’ Capacity of tax administration β Hard (physical) and soft (institutional) infrastructure β Quality of tax legislation and tax design (policy formulation) β Operational autonomy and integrity (implementation)
β’ Sophistication of tax payers β Literacy rate (text and numeric) β IT usage (recordkeeping and reporting, tax filing) β Supporting services (tax accountants, lawyers, & advisors)
β’ Social compact (political and cultural expectations) 7
ααα¬α±ααΈαααα¬ ααα±αα¬αα (Fiscal Architecture) β’ α αΈααΌα¬αΈα±ααΈ α αα ααα±αα¬αα
β α±ααΈαα (αα αααα αα) α ααα¬α α»α α»α (ααΈα αΌααα±αα¬ αα±ααΌ) β ααααΈα αααΈαααΈ (ααααα α¬) α ααα¬α ααααΈαααα¬αα±αα¬αααΈαααΈ (ααααα‘ααα‘αα)
β α±ααΌα±αΎααΈαααα¬ α±ααΈα±ααααα¬αΈααΌα αα«αα±ααα αααα±ααΌαΈαααα¬αΈ (αααα α₯ααΈαααΈαααα»αααΈα α±ααΌαα¬αΈα α ααα¬α α‘αααα±αα¬αα αααΈαααΈα»αα α±ααΈα±ααααα¬αΈ)
β ααα«αΈααΌαα αΈααΌα¬αΈα±ααΈ (ααααΌαααα‘αααΈαααααΈαα¬αΈ) α ααα¬α ααα«αΈααα αΈααΌα¬αΈα±ααΈ (αα¬ααΌααα α‘αα¬αΈα±ααΈ) β ααα¬αααα¬ααα¬αΈ αΎααΌαα»αααΈ (ααα¬αααΈα»αα ααα α¬)
β’ α‘ααΌα α ααα ααΌα»αααΈαααα¬ α‘ααα‘α±ααΌαΈ β α‘αα¬αα (αααααΈαααα¬) αα α‘α±αα¬αα (α ααΈαα₯αΈαα±αα¬α ααΌα ααΈααα±αα¬ααααααα¬)
α‘α±α»ααα‘α±αα¬αα‘α‘αα¬αΈ β α‘ααΌα α₯αα±ααα¬αΈα α‘ααα‘α±ααΌαΈ αα α‘ααΌαα αα ααααΈα±ααΈααΌα»αααΈ (αα«α α±ααΈααΌα»αααΈ) β αααααΈααααα±αα¬αααΌααα¬ααΌααααα αα ααααΏααΏαα αΌα¬α‘α±αα¬αα‘ααα±αα¬α±ααΈ
β’ α‘ααΌααααΈα»ααααα¬αΈα αααα±ααΌαΈαααα±αα¬ααα¬α (α±ααααα‘α ααα α±αα¬αααΌααααα) β α α¬ααα±α»αα¬αααααααΈ (α α¬αα¬αΈ αα αααΈααααΈ) β ααααΈα‘ααα‘αααα αααΈααα¬ α‘ααΈα»ααα (α‘ααα‘αααα¬αΈ αααΈαααΈαα¬αΈαααα α‘α αααααα»αααα
α‘ααΌααααα¬ α‘ααα‘αα α»ααααΌααΈα»αααΈα) β α±αα¬ααααα±ααΈα±αα¬ αα±αα¬ααααα¬αΈ (α‘ααΌαα α¬αααΈαααα¬αΈα α±α αα±ααα¬αΈ αα α‘αΎαα±ααΈαα¬αΈ)
β’ αααααα₯α¬α (αααα±ααΈ αα ααΈαααΈα»αα αα α±αα¬αααααα¬αΈ)
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Economics of Taxation
β’ Economic Efficiency
How much distortion does the tax cause?
β’ Social Equity
How fair is the tax?
β’ Administrative Feasibility
How much net revenue does the tax generate?
