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TAXATION AND DEMOCRACY

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Title: TAXATION AND DEMOCRACY


1
Lecture 22 TAXATION AND DEMOCRACY November 20,
2014
2
I. WHAT IS TAXATION?
3
I. WHAT IS TAXATION?
1. What is Taxation Two Answers
Answer 1Taxes the public taking from the
private. People earn income through private
economic activity. This income belongs to them.
Taxation is the government taking money away
from citizens and using it to pay for government
activities.
4
I. WHAT IS TAXATION?
1. What is Taxation Two Answers
Answer 1Taxes the public taking from the
private. People earn income through private
economic activity. This income belongs to them.
Taxation is the government taking money away
from citizens and using it to pay for government
activities. Extreme version Taxation is theft.
Answer 2 Taxes The division of total income
into public and private shares. The total
economic pie is produced through complex
interdependent economic activities. This pie
needs to be divided up between public purposes
and private purposes. Taxation is the way of
accomplishing this in a capitalist economy.
5
I. WHAT IS TAXATION?
2. Tax ideology and class interests
6
I. WHAT IS TAXATION?
2. Tax ideology and class interests Key question
Who really benefits from a particular view of
the problem? In whose interests is it to insist
that taxation is the way government takes your
money? Is this understanding more in the
interests of the rich and powerful than of
ordinary citizens or the poor? But Note
Showing that a particular view serves the
interests of privileged groups does not show that
the view is incorrect.
7
II. The Logic of Income Taxes
8
II. THE LOGIC OF INCOME TAXES
  • Three different views of Tax Fairness

9
II. THE LOGIC OF INCOME TAXES
  • Three different views of Tax Fairness
  • Everyone pays the same amount (a poll tax)

10
II. THE LOGIC OF INCOME TAXES
  • Three different views of Tax Fairness
  • Everyone pays the same amount (a poll tax)
  • Everyone pays the same percentage of their
  • income (a flat tax)

11
II. THE LOGIC OF INCOME TAXES
  • Three different views of Tax Fairness
  • Everyone pays the same amount (a poll tax)
  • Everyone pays the same percentage of their
  • income (a flat tax)
  • Everyone should have the same tax burden,
  • make the same sacrifice (a progressive
    tax)

12
II. THE LOGIC OF INCOME TAXES
The Flat Tax idea Compare two people one earns
10,000/year, the other earns 100,000/year.
Suppose there is a flat tax of 25. This means
that the poor person pays 2,500 in taxes and the
affluent person 25,000 in taxes. This means that
the better off person pays 10 times as much. If
these two people were the only tax payers, the
richer person would pay over 90 of total taxes
for the common good schools, police, the
military, etc. Is this fair?
13
II. THE LOGIC OF INCOME TAXES
What is an Equal Burden? Compare the same two
people one earns 10,000/year, the other earns
100,000/year. They each get a raise of 10,000.
What does it mean for them to have equal burden
or equal sacrifice in the taxation on this
additional income? Suppose there is a flat tax
of 25. This means that the poor person and the
affluent person each pay an additional 2,500
taxes because of their additional income. Is
2,500 the same burden on a person earning
20,000 as on a person earning 110,000?
14
II. THE LOGIC OF INCOME TAXES
What is an Equal Burden? Compare the same two
people one earns 10,000/year, the other earns
100,000/year. They each get a raise of 10,000.
What does it mean for them to have equal burden
or equal sacrifice in the taxation on this
additional income? Suppose there is a flat tax
of 25. This means that the poor person and the
affluent person each pay an additional 2,500
taxes because of their additional income. Is
2,500 the same burden on a person earning
20,000 as on a person earning 110,000?
15
II. THE LOGIC OF INCOME TAXES
Equal Burden continued How much income would
someone earning 110,000 have to give up to be
the equivalent sacrifice as 2,500 for someone
earning 25,000? Key idea from economics the
declining marginal utility of money. Above a
certain income, the more you earn, the less
difference an additional dollar makes to your
welbeing.
16
II. THE LOGIC OF INCOME TAXES
2. U.S. MARGINAL INCOME TAX RATES (single tax
payer) Bracket 1. 10 on income between 0 and
9,075Bracket 2. 15 on the income between
9,076 and 36,900Bracket 3. 25 on the income
between 36,901 and 89,350 Bracket 4. 28 on the
income between 89,351 and 186,350 Bracket 5.
33 on the income between 186,351and
405,100 Bracket 6. 35 on the income over
406,751
Example A person who earns 100,000 will pay total income taxes of 21,175, or a total tax rate of 21.0. Here is how that is generated
Income bracket income earned in this bracket Tax due
1 9,075 10 907.50
2 27,825 15 4,173.75
3 52,450 25 13,112.50
4 10,650 28 2,982
Totals 100,000 21.3 21,175.75
17
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 1 How to define taxable income
  • Examples
  • A family with 5 children vs a single adult
    earning the same amount of income
  • A person with large medical expenses vs a person
    with no medical expenses earning the same amount
    of income
  • A person whose house is destroyed by a hurricane
    vs a person whose house is undamaged earning the
    same amount
  • Solution Tax Deductions as a way of making tax
    rates fairer

