Taxation

Taxation

Why does U.S. government tax it’s citizens and corporations?

Taxation

Federal Government Expenditures

Taxation

What do we mean by a progressive tax? How about a regressive tax?

Taxation

How progressive is U.S. tax system?

“The taxes I pay to the federal government, including the payroll tax that is paid for me by my employer, Berkshire Hathaway, are roughly the same proportion of my income as that paid by the receptionist in our office. My case is not atypical -- my earnings, like those of many rich people, are a mix of capital gains and ordinary income -- nor is it affected by tax shelters (I've never used any). As it works out, I pay a somewhat higher rate for my combination of salary, investment and capital gain income than our receptionist does. But she pays a far higher portion of her income in payroll taxes than I do. ...”

-Warren Buffet

How does the U.S. tax system work?

Taxation Income taxes – how do they work?

Current marginal rates (2015) on “taxable earnings income” Single Married Marginal Rt

0 – $9,225 0 – $18,450 10%

$9,226-$37,450 $18,451-$74,900 15%

$37,451-$90,750 $74,901-$151,200 25%

$90,751-$189,300 $151,200- $230,450 28%

$189,301-$411,500 $230,451-$411,500 33%

$411,501-$413,200 $411,501-$464,850 35%

> $413,200 > $464,850 38%

Taxation How progressive is U.S. income tax system?

Marginal vs. Average tax rates? Consider two individuals, one earning $90,000/yr and the other

earning $270,000/yr.

What is effective tax rate (i.e. avg tax rate) for each?

Taxation How progressive is U.S. income tax system?

Top marginal rate over time: 94% in 1940s 91% 1950s – 1960s 70% 1960s - 1980s 28% 1980s 35% 1990s – 2010 38% now

The top marginal rate is only a small part of the story though. When does it kick in (how many “steps” are there?) How is taxable income determined?

Taxation

Taxes actually based on AGI (Adjusted Gross Income) What is this? How does it differ from Gross Income?

Taxation

Deductions (far from a complete list) Childcare, 403B college savings Mortgage interest, energy upgrades, real estate tax IRA Charitable donations Business expenses (home office, car use, travel) Capital losses

Tax saving vehicles for capital gains 401K, Roth IRA, 403B college savings plans, Healthcare savings

accounts

Differential tax rates for capital gains

Taxation

Capital Gains Rates

Marginal Rt (Wages) Short-term Captial Gain Long-term Capital Gain

10% 10% 0%

15% 15% 0%

25% 25% 15%

28% 28% 15%

33% 33% 15%

35% 35% 15%

38% 38% 20%

How does all of this relate to the progressivity of the income tax structure?

Taxation

Taxation

Other Taxes Payroll taxes

Taxes paid for each person by employer directly out of each paycheck. Often referred to as FICA taxes

How do payroll taxes work?

So are these taxes progressive/regressive?

Separate tax system since these funds are “used to pay for Social Security and Medicare” Why the quotes?

Taxation

Corporate Taxes Extremely complicated Rates range from 19 – 35% of net earnings (gross receipts minus

“cost of doing business”)

Why tax corporations?

Taxation

So how progressive is our national tax system?

Taxation Average Federal Tax rates by Income Quintile and Tax Source (CBO)

Why is income tax rate negative for lowest two quartiles?

Taxation

Taxation

Household Income Distributions – pre-tax vs post-tax and transfer

Taxation

What are concerns with taxation and progressive taxation in general?

Taxation

Inflation adjusted increase in after-tax household income between 1979 and 2007 (Source: Congressional Budget Office)

Taxation

How does U.S. compare to other countries?

Taxation

Kleven – How Can Scandinavians Tax So Much? (cont)

Taxation

Kleven – How Can Scandinavians Tax So Much? (cont) Tax avoidance behavior much lower

Reasons:

1. A much higher fraction of jobs have third-party income reporting---fewer self-employed, more oversight over self-employed, fewer in “evasive” jobs (i.e., lots of cash transactions)

2. Broader “tax bases” Elasticity of taxable income to taxes smaller

-0.05 to -0.15 in Denmark vs -0.4 to -0.5 in U.S. Reasons:

1. Harder to find tax avoiding behavior (due to reasons above).

2. Labor supply elasticity relatively small.

Taxation

Kleven – How Can Scandinavians Tax So Much? (cont)

Taxation

Kleven – How Can Scandinavians Tax So Much? (cont)

Why don’t Scandinavians react more to such high tax rates in terms of labor supply?

Taxation Kleven – How Can Scandinavians Tax So Much? (cont)

Less Inequality? Gini Coefficients - Before Taxes and Transfers

US = 0.486 UK = 0.456 Germany = 0.54 Denmark = 0.416 Norway = 0.410 Sweden = 0.426

Gini Coefficients - After Taxes and Transfers US = 0.378 UK = 0.345 Germany = 0.295 Denmark = 0.248 Norway = 0.250 Sweden = 0.259

Taxation

Kleven – How Can Scandinavians Tax So Much? How tax money is spent?

Taxation

Kleven – How Can Scandinavians Tax So Much? Culture?

Taxation

Kleven – How Can Scandinavians Tax So Much?

Taxation Kleven – How Can Scandinavians Tax So Much?