2. U.S. Tax System
Effects of tax depend upon how it interacts with other taxes
U.S. has federal tax system
3 major categories of U.S. tax system:
Federal taxes
State taxes
Local taxes

3. Federalism and the Tax System
Federal government collects more in revenues than all other U.S. governments combined
Income tax primarily a federal tax
Property tax primarily a local tax
Sales taxes primarily state taxes

4. Federalism and the Tax System

5. Federal Taxes
Personal income tax most significant source of federal government revenue
Social insurance payroll taxes
Social security tax structure is regressive

6. Federal Taxes

7. Intergovernmental Revenues
Major revenue source for lower-level governments
Most significant intergovernmental revenues consist of federal aid to state/local governments
State governments provide assistance to local governments

8. Intergovernmental Revenues
Can have significant effects on government finance
Can substitute for own-government taxation
Most come from higher-level governments to lower-level governments

9. Intergovernmental Revenues
Reasons to establish intergovernmental programs:
Higher-level governments provide money to encourage certain programs by lower-level governments
Taxation for lower-level governments can be shifted to higher-level governments
Equity

10. State and Local Taxes States rely on sales and income taxes
Local governments rely on property taxes
Sales and income taxes have risen faster than property taxes

11. State and Local Taxes

12. Progressivity of Tax System
Important to consider lifetime income as well as income in a particular year
Progressivity of tax system as a whole more important than progressivity of any particular tax
Importance of nonmonetary income

13. Progressivity of Tax System
Tax system is slightly progressive overall
Most progressive tax is income tax
Sales and excise taxes generally regressive
Property tax exhibits U-shaped pattern with respect to income

14. Progressivity of Tax System
Problems with considering progressivity of tax system over a lifetime:
People do not have lifetime income available to pay tax at any one point in time
Tax structure can change substantially over time
Does not consider how tax money is spent

15. Political Influences on Tax System
Tax policy made through political process
Economic analysis:
Provides arguments both sides use
Estimates effects of tax changes
Special interests tend to dominate political debate

16. Tax Reform Most changes in tax law small and affect few taxpayers
Many changes in the form of loopholes
Allow some taxpayers to reduce tax payments
1986 tax reform

17. Comprehensive Versus Piecemeal Tax Reform
Benefit special interests
Tax code becomes more complex
Comprehensive tax reform
More efficient tax code
Lower overall tax rates

18. Revenue-Neutral Tax Reform
Change tax system in some ways
Leave amount of tax revenues to be collected unchanged
Allows efficiency and equity issues to be considered separately from amount of tax revenues

19. Taxes in Isolation and the Tax System
Optimal provision of one tax depend on other taxes
Taxes must be viewed as individual components of overall tax system