IncomeTaxOutline-NewYorkUniversitySchoolofLaw.docVIP

Income Tax Outline TAX POLICY Revenue – primary goal – Government raises money essentially through federal income tax which has economic, social and behavioral impacts. Tax code is full of special interest legislation, value judgments, incentives and disincentives. Declining to levy a tax is a judgment too and is effectively the government spending money by not taking any in. Efficiency and Fairness – who should pay? Efficiency – Neutrality – the more a tax changes behavior, the less efficient it is. No effect on behavior means it’s neutral. A head-tax would be neutral. Income taxes affect leisure time. Consumption taxes affect spending. Elasticity determines the degree to which tax affects behavior. High response/high elasticity. Income effect – when people work more to have same amount of money as if there were no tax. Substitution effect – substitute leisure time for work so as to pay less tax. The two effects offset each other, which predominates depends on elasticity, income and tax level (from Econ 1). Incidence – who bears burden of the tax? Important for determining fairness. Real incidence – who bears burden. Nominal incidence – who pays bill. Example, government could levy consumption tax on consumers or on retailers, who would pass tax on in form of higher prices. Often hard to determine who is bearing what share of burden. Corporate income tax – do shareholders, employees or consumers bear burden? Capitalization – market can shift burden of tax by affecting price. If annual real property tax introduced, current owner will pay tax but also bear burden of subsequent purchases (reflected in purchase price). Taxes get built into price of an item and changing rules can adversely affect owners. If value falls by present value of all future liability, tax is fully capitalized into the purchase price and current owner bears whole burden. Mechanism by which market responds to different tax treatments of identical transactions. Tax free bond will