[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Wrap-Up
CRITERIA FOR EVALUATING A TAX SYSTEM
Fairness
Efficiency
Administrative simplicity
Flexibility
Transparency
THE SCOPE OF THE U.S. TAX SYSTEM
The U.S. government raises tax revenues from a variety of sources. The earnings
of individuals and corporations yield individual income taxes and corporation
income taxes. Real estate—buildings and land—is subject to taxation by most states;
these payments are known as property taxes. Large bequests and gifts are taxed,
through gift and estate taxes. Special provisions apply to the taxation of capital
gains (the increase in value of an asset between the time an individual purchases it
and the time she sells it). Furthermore, wage income is subject not only to the income
tax but also to the payroll tax (the tax levied on a company’s payroll, half of which
is deducted from employees’ paychecks). Revenues from the payroll tax finance
two programs: Social Security (retirement and disability income) and Medicare
(medical care for the aged).
There are also taxes on the purchase of specific goods and services, known as
excise taxes. The two heaviest excise taxes are on alcohol and tobacco, also known
as sin taxes. The excise taxes on air travel and gasoline are sometimes called benefit
taxes because the proceeds are spent on benefits (e.g., airports and roads) for
those who purchase the good. Excise taxes on perfume, large cars, yachts, and expensive
fur coats, aimed at the rich, are referred to as luxury taxes. Other excise taxes,
such as the one on telephone services, have no particular justification other than to
raise revenue. Most states impose a general tax on purchases of goods and services,
known as a sales tax, though often some items (such as food) are exempted.
As this list indicates, few transactions in our economy escape taxation. Figure 17.2
shows the relative importance of various taxes at the federal and at the state and
local levels. At the federal level (panel A), the single most important source of revenue
is the tax on individuals’ income (contributing almost half of total revenue),
followed by the payroll tax. At the state and local levels (panel B), the sales tax is
the most important revenue source.
GRADING THE U.S. TAX SYSTEM
How well does the U.S. tax system measure up against the five principles of a good
tax system? Equally important, have the major changes in the tax laws over the past
Excise
4%
Corporation
income
10%
Individual
income tax
14%
Property
tax
20%
Payroll
40%
Others
18%
Custom
duties/fees
1%
Miscellaneous
receipts
3%
Sales tax
23%
Individual
income
42%
Corporate
income tax
2%
Individual
grants-in-aid
23%
B
Sources of State and Local
Tax Revenues 2003
Figure 17.2
A
Sources of Federal Tax
Revenues 2003
THE IMPORTANCE OF
VARIOUS TAXES
At the federal level, the largest share of
taxes comes from the individual income
tax, followed by the payroll tax and the
corporate income tax, as shown in panel
A. Sources of revenue at the state and
local level are more fragmented, as seen
in panel B; they include sales and property
taxes, as well as revenue received
from other levels of government.
SOURCE: Bureau of Economic Analysis, National
Income and Product Accounts (2004), Tables 3.2
and 3.3 (www.doc.gov)
THE U.S. TAX SYSTEM IN PRACTICE ∂ 383