18
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 1 How to define taxable income
  • Examples
  • A family with 5 children vs a single adult
    earning the same amount of income
  • A person with large medical expenses vs a person
    with no medical expenses earning the same amount
    of income
  • A person whose house is destroyed by a hurricane
    vs a person whose house is undamaged earning the
    same amount
  • Solution Tax Deductions as a way of making tax
    rates fairer

19
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 1 How to define taxable income
  • Examples
  • A family with 5 children vs a single adult
    earning the same amount of income
  • A person with large medical expenses vs a person
    with no medical expenses earning the same amount
    of income
  • A person whose house is destroyed by a hurricane
    vs a person whose house is undamaged earning the
    same amount
  • Solution Tax Deductions as a way of making tax
    rates fairer

20
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 1 How to define taxable income
  • Examples
  • A family with 5 children vs a single adult
    earning the same amount of income
  • A person with large medical expenses vs a person
    with no medical expenses earning the same amount
    of income
  • A person whose house is destroyed by a hurricane
    vs a person whose house is undamaged earning the
    same amount
  • Solution Tax Deductions as a way of making tax
    rates fairer

21
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 1. How to define taxable income
  • Examples
  • A family with 5 children vs a single adult
    earning the same amount of income
  • A person with large medical expenses vs a person
    with no medical expenses earning the same amount
    of income
  • A person whose house is destroyed by a hurricane
    vs a person whose house is undamaged earning the
    same amount
  • Solution Tax Deductions as a way of making tax
    rates fairer

22
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 2. Deductions are a policy tool to
    create incentives for
    people to do certain things in the public
    interest
  • the problem of tax expenditures
  • Examples
  • Green energy tax breaks for individuals to
    weatherize their houses or for companies to
    invest in solar panels.
  • Home mortgage interest deduction If you think
    home ownership is good public policy and you want
    to encourage people to buy their own homes, then
    the mortgage interest deduction is a way of
    funneling government revenues to help people buy
    homes.
  • Charitable contributions If you give 10,000 and
    your marginal tax rate is 35, you get back 3500
    in tax refunds, so the contribution only really
    costs you 6,500. In effect the government is
    giving the charity 3,500.

23
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 2. Deductions are a policy tool to
    create incentives for
    people to do certain things in the public
    interest
  • the problem of tax expenditures
  • Examples
  • Green energy tax breaks for individuals to
    weatherize their houses or for companies to
    invest in solar panels.
  • Home mortgage interest deduction If you think
    home ownership is good public policy and you want
    to encourage people to buy their own homes, then
    the mortgage interest deduction is a way of
    funneling government revenues to help people buy
    homes.
  • Charitable contributions If you give 10,000 and
    your marginal tax rate is 35, you get back 3500
    in tax refunds, so the contribution only really
    costs you 6,500. In effect the government is
    giving the charity 3,500.

24
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 2. Deductions are a policy tool to
    create incentives for
    people to do certain things in the public
    interest
  • the problem of tax expenditures
  • Examples
  • Green energy tax breaks for individuals to
    weatherize their houses or for companies to
    invest in solar panels.
  • Home mortgage interest deduction If you think
    home ownership is good public policy and you want
    to encourage people to buy their own homes, then
    the mortgage interest deduction is a way of
    funneling government revenues to help people buy
    homes.
  • Charitable contributions If you give 10,000 and
    your marginal tax rate is 35, you get back 3500
    in tax refunds, so the contribution only really
    costs you 6,500. In effect the government is
    giving the charity 3,500.

