Personal%20Income%20Tax - PowerPoint PPT Presentation

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Personal%20Income%20Tax

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Some types of savings Does it stimulate savings? ... accumulate debt Tax when economy is booming, pay off debt Personal Income Tax Basic Structure What is fair? – PowerPoint PPT presentation

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Title: Personal%20Income%20Tax


1
Personal Income Tax
2
Basic Structure
3
What is fair?
  • People with equal incomes should pay equal taxes?
  • People should pay in proportion to the benefits
    they receive
  • Is progressivity fair?
  • Do rich people receive proportionally greater
    benefits than poor people?
  • Property rights
  • Are there better public schools in rich
    neighborhoods? Better public infrastructure?
    Better quality environment?

4
What is Income?
  • Money value of the net increase in an
    individuals power to consume during a period
  • How much you consume this period without reducing
    your ability to consume in future periods
  • Are your job benefits income?
  • Are unrealized capital gains income?
  • Is income in kind income?
  • Housework and child care?
  • Imputed rent?
  • My garden and furniture?

5
Business expenses
  • Capital investments and depreciation
  • Three martini lunches

6
Excludable income
  • Interest on state and local bonds
  • Why does government allow this?
  • Is it efficient?
  • Potential for arbitrage
  • Capital gains
  • Why a deferred rate?
  • Why a lower rate?
  • Earned vs. unearned income
  • Double taxation
  • What about inflation?
  • Some types of savings
  • Does it stimulate savings?

7
Exemptions and Deductions
  • Exemptions and progressivity
  • Are deductions fair and efficient?
  • Relative prices
  • Mortgage deductions and land speculation
  • State and local taxes
  • Why have all these deductions?

8
Tax simplification
  • Importance of transaction costs
  • 1040 form with 127 pages
  • 1,300,000 words in tax code
  • 1986 tax code changes
  • 2001 tax code changes
  • Sunset provisions
  • AMT

9
Tax Reform
  • Flat tax
  • Green taxes/Land taxes
  • Tobin Tax
  • Wealth taxes
  • Estate taxes

10
Deficit Finance
11
Definitions
  • Deficit flow variable measured over time
    (usually 1 year), difference between expenditures
    and revenue
  • On-budget deficit ignores social security and
    postal service
  • Off-budget deficit social security and postal
    service
  • Unified budget deficit the two together
  • Surplus an historical curiosity, no longer
    relevant
  • Debt stock variable measured at a point in time,
    sum of all accumulated deficits

12
Facts and figures
  • Federal Debt currently about 7.3 trillion
  • How big is a trillion?
  • 3 trillion held by government
  • 0.6 trillion held by Fed
  • 1.7 trillion held by foreigners
  • Per capita Fed debt about 24,910
  • Rate of increase about 1.73 billion per day, or
    2000 per person per year
  • State and local debt 1.4 trillion

13
Federal deficit
14
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15
Debt, deficits and inflation
  • Inflation erodes value of debt
  • 2 inflation x 7 trillion debt 140 billion
    inflation tax
  • US could simply print money to pay off the debt
    with inflation tax

16
Capital accounts vs. current accounts
  • Debt does not distinguish between consumption and
    investment
  • Should tangible assets be included?
  • What would be the net result if we account for
    natural resource loss?
  • Privatization and the deficit
  • Developing countries
  • US
  • Why doesnt the government distinguish?

17
Should obligations be included?
  • 9 trillion in social security obligations
  • 6 trillion in Medicare obligations
  • 1.75 trillion in pension obligations

18
Burden of Debt
  • Interest payments 10 of federal expenditures
  • Is it spent on consumption or investment?
  • If rate of return on investment is higher than
    interest, no problem
  • Is it internal?
  • Does internal debt impose a burden on future
    generations?
  • Studies suggest that debt now higher future
    taxes, transfer of resource from future to present

19
Crowding out
  • What happens to interest rates when demands for
    loans increase?
  • What is the impact on business?
  • What is the impact on foreign countries holding
    US dollar debt?
  • Reagan deficits and Latin American Debt crisis

20
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21
Why do foreigners assume US debt?
  • It is safe
  • Dollar is strong
  • Risk adjusted interest rates are competitive
  • What else do you do with a trade surplus?
  • What happens if dollar gets weak?
  • Foreigners will not buy bonds and will sell
    dollars
  • What does this do to the dollar?
  • Interest rates must be raised to attract money
  • What does this do to business?

22
Tax or Borrow?
  • Really a question of tax now or tax later?
  • Beneficiary pays principle
  • Intergenerational equity issue
  • Keynesian answer
  • Borrow when economy is weak, accumulate debt
  • Tax when economy is booming, pay off debt
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