The Tax System of the United States

If the democratic political system truly were representative, everyone’s interests would be given equal weight in designing the tax system. In reality, special interests tend to dominate political debate because they are the ones who have the most to gain, and interests with more wealth will be in a better position to use their resources to steer the course of political decision making. This has the potential for pushing the tax system toward a complex set of special interest benefits giving loopholes to those who have political influence, while leaving those who do not have much influence to bear increased tax burdens.

One problem is that when special interests seek tax advantages, they will care little whether those advantages enhance overall efficiency as long as they benefit the special interests. Tax reforms that actually do enhance economic efficiency probably will have a better chance of passing through Congress because they will have less opposition than inefficient tax reforms, but this may not be enough to produce an efficient tax system.

This is especially true when one considers the tax system as a whole. One change in the tax laws may have a plausible rationale but may be counterproductive when considered within the context of the rest of the tax system.

half the tax revenues in the United States, with state governments raising about a quarter, and local governments a little less than that. Although there is not an absolute division among tax bases used by the various levels of government, the federal government relies mostly on income taxes, state governments rely most heavily on sales taxes (but also get significant revenues from income taxation), and local governments rely most heavily on property taxes.

Intergovernmental revenues make up a substantial amount of state and local government revenues, mostly in the form of federal government grants. The use of intergovernmental revenues helps equalize expenditures across the nation, so that lower-income areas are not as disadvantaged because of smaller tax bases. These revenues also have the effect of lowering the state or local government tax price for government spending, which encourages more state and local spending. This is often the intention, as federal grants are made to entice lower-level governments to spend more in certain areas. Because federal government programs spread across the nation, intergovernmental revenues also make different jurisdictions more similar and therefore lower intergovernmental competition.

One of the significant issues with regard to any tax, and especially with regard to the overall tax system, is its degree of progressivity. The tax system in the United States is, overall, progressive, with people at the extreme lower end of the income distribution paying much less in taxes as a percentage of their incomes, and people at the extreme upper end paying much more, than average. For people who are not at the extremes of the income distribution, however, the tax system is roughly proportional. Income taxes are the most progressive taxes as a group, while sales and excise taxes are the most regressive, but the progressivity of income taxes more than offsets the regressivity of sales taxes.

With regard to both equity and efficiency issues, taxes are best considered within the context of the overall tax system. Some taxes, such as cigarette taxes, may be very regressive, yet they are a small part of the total tax payments of any group and therefore are not viewed as unfair because of their regressiveness. Similarly, the efficient tax treatment of dividends, capital gains, inheritances, and most kinds of property depends upon how related tax bases are treated throughout the tax system, so one cannot get a complete understanding of any individual tax without seeing how it works as a part of the entire system of taxes.

Ultimately, the tax structure is a product of the political system, so understanding the political forces involved in changing the tax laws goes a long way toward understanding the nature of the actual tax system, especially when the actual system seems to deviate from what appears to be fair and efficient. Special interests tend to have an undue influence over tax changes, as they do over legislation in general, with the result that if tax reform takes place on a piecemeal basis, the tax structure is likely to be increasingly riddled with special interest benefits that erode the tax base and make the tax code inefficient. More comprehensive tax reform has the chance of creating greater potential gains for the general public, which increases the likelihood that reform will take place in the general public interest rather than for the benefit of special interests. The federal tax reform of 1996 serves as a model in this regard.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography

 

1. Dr. Randall G. Holcombe. The Tax System in the United States. New York: Academic Press, 2010.
2. John Leslie Livingstone. The portable MBA in Finance and Accounting. New Jersey: John Wiley & Sons, Inc., 2011.

E-resources:

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3. www.mrc.twsu.edu