pub econ lecture 18 taxation
TRANSCRIPT
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Public Finance
Dr. Katie Sauer
Taxation
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Figure 18-1
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Figure 18-2
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Calculating your Federal Income Tax
1. compute gross income
- wages, salaries
- interest, dividends, rental income
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2. compute adjusted gross income
subtract off:- retirement savings contributions
- alimony
- educator expenses
- contributions to HSAs- job-related moves expenses
- interest paid on student loans
- if self-employed:- health insurance premiums
- 50% of paid payroll taxes
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Exemptions used to be ³phased out´ for very high
income levels.
- personal exemption phaseout (PEP)
These limits will not apply for the year 2010, 2011 or
2012.
The limits will come back in 2013 (unless further legislation is passed).
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Income Range for PEP (2009)
Filing Status Phaseout Begins Phaseout Ends
Married Filing Jointly 250,200 372,700
Qualifying Widow(er) 250,200 372,700Head of Household 208,500 331,000
Single 166,800 289,300
Married Filing Separately 125,100 186,350
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4. Decide on deduction type
Standard Deduction:
$11,600 for married couples filing jointly
$5,800 for singles
$5,800 for married individuals filing separately$8,500 for heads of household
additional standard deduction for blind people
and senior citizens$1,150 for married individuals
$1,450 for singles and heads of household
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Itemized Deduction:
- medical and dental expenses exceeding 7.5%of AGI
- other taxes paid (state, local income tax)
- interest on mortgage
- charitable donations
- casualty and theft losses
- union dues and job travel expenses
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According to the IRS, 2 out of 3 tax payers takes the
standard deduction .
(IR-2010-127, Dec. 23, 2010)
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5. Compute Federal Income Tax Owed
Here are the tax brackets for a single person for 2011:
Marginal Tax Tax Bracket
Rate over but not over
10% $0 $8,500
15% $8,500 $34,500
25% $34,500 $83,600
28% $83,600 $174,400
33% $174,400 $379,150
35% $379,150
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Suppose you are single in 2011 and your AGI is $50,000.
Marginal Tax Tax BracketRate over but not over
10% $0 $8,500
15% $8,500 $34,500
25% $34,500 $83,600
38% $83,600 $174,40033% $174,400 $379,150
35% $379,150
On the first $8500, you pay 10% in taxes.8500 x 0.10 = 850
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Marginal Tax Tax BracketRate over but not over
10% $0 $8,500
15% $8,500 $34,500
25% $34,500 $83,600
38% $83,600 $174,40033% $174,400 $379,150
35% $379,150
On the next portion of income, you pay 15% in taxes.34500 ± 8500 = 26000
26000 x 0.15 = 3900
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Marginal Tax Tax BracketRate over but not over
10% $0 $8,500
15% $8,500 $34,500
25% $34,500 $83,600
38% $83,600 $174,40033% $174,400 $379,150
35% $379,150
On the next portion of income, you pay 25% in taxes.50000 ± 34500 = 15500
15500 x 0.25 = 3875
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The total amount you pay in taxes is:
= (0.10)(8500) + (0.15)(34500-8500) + (0.25)(50000-34500)
= 850 + 3900 + 3875
= 8625
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The marginal tax rate is the extra taxes paid on anadditional dollar of income.
If your AGI is $50,000 and then you earn one extradollar of income, that dollar is taxed at a rate of 25%.
Your current marginal tax rate is 25%.
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The average tax rate is the total taxes paid, divided by
total income.
= 8625 / gross income
Suppose your gross income is $60,000.
= 8625 / 60000= 14.4% is your average tax rate
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How your Federal taxes are spent http://www.whitehouse.g ov/taxreceipt
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Colorado has a flat 4.63% income tax
http://www.col orad o.g ov/taxtrack s/
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The Haig-Simons Comprehensive
Income Definition
It defines taxable re source s as an individual¶s ability t o
pay taxes.
The ability t o pay is equal to an individual¶s potential
annual con sumption.
P o
tential annu
al co
n su
mption is equal to t
otal con sumption during the year pl us any increa se in wealt h.
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This is how public economists define income.- improves vertical efficiency (high income pay
a larger share of income in taxes)
- those who have more resources pay
more in tax
- improves horizontal efficiency (same incomes
pay same taxes)
- same underlying resources pay same intax
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Difficult to do in practice:
On ability-to-pay grounds, we might like to deduct- property and casualty losses
- medical expenditures
- state and local tax payments
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On externality/public goods grounds we might deviate
for - charitable giving
- housing
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Charitable Giving
Suppose there are not enough homeless shelters.
- government could finance
- government could give incentives to private
sector to provide
When charitable donations are tax deductible, charitable
giving is ³cheaper´ relative to other types of
consumption.
It might be preferred to have tax subsidy crowd-in as
opposed to government spending crowd-out.
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Ex: Ellie is deciding whether to buy a $1 cup of coffee
or to donate $1 to a homeless shelter.
To get $1 to spend on coffee, she¶ll have to earn more
than $1:
$1 / (1 ± tax rate)
To get $1 to spend on a donation, she¶ll have to earn
exactly $1:
$1 / (1 ± 0)
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The relative price of charitable giving is:
= $1
$1 / (1 ± tax rate)
= $(1 ± tax rate)
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This type of preferred tax treatment yields a benefit at thecost of deviating from Haig-Simons.
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To consider:
When the government gives a tax subsidy for an action,
it will be giving a tax break to individuals who would
have taken t he action anyway.
- inframarginal impact
When the government gives a tax subsidy for an action,
some people are incentivized to take the action.
- marginal impact
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The government should use a tax break instead of direct
spending if:
the increase in charity > 1 ± the reduction in
per dollar of tax break charity per dollar of
government spending
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Tax subsidies may also be preferred to government
spending on consumer sovereignty grounds.
- when government spends, it is imposing its preferences
- when individuals spend, they express their own
preferences
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Housing
If the mortgage deduction were discontinued, it isestimated federal tax revenues would rise by $80
billion per year.
Why subsidize home ownership?
- in theory has positive externalities that renting
does not
- stake in society, neighborhood, town
- vote for long run investments
- mixed empirical evidence
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Effect of housing tax subsidies:
- doesn¶t seem to induce people to buy homes
- does increase expenditures on housing
- for every $1 more of tax subsidies, $1
more is spent on housing
« no real justification to deviate from Haig-Simons
« very popular
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If we are going to deviate from Haig-Simons,
is it better to use tax deductions or tax credits?
T ax ded uction s allow taxpayers to reduce their taxableincome.
T ax credit s allow taxpayers to reduce the amount of the
tax that they owe.
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Efficiency Considerations: unclear
Consider replacing the current deductibility of charitable donations with a 100% tax credit, up to
$1000.
If you gave less than $1000:- likely give full $1000 now because your
tax bill goes down by $1 for every $1 you
give
If you gave more than $1000:
- less of an incentive to give once reach
$1000
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Two considerations for efficiency:
1. nature of demand for the subsidized good
- elastic « credits may induce more giving
2. importance of achieving a minimum level of
the behavior
- credit can induce a minimum level
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Equity Considerations:
Vertical
- tax credits are more equitable than deductions- deductions are regressive
- credits are progressive
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Another consideration: are tax credits refundable?
Refundable means available to individuals who owe fewor no taxes.
- increase refund amount
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Tax Expenditures
The existing set of deviations from Haig-Simons is aset of tax expendit ure s.
- government revenue losses attributable to tax
law provisions that allow special exclusions,exemptions, or deductions from gross income
- government revenue losses attributable to tax
law provisions that provide a special credit, preferential tax rate, or deferral of liability
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Table 18-2