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α‘ααΌαα±αα¬ααα»αααΈα α±αα¬αα±αααα±αα¬ααα¬αΈ
β’ α αΈααΌα¬αΈα±ααΈα‘α α‘α»ααααΈα αΌααΈα±αα¬ααααα
β α‘ααΌαα±αα¬ααααα±αΎαα¬αα ααααα ααα±αα¬αααα«ααααΈα
β’ αααα±ααΈαααα¬ αα¬ααααα
β α‘ααΌααα ααα αααα«ααααΈα
β’ α ααααααΌαααααα¬ αααααααα
β α‘ααΌαα±αα¬ααααα±αΎαα¬αα α‘αα¬αΈαα αα±ααΌααα±αα¬αααα«ααααΈα
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Economic Efficiency
β’ Marginal Social Benefit = Marginal Social Cost
β’ Behavioral Change Excess Burden/Deadweight Loss
β’ Price Elasticity of Demand
β’ Income and Price (Substitution) Effects 11
α αΈααΌα¬αΈα±ααΈα‘α α‘α»ααααΈα αΌααΈα±αα¬ααααα
β’ α‘α αΌααΈααΌα (ααα) α‘ααΈα‘α»αα = α‘α αΌααΈααΌα (ααα) α αα
β’ α‘α»αα‘ααααα¬ α±α»αα¬ααΈααα ααααααααΈ / α‘ααΌαα±αΎαα¬α α αΈααΌα¬αΈα±ααΈα‘α α‘α»ααααΈα αΌααΈα±αα¬ααααα (αα±αααα‘ααα‘αααΈ) α αααα±α αα
β’ α±α αΈααααΈα±α»αα¬ααΈαααα±αΎαα¬αα»αα αα ααα‘α¬αΈα‘α±αα¬α‘αααΈ
β’ αα±ααΌ αα α±α αΈααααΈα‘α±αα ααα±αα¬ααααα¬αΈ (α‘α α¬αΈααΈααα αα‘α±ααααα±αα¬ααα)
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Social Equity
β’ Horizontal and Vertical Equity
β’ Policy Objective vs. Administrative Feasibility
β’ Tax Policy vs. Expenditure Policy
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Social Equity αααα±ααΈαααα¬ αα¬ααααα
β’ α±ααΈαααααα¬αα αα¬ααααα αα α‘ααα±α‘α¬α αααα¬αα αα¬ααααα
β’ αα«αααα¬ αααααΈαααα¬αΈ Vs α ααα ααΌαααααα¬ α»αα ααα±αααααα¬αΈ
β’ α‘ααΌααα«α αα α‘ααΈα αααα«α
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Tax Incidence
β’ Ultimate Bearer of Tax Burden
β’ Net Changes in Income/Wealth
β’ Statutory vs. Economic Incidence
β’ Progressive/Proportional/Regressive
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α‘ααΌααααα¬ ααααααΈ
β’ α‘ααΌααααα¬ ααααααΈα α‘α»ααααΈ αααΈα±αα¬ααα
β’ αα±ααΌ/ααα₯α α₯α¬αΎααΌαααααΌα α»αα α±ααα±αα¬ α‘αα¬αΈαα α±α»αα¬ααΈααααα¬αΈ
β’ α₯αα±αα‘α α ααΈαΎαααα αα α αΈααΌα¬αΈα±ααΈα‘α α ααΈαΎαααα
β’ ααααΈααΈααΌαα α‘ααΈαααΌαα ααααΈα±αα¬ααΌα
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Examples from the United States
Income
β’ Income tax: increasing % as Y increases
β’ Progressive: tax burden/Y rises as Y rises
Insurance
β’ Social security: flat/constant % of Y
β’ Proportional tax: tax burden/Y constant as Y rises