25
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 2. Deductions are a policy tool to
    create incentives for
    people to do certain things in the public
    interest
  • the problem of tax expenditures
  • Examples
  • Green energy tax breaks for individuals to
    weatherize their houses or for companies to
    invest in solar panels.
  • Home mortgage interest deduction If you think
    home ownership is good public policy and you want
    to encourage people to buy their own homes, then
    the mortgage interest deduction is a way of
    funneling government revenues to help people buy
    homes.
  • Charitable contributions If you give 10,000 and
    your marginal tax rate is 35, you get back 3500
    in tax refunds, so the contribution only really
    costs you 6,500. In effect the government is
    giving the charity 3,500.

26
II. THE LOGIC OF INCOME TAXES
CHARITABLE DONATIONS Two ways the government can
allocate money to various kinds of nonprofit
activity in the public interest 1. Set up a
government agency, allocate funds to that agency,
institute a bureaucratic procedure for giving out
grants. Examples National Science Foundation,
National Endowment for the Humanities, National
Endowment for the Arts 2. Allow tax deductions
for individual contributions to nonprofit
organizations. This is a form of highly
decentralized participatory government spending
the people directly decide how to allocate public
funds. This is the way government spends
billions of dollars a year on religion tax
expenditures for church donations (in addition to
churches not paying taxes).
27
II. THE LOGIC OF INCOME TAXES
CHARITABLE DONATIONS Two ways the government can
allocate money to various kinds of nonprofit
activity in the public interest 1. Set up a
government agency, allocate funds to that agency,
institute a bureaucratic procedure for giving out
grants. Examples National Science Foundation,
National Endowment for the Humanities, National
Endowment for the Arts 2. Allow tax deductions
for individual contributions to nonprofit
organizations. This is a form of highly
decentralized participatory government spending
the people directly decide how to allocate public
funds. This is the way government spends
billions of dollars a year on religion tax
expenditures for church donations (in addition to
churches not paying taxes).
28
II. THE LOGIC OF INCOME TAXES
CHARITABLE DONATIONS Two ways the government can
allocate money to various kinds of nonprofit
activity in the public interest 1. Set up a
government agency, allocate funds to that agency,
institute a bureaucratic procedure for giving out
grants. Examples National Science Foundation,
National Endowment for the Humanities, National
Endowment for the Arts 2. Allow tax deductions
for individual contributions to nonprofit
organizations. This is a form of highly
decentralized participatory government spending
the people directly decide how to allocate public
funds. This is the way government spends
billions of dollars a year on religion tax
expenditures for church donations (in addition to
churches not paying taxes).
29
II. THE LOGIC OF INCOME TAXES
THE PROBLEM WITH CHARITABLE DONATIONS The richer
you are the more you are in a position to vote
for government spending on things you like.
Alternative Non-refundable tax credit
targeted for specific purposes everyone gets the
same amount to allocate to non-profit purposes in
civil society.
30
II. THE LOGIC OF INCOME TAXES
THE PROBLEM WITH CHARITABLE DONATIONS The richer
you are the more you are in a position to vote
for government spending on things you like.
Alternative Non-refundable tax credit
targeted for specific purposes everyone gets the
same amount to allocate to non-profit purposes in
civil society.
31
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 3. Deductions that reduce the fairness
    of taxation the problem of loopholes
  • Examples
  • Home mortgage interest deductions A rich person
    with a million dollar mortgage on an expensive
    house and a 10,000/month interest and a marginal
    tax rate of 35, saves 3,500 a month, or
    42,000/year. Working class person who buys a
    home with a 100,000 mortgage with a 1,000/month
    interest payment and only a 15 marginal tax
    rate, saves 150/month, or 1800/year. The rich
    persons house costs ten times more, but the
    subsidy is over 23 times more.
  • Corporations can count as business expenses all
    sorts of things which are disguised forms of
    consumption for executives company cars, private
    corporate jets, corporate meetings in Hawaii
    resorts

