Personal%20Income%20Tax

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Personal Income Tax
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Basic Structure
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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?

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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?

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Business expenses

• Capital investments and depreciation
• Three martini lunches

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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?

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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?

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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

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Tax Reform

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

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Deficit Finance
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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

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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

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Federal deficit
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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

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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?

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Should obligations be included?

• 9 trillion in social security obligations
• 6 trillion in Medicare obligations
• 1.75 trillion in pension obligations

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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

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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

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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?

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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