Consumption
β’ Sales tax: flat/constant % of sales
β’ Regressive: tax burden/Y falls as Y rises 17
α‘α±ααααα»ααα±αα¬αα α α‘ααΌαα₯ααα¬αα¬αΈ
αα±ααΌ β’ αα±ααΌααΌα: αα±ααΌααΈαα«α αα±ααΌααΌααααΈ ααααΈααα ααΈαα¬ β’ ααααΈααΈααΌα: αα±ααΌααΈαα«α α‘ααΌαααααααΈ ααΈα»αα
α‘α¬αα β’ αααααα±ααΈ: αα±ααΌα αα α±α»ααΈαα»αα α±αα¬ αα¬ααααααΈαα α αααα β’ ααααΈαααΌα: αα±ααΌααΈα±αα¬αααΈ ααααααααΈα αααααΈα»αα α‘ααΌαααα αα¬
αααΈα±α
α α¬αΈααΈαα β’ α‘α±αα¬ααΈααΌα: α±αα¬ααΈααααααα¬αα αα α±α»ααΈα ααααααααΈαα ααα¬ β’ ααααΈα±αα¬ααΌα: αα±ααΌααΈαα«α α‘ααΌαααα α±αα¬αααΈ
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Tax Administration Terminology
β’ Tax Ratio: Level of Taxation
Tax Revenue/GDP (or Tax Revenue/GNP)
β’ Tax Capacity: Tax Potential
Taxable Income or Wealth
β’ Tax Effort: Utilized Tax Capacity
Tax Collected/Tax Capacity
β’ Collection Ratio: Tax Administration Efficiency
Tax Collected/Tax Assessed
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α‘ααΌαα ααα ααΌαααααα¬ α‘ααΈα‘ααααΈαα¬αΈ
β’ α‘ααΌα α‘ααΈα‘α α¬αΈ - α‘ααΌαα±αα¬αααα α‘αα β α‘ααΌαα ααα±αα¬ ααα¬α±ααΌ αα α α α±αα«ααΈα»ααααΌααΈααααααααΈ
(α ααα¬α α‘ααΌαααα¬α±ααΌ/α α α±αα«ααΈα‘ααΈαα¬αΈααααααααΈ) β’ α‘ααΌαα±ααΈα±αα¬ααααα α αΌααΈαα - α‘ααΌααα±ααΌ α‘αα¬αΈα‘αα¬
β α‘ααΌαα ααΈαΎααααα±αα¬ αα±ααΌ α ααα¬α ααα₯α α₯α¬ β’ α‘ααΌαα±αα¬αααα¬ααΌα α‘α¬αΈαααα - α‘ααΌαα±ααΈα±αα¬αααα αΌααΈα α‘ααΈααααα
β α±αα¬ααααα±αα¬ α‘ααΌα αα α‘ααΌαα±ααΈα±αα¬ααααα α αΌααΈαα β’ α‘ααΌαα±αα¬ααα»αααΈαααα¬α‘ααΈ - α‘ααΌαα ααα ααΌααα αΌααΈ
β α±αα¬ααααα±αα¬ α‘ααΌα/α±αα¬ααααααααα α±αα¬αααΈαα¬αΈα±αα¬ α‘ααΌα
Features of a Sound Tax Regime
β’ Low Tax Rates
β’ Large Tax Bases
β’ Design Simplicity
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α±αα¬ααΈααΌαα±αα¬ α‘ααΌαα αα αα αα α‘ααΌαα‘α»αααα¬αΈ
β’ ααα±αα¬ α‘ααΌαααααΈ β’ ααα»αααα±αα¬ α‘ααΌαα‘α±α»α
β’ ααΈαααΈα±αα¬ α‘ααΌαααααΈ
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Taxation of Income
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αα±ααΌααΌα α±αα¬ααα»αααΈ
Income Tax: Basic Concepts
β’ The income tax is usually at the national level, but sometimes it is also at the state of local level
β’ It is a direct tax on personal and corporate income
β’ It is based on ability to pay > benefits received
