Presentation on theme: "Overview of U.S. Federal Taxes with emphasis on the Personal Income Tax Public Econ Seminar, Econ 398 Joseph Guse."— Presentation transcript:
Overview of U.S. Federal Taxes with emphasis on the Personal Income Tax Public Econ Seminar, Econ 398 Joseph Guse
History of Federal Budget source: www.whitehouse.gov/omb/budget/Historicals (Table 1.2)
Most Common Types of Taxes Individual Income Taxes. Progressive structure. Levied on all income – labor and capital. Payroll Taxes. Finance SS, Unemp Ins, Medicare. Levied only on labor income. Regressive structure. Corporate Income Taxes. Wealth Taxes. Federal Estate Tax and Gift Taxes. Local Property Taxes. Consumption Taxes. Federal excise taxes (e.g. gas and cigs) and import tarriffs. Local sales and excise taxes. Other Revenue Sources.
Revenue and Shares by Type Federal Tax 2005 Source: BEA via Slemrod and Bakija Receipts ($Billions) Share of Federal Revenue Share of GDP Personal Inc. Tax92841.3%(7.4%) Payroll Taxes (Soc Ins)85538.1%(6.9%) Corporate Inc.Tax32614.5%(2.6%) Excise Tax,Customs1014.5%(.8%) Estate and Gift Tax251.1%(.2%) Total2247100%(18%) Total State and Local1185(9.5%)
Revenue Composition History Source: www.whitehouse.gov/omb/budget/Historicals (Table 2.2)
History of Personal Income Tax Summarized from Bakija and Slemrod Civil War Era Income Tax 1861-1871. 1894. Income Tax Enacted but Overruled by Supreme Court. 1913. 16 th Amendment. Start of modern Income Tax. 1914. Graduated Rates (1-7%). Large Personal Exemption: only 0.5% of population has income high enough to have any liability. Still only 6% on eve of WWII. 1917 Deductions for mortgage interest, local taxes and charitable giving already in place. WWII. Receipts goes from 1 to 8% of GDP. Percent filing goes from 6% to 34% of population. Employer withholding introduced.
Top Marginal Rate History Source: www.taxpolicycenter.org/taxfacts
Definition of “Income” Haig-Simon: “The increase in person’s ability to consume over a given period of time” Income = Consumption + Net Change in Wealth Would include… Wages Value of all Employer and Govt benefits Capital Income (rent, dividends) Capital Gains/Losses (whether realized or not) in real terms. (appreciate and depreciation). Domestic production Value of services from owned durable good. (Rental value of own home, cars, etc) Subtract cost of earnings (inputs, interest, maintenance costs, etc)
Further Discussion of Haig-Simon definition Problem with measurement. – Timing problems. Lotteries and annuities. Retained corporate earnings. – Uncertainty Problems. E.g. Intellectual property. Why we care – Taxing only some forms of income lead to distortions and fairness issues.
Federal Tax Definition of Income Tax code “lays out transactions and events that trigger tax liability” Adjusted Gross Income (AGI) – Wages and Salaries (73%) – Returns to Capital (dividends, interest, cap gains, rent, royalties) – Small Business Income (mixture of the two)
Capital Issues MOST Interest and Dividend Income is exempt (pension plans, tax-free bonds, etc), though some dividend income excluded from AGI may have taxed by corporate income tax. Only Realized Nominal Gains/Losses counted Exemptions – Gains held until death – Gains on owner-occupied housing up to $500K Cap gains are taxed at special rates (15%) In general cap gains can be taxed once, twice (because of interaction with Corporate Tax) or not at all! – The amount of cap gain included in AGI over 1980 – 2004 is roughly equal to Haig-Simon definition, but that just reflects rough balance of huge “errors” in both directions. Interpretation: Because of generally lower rates on returns to savings (via exemptions from 401ks, IRAs, and special cap gains rate), our system is really a hybrid of an income tax and a consumption tax.
Other Exclusions from Taxable Income $1 trillion (2004) excluded from AGI due to evasion. $363B (2004) State and Local Tax Deduction $340B (2004) Mortgage/Home Equity Loan Interest Deduction. $166 (2004) Charitable Contributions $62 (2004) Medical Dental Deductions Standard Deduction Personal Exemptions
2012 Marginal Rates (Single) Source: IRS 10% on taxable income $0 to $8,700, plus 15% on taxable income $8,700 to $35,350 25% on taxable income $35,350 to $85,650 28% on taxable income $85,650 to $178,650 33% on taxable income $178,650 to $388,350 35% on taxable income $388,350.
Marginal Rates, 2012, Married Jointly 10% on taxable income $0 to $17,400 15% on taxable income $17,400 to $70,700 25% on taxable income $70,700 to $142,700 28% on taxable income $142,700 to $217,450 33% on taxable income $217,450 to $388,350 35% on taxable income $388,350.
Tax Credits – Welfare Through the Tax Code EITC and Child Credit are Refundable EITC is a wage subsidy that eventually get phased out as income increases. Ramp-up, plateau, phase-out structure. – 2007 example. Married with 2 children. 40% up to $11,790. plateau to $17,390. phase out at 21% rate. EITC is zero above $39,783. Child Credits. $1000 per kid!