Taxes and Public Policy
Sources of Federal Revenue
- What does cost the federal budget a substantial sum is the system of tax expenditures, which represents the difference between what the government actually collects in taxes and what it would have collected without special exemptions.
- Tax expenditures amount to subsidies for different activities. The government encourages charitable contributions, permits homeowners to deduct from their income the billions of dollars they collectively pay each year in mortgage interest, and allows businesses to deduct expenses from their taxes at a more rapid rate than they deduct other expenses.
- The Office of Management and Budget (OMB) estimates that the total tax expenditures equal about 1/3 of the federal government's total receipts.
- On the whole, tax expenditures benefit middle- and upper-income taxpayers and corporations more than the poor.
- Three major sources of federal revenues are the personal and corporate Income Tax, Social Security Taxes, Borrowing and a small share comes from sources such as gasoline, transportation, etc.
Sources of Federal Revenue
- President Reagan proposed a massive tax-cut bill in 1981:
- Social Security taxes come from employees and employers.
- Social Security taxes is money deducted from employees' paychecks and matched by their employers. These payments do not go into the government's general money fund but are earmarked for a specific purpose: the Social Security Trust Fund that pays benefits to the elderly, the disabled, the widowed, and the unemployed.
- Social Security taxes have grown faster than any other source of federal revenue, and they will continue to grow as the population ages.
- When the federal government wants to borrow money, the Treasury Dept. sells bonds, guaranteeing to pay interest to the bondholder.
- Government borrowing crowds out private borrowers, both individuals and businesses, from the loan marketplace.
- tax levied by a government directly on income, especially an annual tax on personal income.
- Individuals are required to pay the government a portion of the money they earned.
- The first peacetime income tax was ratified in 1894.
- In 1895 the Supreme Court declared the tax unconstitutional in Pollock v. Farmer's Loan and Trust Co. (1895).
- In 1913, the Sixteenth Amendment was added to the Constitution, explicitly permitting Congress to levy an income tax; however, even before the Sixteenth Amendment was enacted, Congress had already started to collect income tax revenue. The Internal Revenue Service (IRS) was established to collect it.
- Like individuals, corporations also pay income taxes.
- It is no longer true that corporate taxes yield more revenues than individual income taxes. Today corporate taxes yield only about 13 cents of every federal revenue dollar, compared with 48 cents coming from individual income taxes.
Under Reagan tax-cut bill
- over a 3 year period, the federal tax bills were reduced 25%
- corporate income taxes were also reduced
- new tax incentives were provided for personal savings & corporate investment
- taxes were indexed to the cost of living (govt. no longer received a larger share of income when inflation pushed incomes into higher brackets while the tax rates stayed the same)
- families with high incomes received significant tax reductions but those at the lower end of the income ladder saw little change in their tax burden because of social insurance and excise taxes.
- Many blamed the massive deficits on the 1981 tax cuts, as government continued to spend but at the same time reduced its revenues.
Sources of Federal Revenue
Taxes and Public Policy
In addition to raising revenues to finance its services, the government can use taxes to make citizens' incomes more nearly or less nearly equal, to encourage or discourage growth in the economy, and to promote specific interests.
Budget is a policy document allocating burdens (taxes) and benefits (expenditures).
- To deal with these deficits, in 1993 President Clinton persuaded Congress to raise the income tax rate on those in the top 2% of income and top corporate income tax rate.
- Congress also increased a small energy tax that would be paid by all but those with low incomes.
- Cutting taxes was once again a popular rallying cry for some politicians.
- In 2001 , Congress enacted a tax cut that gradually lowered tax rates over the next 10 years.
- Critics charged that the president was fiscally irresponsible when deficits immediately reappeared.
- Who bears the burden of paying for government? Taxpayers/citizens, typically the less well-off Americans.
- Who receives the benefits? The wealthy.
- A tax loophole is presumably a tax break or tax benefit.
- The IRS Code, which specifies what income is subject to taxation, contains many legal exemptions, deductions, and special cases.
- Because of loopholes, some taxpayers benefit more than others. Jimmy Carter, campaigning for the presidency, called the American tax system a "national disgrace" because of its special treatment of favored taxpayers.
- Tax loopholes may offend Americans' sense of fair play, but they cost the treasury relatively little because they apply to only a few people
- Loopholes are actually only one tax expenditure.
What does America want from the President and Congress?
- A balanced budget
- Maintain or increase the level of government spending on most policies
- Keep taxes low
Taxes and Public Policy
Tax Reform
Over many years, the number one issue that the President is criticized for is not being able to maintain balance of budget.
- Wealth Inequality in America: Perception vs. Reality
- The Tax Reform Act of 1986 was one of the most sweeping alterations in federal tax policy history.
- It eliminated or reduced the value of many tax deductions, removed several million low-income individuals from the tax rolls, and greatly reduced the number of tax brackets (categories of income that are taxed at different rates).
- President Reagan signed the Tax Reform Act of 1986, which was passed with the backing of congressional leaders and administration officials.
- The legislation- the most wide-ranging reform of federal tax policy since the Sixteenth Amendment legalized income taxes in 1913- was implemented despite protests from numerous interest groups that did not want to lose their tax deductions.
- The Treasury Department sells bonds, guaranteeing to pay interest to the bondholder whenever the Federal government wants to borrow money.
- Federal debt is all the money borrowed over the years that is still outstanding. As of today, our National debt is $17,988,139,701,976.
- $7,060,259,674,497.51-- Federal Debt Up $7 trillion under Obama's presidency.
- For every dollar that the government borrows today, it will cost taxpayers many more dollars in interest over the next 30 years.
- Concern about the national debt led to something called a balanced budget amendment- presented to Congress requiring them to balance peacetime federal budgets.
- Unlike state or local governments and private businesses, the federal government does not have a capital budget, a budget for expenditures on items that will serve for the long term.
- The government borrows money through the issuance of bonds.
- These debts do not count against the operating budget.
- The federal government's purchases are counted as current expenditures and run up the deficit.
- Despite borrowing, most of the government's income still comes from taxes.
Sources of Federal Revenue
LaTia West & Ha Khanhvan
3A