β’ Income is used as a proxy for ability to pay
β’ Income should be defined as broadly as possible: Haig-Simons Income = Consumption (cash & in-kind) + Change in Net Wealth
β’ Exclusion of Income from Tax Base = Tax Expenditure
β’ Administration is very difficult because it is easy to move and hide income
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αα±ααΌααΌα - α‘α±α»αααα±αα¬ααα¬αΈαα¬αΈ β’ αα±ααΌααΌαα‘α¬αΈ αα¬αΈα±αα¬α‘α¬αΈα»αα α»ααα±αα¬αα α‘ααααΌα α±αα¬ααα±ααααα ααα±αα¬
αα αα«αα αα α±ααα‘ααααΌα α±αα¬αααααααΈαααα
β’ αα±ααΌααΌααα ααα’αα αααα¬ αα±ααΌαα α αΈααΌα¬αΈα±ααΈαααααΈα αα¬αΈα αα±ααΌα α‘α±ααααΌα ααααα±αα¬ααα±αα¬ α‘ααΌαα»αα ααα
β’ α‘ααΌαα±ααΈα±αα¬αααααα‘α±ααααΌα ααααΏααΈα±αα¬ααα»αααΈα»αα αα α
β’ α‘ααΌαα±ααΈα±αα¬αααα αΌααΈα αΎαααα¬ααΌα αα±ααΌα‘α¬αΈ αΎαα¬αΈαα‘α»αα α‘ααΈα»αααα
β’ αα±ααΌα‘α¬αΈ αααααα ααααα»αα α»αα α‘αααΈα«αααΌαααα αα‘αααα
(Haig-Simons Income) ααα±ααΌ = α α¬αΈααΈαα (α±ααΌα‘α¬αΈα»αα + αα α₯ααΈα‘α¬αΈα»αα) + ααα₯α α₯α¬ α‘αα¬αΈαα α±α»αα¬ααΈααα
β’ α‘ααΌαα‘α±α»ααα αα±ααΌα‘α¬αΈ αααααα¬αΈα»αααΈ = α‘ααΌαα‘ααΈα αα
β’ α ααα ααΌαα α»ααααα¬ααΌα ααΌαα αΌα¬ααααα«ααα α‘ααα±αΎαα¬ααα±αα¬ αα±ααΌαα α±αα α±α»αα¬ααΈαααΌααα»ααΈα ααΈααΌααα¬αΈαααααΈ ααΌααα±αα¬α±αΎαα¬αα»αα ααα
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Income Tax: Key Issues
β’ Economic efficiency: Cost of behavioral responses to tax (income and substitution effects) β Costs of compliance and distortions caused by tax avoidance and tax
evasion β Disincentives to work, save, and invest
β’ Social equity: Fairness in allocation of tax burden β Definition of tax base (who and what) β Determination of tax rate(s) (how much) β Horizontal and vertical equity (equal treatment of equals and unequal
treatment of unequals)
β’ Administrative feasibility: Potential to generate revenue β Targeting for precision and fairness β Simplicity for efficiency and fairness
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ααα±ααΌααΌα - α‘αααα±αα¬ α‘α±αΎαα¬ααΈα‘αααα¬αΈ
β’ α αΈααΌα¬αΈα±ααΈα‘α α±αααα αΌααΈα±αα¬ααααα - α‘ααΌαα±αα¬ααααα‘α¬αΈ α»αααααα α»ααα±αα¬αααΌααα α‘α»αα‘ααααΈαααα¬α αααα¬αΈ (ααα±ααΌαα α‘α α¬αΈααΈααα ααα¬αΈαααα¬ ααα±αα¬ααααα¬αΈ) β α‘ααΌαα±αα¬αα»αααΈ αα α‘ααΌαα±αα¬αααα ααα¬α α±αα¬αα»αααΈααα±αΎαα¬α α»αα α±αααα¬α±αα¬
