Tax Inefficiencies and Alternative Solutions
Tax Inefficiencies and Alternative Solutions
Tax Inefficiencies and Alternative Solutions
federal tax code, and perhaps shed some light on ways to tax
collection.
which point the tax rate goes up on those additional dollars and again
when you reach the next bracket. This process continues until youve
reached your level of income. On the last page I have a table that
identifies the marginal tax rates for individuals and married couples.
These are the up-to-date rates as of 2013. The primary difference
between these rates and past rates is the addition of an additional
bracket for those whose annual income exceeds $400,000, at which
point the marginal tax rate is 39.6%. There are a number of
implications inherent in this particular tax system. The first, and
perhaps most controversial, issue is that of equity. Designing a tax
system that appeals to everyones sense of fairness is a political
impossibility simply because of the variability in how one defines fair.
A large number, if not a majority, of people seem to favor a progressive
tax system (one that taxes more successful people at higher rates) as
being more fair because wealthy individuals have a lower marginal
utility associated with their consumption spending than does the poor.
This is true, but the fact that I dont agree with it being characterized
as fair only demonstrates the stratification of thought regarding the
matter. In order to determine the equitable nature of any tax, however,
would require us to define a fixed set of criteria as to what any
individuals fair share of taxes should be. Delineating what these
criteria are, or should be, is beyond the scope of this paper. The point
is that the lack of consensus on the matter is in part responsible for the
complexity that exists in the tax code today. If you printed the federal
tax code out on 8.5 x 11 inch paper, you would have 8,000 pages of
material to sift through. The result of this is a cost that all of us must
bear as consumers referred to as compliance costs. Compliance
costs are the costs of time and money that must be incurred by
individuals or businesses to insure their taxes are paid in the correct
amount and on time. The number of exemptions, deductions, credits,
and variable tax rates makes these costs quite substantial. According
to one estimate by the IRS Taxpayer Advocate, Americans aggregately
spent $163 billion (11% of tax receipts) complying with tax laws in
2008. The existence and impact of these costs is prevalent by simply
observing the number of companies available to help manage them
(i.e. H&R Block, Tax Resolution Services, Turbo Tax, etc). Of course,
these are not the only costs associated with the income tax. Perhaps
the most devastating cost, from an economic standpoint, is the
disincentives for work and the resulting dead-weight loss that they
cause. Any marginal tax on income is going to provide a disincentive to
work when a marginal increase in earnings would move one into a
higher tax bracket and thus increase their tax liability. This occurrence
can be noted when examining the demand and supply for labor in the
marketplace. The demand side of the equation is not impacted by a tax
on labor earnings, but the supply curve shifts to the left. The result is a
higher market wage, a reduced number of workers, and a dead-weight
Not only this, but like the income tax, the capital gains tax is
progressive. As for the pace of asset-liquidation, the capital gains tax
has two categories: short term (1 year), and long term (greater than 1
year). The capital gains rate changes frequently, the most recent being
2013. For the current fiscal year, short-term capital gains are taxed as
ordinary income and long-term capital gains will qualify for either a 0%,
15%, or 20% rate, depending upon your income. The difference in tax
rates between the short-term and long-term, and the fact that gains
are taxed only on realization creates what is referred to as the lock-in
effect. Basically, it pays off to defer your asset sales as far into the
future as possible in order to minimize the present value of future tax
liabilities. This slows down asset sales, which may have negative
implications regarding the efficiency of asset price-adjustments.
The other wealth tax that I will comment on briefly is the estate
tax. The estate tax, sometimes referred to as the death tax, is a tax
on remaining assets that are passed on to ones heirs when they die.
The estate tax ranges from 15-45% on estates valued at $3.5 million or
higher making it, once again, a highly progressive tax. The applicable
tax base for this tax is fairly small, and it thus not a large source of
revenue for the federal government. However, 2008 statistics reveal
that the estate tax raised about $18 billion in tax receipts. Considering
the limited nature of the tax, most arguments in favor of it are
normative ones centering on the issues of fairness and wealth
be the next big idea to rescue the United States from fiscal disaster,
only time will tell. If Ive been able to contribute to the tax policy
debate in any way, however minuscule, then this paper has
accomplished its objective.
JustFacts.Com
http://www.justfacts.com/taxes.asp#distribution
About.com
http://taxes.about.com/od/capitalgains/a/CapitalGainsTax_4.htm
FairTax.org
http://www.fairtax.org/site/PageServer
Wikipedia.org