Taxation

Mark Twain once said that there were only two
things in life that were as certain as the dawn, death and taxes. It
is true, we as a society have come to accept the inevitability of
taxes. Everyone hates them, but we recognize their need.

Taxes are any payment on behalf of the
individual to the government. Taxes are used to pay for all
government services. Without taxes the government would have no money
to operate.

Just about every taxpayer complains about the
high rate of taxes, yet if one were asked if they would trade the tax
for the removal of service, they would rather pay the tax. In order
for taxes to be acceptable, however, they must meet certain criteria.
In order for a tax to be successful, it must be equitable, simple,
and efficient.

What Makes a “Good
Tax”

For most Americans, it is believed that taxes
should be impartial and fair. However, there is dispute over the
level of equity of a tax. Some believe that a tax is fair only if
everyone pays the same amount- a flat tax. Others argue that a tax
is only fair if wealthier people lay more than those with lower
incomes- progressive tax are are. Many also argue over the equity of
tax loopholes seeing that they allow some people to get out of paying
certain taxes.

A second standard for taxes is simplicity. Tax
laws should be written in an intelligible manner so that both the
taxpayer and the tax collector can understand them. Though it is not
an easy task, people are more willing to pay their taxes if they
understand them.

Efficiency is the final principle of taxation.
A tax should be easy to administer and to gain money from. The income
tax fits into this category. An employer withholds a portion of each
employee’s pay and then sends a single check to the government on a
regular basis. At the end of the year the employer notifies each
employee of the amount of tax withheld. Other taxes are less
efficient. Those collected in toll booths are considered so because
the state invests millions of dollars into reinforcing booths, but
the cost to commuters is the damage to their automobile from having
to slow down and use the booths. Efficiency also means that the tax
should raise enough revenue to be worthwhile. If it doesn’t, or it
hurts the economy, it has little value.

Principles of Taxation

The benefit principle of taxation is based on
two ideas. The first and foremost is that those who benefit from
services should be the ones who pay for them. Secondly, people
should pay taxes in proportion to the amount of services or benefits
they receive. But there are two limitations of this type of
taxation. First, many government services provide the greatest
benefit to these who can least afford to pay for them (i.e. welfare).
The second limitation is that the benefits often are hard to
measure.

The second principle of taxation is the
ability-to-pay, which is based on the idea that people should be
taxes according to their ability to pay, regardless of the benefits
they receive. This type of tax recognizes that societies are not
always able to measure the benefits derived from government spending.
It also assumes that persons with higher incomes suffer less
discomfort paying taxes than a person just getting by on their income
would.

The Three Types of Taxes

The three types of taxes are the proportional
tax, the progressive tax, and the regressive tax.

A proportional tax imposes the same
percentage of taxation on everyone, regardless of income. If the
percentage tax rate is constant, the average tax rate is constant,
regardless of income. This means that if a person’s income goes up,
the percentage of total income paid in taxes doesn’t change.

The second tax, the progressive tax,
imposes a higher percentage rate of taxation on those with higher
incomes. Progressive taxes use a marginal tax rate that increases as
the amount of taxable income increases. Therefore, the percentage of
income paid in taxes increases as income goes up.

The final tax is the regressive tax,
which imposes a higher percentage rate of taxation on low incomes
than on high incomes. For example, if the state sales tax were 5%,
the person with the lower income would pay a greater percentage of
their total income in sales tax.

Tax Revenue

Where income tax is the largest form of income
for the federal government, The sales tax in the largest source of
revenue for states. Rates for the sales tax vary for each state. By
definition, a sales tax is a general tax levied on consumer purchases
of nearly all products. It is added to the final price the consumer
pays, and merchants collect the sales tax at the time of sale. The
taxes are then given to the proper state government agency on a
weekly or monthly basis. The sales tax is an effective way for
states and cities to raise revenue. The tax is difficult to avoid
and because of that it raises huge sums of money. The sales tax,
however, is a regressive tax because it is the same percentage rate
for all people, meaning the percentage of income paid in sales tax
goes up as the income goes down. The second largest source of
revenues for state governments are funds that they receive from the
federal government. These funds help finance highways, health,
hospitals, education, and welfare. The third largest source of state
revenue comes from the individual income tax. Generally, individual
income tax revenues are about five times as large as the income tax
collected from corporations. Lastly, many states impose taxes, fees,
or other assessments on their employees to cover the cost of state
retirement funds and pension plans.

A majority of the revenues for local
governments come from intergovernmental transfers from state
governments. They are generally for the purpose of education or
welfare. A smaller amount comes from the federal government, mostly
for urban renewal. The second largest source of revenue for local
governments comes from the property tax– a tax on real
property and tangible and intangible personal property. Real
property includes real estate, buildings, and anything
permanently attached such as central heating. Tangible personal
property includes all tangible items of wealth not permanently
attached to land or buildings. Intangible personal property is
property with an invisible value and is represented by paper
documents such as stocks, bonds, or checks. However, out of all of
these property taxes, the real estate tax raises the most revenue.
Taxes on personal property are rarely collected because of the
problem of valuation. In addition, it would be neither efficient nor
effective to have a tax assessor view everyone’s personal property,
and come up with values for all of them. The third largest source of
revenue for local governments is utility and state-owned liquor store
income. Finally many towns and cities impose their own sales taxes
in order to increase revenue. Merchants collect these taxes right
along with the state sales tax, and the point of the sale.

Many of the taxes paid to the federal, state,
and local governments are deducted from one’s paycheck. A worker
will have taxes taken out for the federal, state, and city
governments with the amount taken out decreasing in this order. FICA
is also taken out. Sometimes if a worker has insurance payments or
retirement contributions, purchases savings bonds, or puts money into
a credit union, even more deductions will appear on the paycheck,
though they are not taxes. The only major taxes that don’t appear on
the paycheck are state sales taxes, local property taxes, and federal
excise taxes.