αααα¬αααααΌααΈα»αααΈαα¬αΈ αα α‘ααΌαα αα α α±ααΈα α¬αΈαααα¬αααααα αααα»αααΈαα¬αΈα β α‘ααΌαααααααααΈα±αΎαα¬α α‘ααααααα αααΈααΈα»ααααα αα α±ααΌα α±αα¬ααΈαα α αα‘α¬αΈαααααα ααα±αα¬α»αααΈα
β’ αααα±ααΈαααα¬ αα¬ααααα- α‘ααΌααααααα‘α¬αΈ αααΈα±αα¬αα±α αα¬ααΌα αααα β α‘ααΌαα‘α±α»ααα α‘αααΈα«αααΌαααα (ααα αα ααααα‘αα¬) β α‘ααΌαααααα¬αΈ(αα¬αΈ) ααααα»αααΈ (αααα±αα¬αααα) β α‘αα¬αΈαα αα α‘ααα±α‘α¬α αααα¬αα αα¬ααααα (equal treatment of equals and unequal
treatment of unequals - αααΈαααααααα¬αΈα‘ααΌα αα¬αααα»αα αα αα αααΈαααααα»αα ααα¬αΈα‘ααΌα αααα¬αα¬α±ααΈα αα¬ααα α»αα αα)
β’ α‘ααΌαα ααα ααΌαααααα¬ααΌα α»αα ααα±α»αααα - ααα¬α±ααΌαααααα α‘αα¬αΈα‘αα¬ β αααα αα ααααα α‘ααΌα α₯αΈαααα¬αΈα»αααΈ β αα±αα¬ααα αα ααααα α‘ααΌα ααΈαααΈαα αα‘αα»αααΈ
28
Income Tax: Strengths and Weaknesses Strengths
β’ Easy to administer for the formal non-service sector (salaried employees)
β’ Payroll withholding is a good tax handle β’ Progressivity addresses political and social pressures to appear to
tax the rich β’ Relatively high buoyancy
Weaknesses
β’ Difficult to administer for the informal sector and professional services
β’ High transaction costs for both tax administrators and tax payers β’ Paid in relatively large, visible increments β’ Tax base eroded by income adjustment (exclusions, exemptions,
deductions, credits) 29
ααα±ααΌααΌα - α‘α¬αΈαα¬αααα¬αΈ αα α‘α¬αΈαααΈαααα¬αΈ α‘α¬αΈαα¬αααα¬αΈ β’ αα±αα¬αααααααα¬ααα ααααΈα (αα α¬α»αα ααα±ααΌαααα αααααΈαα¬αΈ) ααα‘ααΌα α αααααΌαα¬ααΌα
ααΌααα»αααΈα β’ αα α¬α‘α±αα α‘ααΌαα±ααΈα±αα¬ααααααα¬αα‘α¬αΈ α»ααααα¬αΈαα ααα±ααΌααΌαααΈαα¬ α±αα¬ααΈααΌααα αααΈαααΈααΈα»αα β’ αα±ααΌα‘ααα‘α±ααααΌα αααα α±αα¬ααα»αααΈααΈα αααΈαα¬αΎααΌααααα¬αΈα α‘ααΌααα±αα¬ααα αααα±ααΈ αα
αααα±ααΈαααα¬ αα‘α¬αΈαα¬αΈα ααα»ααααα β’ ααααΈα αα±αα¬α»αααΎαααα α α α±αα«ααΈ α»ααααΌααΈ ααααααααΈ αα α‘ααΈαα¬αΈαα±ααΌ (αα α₯αΈα ααα±ααΌα‘αα)
ααΈαααα¬αα«α αααα«α»αααααα¬ααα±αα¬ α‘ααΌαααΈα»αα ααα α‘α¬αΈαααΈαααα¬αΈ β’ ααα¬ααΈαααα¬ααααα αα αα½αΌααΈααααα‘α±α»αα»α αα±αα¬ααααααα¬αΈα‘ααΌα α ααααααΌαα¬ααΌα αααααααα β’ α‘ααΌαα ααα ααΌααα¬αΈα‘ααΌαα±αα¬ α‘ααΌααααΈαα¬αΈα‘ααΌααα« transaction αααα αααα¬αΈ α»αααα¬αΈ β’ αΎααΈαα¬αΈα±αα¬ ααα¬αα»αα α±ααΈα±αα¬ααα»ααΈα ααΈαααα¬ααααα¬αα‘ααΌααααΈ αααα¬α»αααα¬ αααα β’ αα±ααΌαααα¬ α»ααααααααααΈαααα¬αΈα±αΎαα¬α α‘ααΌαα±α»αααα α±αα¬αα«αΈαα¬αα (αα±ααΌααΌααααααα¬αΈ exclusions, exemptions, deductions, credits ααα±αΎαα¬αα»αα )
30
31
α‘ααΌααααα±ααΌ ααΌαααα»αααΈ
32
33
Tax Rates
ITEM
STATUTORY MARGINAL TAX RATE
STATUTORY AVERAGE TAX RATE
EFFECTIVE MARGINAL TAX RATE
EFFECTIVE AVERAGE TAX RATE
34
α‘ααΌαααααΈαα¬αΈαα¬αΈ
α‘ααΈα‘α α¬αΈ
α»ααα¬ααΈαα¬αΈααα‘α ααααΈαα¬ααααα±ααΌα‘α±αα α‘ααΌαααααΈ Statutory Marginal Tax rate
α»ααα¬ααΈαα¬αΈααα‘α α α α±αα«ααΈααα±ααΌα‘α±ααα±ααΈα±αα¬αααα α‘ααΌαααααΈ Statutory Average Tax rate
α‘ααααα ααααΈαα¬ααααα±ααΌα‘α±αα α‘ααΌαααααΈ Effective Marginal Tax rate
α‘ααααα α α±αα«ααΈααα±ααΌα‘α±ααα±ααΈα±αα¬αααα α‘ααΌαααααΈ Effective Average Tax rate
Table 22.2 Federal Tax Rates, 2011
R A T E
S I N G L E F R O M S I N G L E T O M A R R I E D F I L I N G
J O I N T L Y F R O M
M A R R I E D F I L I N G
J O I N T L Y T O
H E A D O F H O US E H O L D
F R O M
H E A D O F H O US E H O L D
T O
10% 0 8,500 0 17,000 0 12,150
15% 8,500 34,500 17,000 69,000 12,150 46,250
25% 34,500 83,600 69,000 139,350 46,250 119,400
28% 83,600 174,400 139,350 212,300 119,400 193,350
33% 174,400 379,150 212,300 379,150 193,350 379,150
35% over 379,150 over 379,150 over 379,150
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Table 22.2 Federal Tax Rates, 2011
α‘α±ααααα»ααα±αα¬αα α (ααα±ααΌααΌα) ααααΈαα¬αΈαα¬αΈ - ααΏαΏ
αααΌα α‘αα±αα¬ααα ααΈααΌααα»α α‘αα±αα¬αα₯αΈα αΈ
36
37
Table 22.3 Average Effective Individual Income Tax Rates by Income Class and Tax Year (Income Class in Quintiles plus Top 1 percent; Rate in Percent)
INCOME TAX QUINTILES 1985 1987 1996 1998 2000 2004
2011
(ESTIMATE)
Lowest 0.5 -0.6 -5.1 -5.4 -4.6 -6.2 -5.8
Second 4.0 3.2 1.8 1.5 1.5 -0.9 -2.9
Third 6.6 5.8 5.4 5.0 5.0 3.0 3.2
Fourth 8.8 8.1 7.9 7.9 8.1 5.9 7.0
Highest 14.0 14.9 16.1 16.5 17.5 13.9 14.9
All families 10.2 10.3 10.7 11.0 11.8 8.7 9.3
Top 1% 18.9 21.5 24.2 23.4 24.2 19.7 20.3
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Table 22.3 Average Effective Individual Income Tax Rates by Income Class and Tax Year (Income Class in Quintiles plus Top 1 percent; Rate in Percent)
INCOME TAX QUINTILES 1985 1987 1996 1998 2000 2004
2011
(ESTIMATE)
Lowest 0.5 -0.6 -5.1 -5.4 -4.6 -6.2 -5.8
Second 4.0 3.2 1.8 1.5 1.5 -0.9 -2.9
Third 6.6 5.8 5.4 5.0 5.0 3.0 3.2
Fourth 8.8 8.1 7.9 7.9 8.1 5.9 7.0
Highest 14.0 14.9 16.1 16.5 17.5 13.9 14.9
All families 10.2 10.3 10.7 11.0 11.8 8.7 9.3
Top 1% 18.9 21.5 24.2 23.4 24.2 19.7 20.3
ααα α‘ααααα αα α₯αΈαααα±ααΌααΌαα±ααΈα±αα¬ααααααααΈαα¬αΈαα¬αΈ ααα±ααΌα‘ααα‘αα αα α α₯α±ααΈα±αα¬ααααααααΈαα¬αΈαα¬αΈ - % α‘α¬αΈα»αα
39
40
Distribution of U.S. Income and Payroll Tax Burden in 2003
-20%
0%
20%
40%
60%
80%
100%
Tax Units Income Y Tax PR Tax Y + PR
>500
200-500
100-200
75-100
50-75
30-50
20-30
10-20
< 10
41
Income Tax Reform β’ Proportional (flat) tax vs. progressive tax β’ Purest form: threshold (exempt amount) with single rate on all income above it
β Possible economic benefits β Might lower and redistribute tax burden β Potential administrative advantages
β’ Trend in Eastern Europe β 1994: Estonia (26%) & Lithuania (33%) β 1995: Latvia (25%) β 2001: Russia (13%) β 2003: Serbia (14%) β 2004: Ukraine (13%) & Slovakia (19%) β 2005: Georgia (12%) & Romania (16%)
β’ Many potential problems β Flat tax β low tax rate β Flat tax β large tax base β Flat tax β simplicity β Correlation vs. causation β Transitional costs
42
αα±ααΌααΌα α»αα»ααα±α»αα¬ααΈαα±ααΈ β’ αα±αααααΈααααα α±αα¬ααα±αα¬ α‘ααΌα (ααααΈαααΌα) Vs αα±ααΌα‘ααα±ααααΌα αααα α±αα¬ααα±αα¬ α‘ααΌα
(ααααΈααΈααΌα) β’ α‘αααΈαααΈααΈαα -- α‘ααααΈαααααα (αααΈααΌαααΌααα±αα¬ ααα¬α)α αααα¬α α‘ααα
αα±ααΌα‘α¬αΈααΈα α‘α±ααααΌα ααααΈαα¬αΈαα αααααα α±αα¬ααα»αααΈα β α»αα ααα±α»ααα±αα¬ α αΈααΌα¬αΈα±ααΈαααα¬ α‘ααΈααααα¬αΈ β α‘ααΌααααα¬ ααααααΈ α±αα¬αααΈαααΏααΈ ααα±αα¬αααα α»ααααα»αααα±αααααα»αα ααα β α‘ααΌαα ααααααΌαααααα¬α‘ααΈααααα¬αΈ αααααα α‘αα¬αΈα‘αα¬
β’ α‘α±α α₯α±αα¬αααααα¬αΈααΌα α±ααααΈα α¬αΈααααΈαα¬ααα αα αα¬αΈ β 1994: Estonia (26%) & Lithuania (33%) , 1995: Latvia (25%) , 2001: Russia (13%) β 2003: Serbia (14%) , 2004: Ukraine (13%) & Slovakia (19%) , 2005: Georgia (12%) & Romania
(16%) β’ α»αα ααα±ααα±αα¬ α»ααα¬αα¬αΈ
β ααααΈαααΌαβ αααΈαα«αΈα±αα¬α‘ααΌαααααΈ β ααααΈαααΌα β ααα»αα α±αα¬ α‘ααΌαα‘α±α»αα β ααααΈαααΌα β ααΈαααΈαα β αα αα‘α»αα¬αΈ ααααΌααααααα Vs. αα αα±αΎαα¬α α‘α»αα¬αΈαα αα ααα±αα¬ααα (Correlaton Vs Causation) β α αα α‘α±α»αα¬ααΈα‘αα‘ααΌα αααα αα