32
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 3. Deductions that reduce the fairness
    of taxation the problem of loopholes
  • Examples
  • Home mortgage interest deductions A rich person
    with a million dollar mortgage on an expensive
    house and a 10,000/month interest and a marginal
    tax rate of 35, saves 3,500 a month, or
    42,000/year. Working class person who buys a
    home with a 100,000 mortgage with a 1,000/month
    interest payment and only a 15 marginal tax
    rate, saves 150/month, or 1800/year. The rich
    persons house costs ten times more, but the
    subsidy is over 23 times more.
  • Corporations can count as business expenses all
    sorts of things which are disguised forms of
    consumption for executives company cars, private
    corporate jets, corporate meetings in Hawaii
    resorts

33
II. THE LOGIC OF INCOME TAXES
  • 3. Tax System Complexity
  • Problem 3. Deductions that reduce the fairness
    of taxation the problem of loopholes
  • Examples
  • Home mortgage interest deductions A rich person
    with a million dollar mortgage on an expensive
    house and a 10,000/month interest and a marginal
    tax rate of 35, saves 3,500 a month, or
    42,000/year. Working class person who buys a
    home with a 100,000 mortgage with a 1,000/month
    interest payment and only a 15 marginal tax
    rate, saves 150/month, or 1800/year. The rich
    persons house costs ten times more, but the
    subsidy is over 23 times more.
  • Corporations can count as business expenses all
    sorts of things which are disguised forms of
    consumption for executives company cars, private
    corporate jets, corporate meetings in Hawaii
    resorts

34
III. Myths Realities about taxes in the US
35
III. MYTHS REALITIES OF TAXES
1. Are taxes high in the US? (2010 data)
Total tax revenue as percentage of gross domestic product, 2010 Total tax revenue as percentage of gross domestic product, 2010 Total tax revenue as percentage of gross domestic product, 2010 Total tax revenue as percentage of gross domestic product, 2010 Total tax revenue as percentage of gross domestic product, 2010
Denmark  47.6 Spain  32.3
Sweden 45.5 Poland 31.7
Belgium 43.5 New Zealand 31.5
Italy 42.9 Portugal 31.3
Norway 42.9 Canada 31.0
France  42.9 Greece   30.9
Finland 42.5 Switzerland 28.1
Netherlands 38.7 Japan 27.6
Hungary 37.9 Turkey 25.7
Slovenia 37.5 Australia 25.6
Luxembourg 37.1 Korea 25.1
Germany  36.1 United States 24.8
Iceland 35.2 Chile 19.6
United Kingdom 34.9 Mexico 18.8
Israel 32.4 OECD-Total 33.8
36
III. MYTHS REALITIES OF TAXES
2. Are taxes fair in the US?
State Local taxes as of family income
37
IV. The Attack on the Affirmative State
38
III. THE ATTACK ON THE AFFIRMATIVE STATE
  • Definition of the Affirmative State
  • A state that provides a wide range of public
    goods and plays active role in solving social
    problems and advancing public purposes.
  • Examples of affirmative state activities
  • Education K-12, higher education, life-long
    learning, skill retraining
  • Building infrastructure like roads, sewers, high
    speed rail
  • Providing health care and preventive health
  • Proving eldercare and daycare for preschool
    children
  • Public safety
  • Subsidies for the arts and recreation
  • Regulations of pollution, health and safety in
    the workplace food quality and product safety
    truthful advertising.

39
III. THE ATTACK ON THE AFFIRMATIVE STATE
  • Definition of the Affirmative State
  • A state that provides a wide range of public
    goods and plays active role in solving social
    problems and advancing public purposes.
  • Examples of affirmative state activities
  • Education K-12, higher education, life-long
    learning, skill retraining
  • Building infrastructure like roads, sewers, high
    speed rail
  • Providing health care and preventive health
  • Proving eldercare and daycare for preschool
    children
  • Public safety
  • Subsidies for the arts and recreation
  • Regulations of pollution, health and safety in
    the workplace food quality and product safety
    truthful advertising.

40
III. THE ATTACK ON THE AFFIRMATIVE STATE
2. Core defenses of the Affirmative State (1).
Democracy as a value the issue here is the
appropriate scope of state activity for a robust
democratic society (2). Expansive public goods
and economic regulation are necessary for the
values of efficiency, prosperity, and
fairness. (3). The value of freedom understood
as positive freedom also requires an
affirmative state.
41
III. THE ATTACK ON THE AFFIRMATIVE STATE
2. Core defenses of the Affirmative State (1).
Democracy as a value the issue here is the
appropriate scope of state activity for a robust
democratic society (2). Expansive public goods
and economic regulation are necessary for the
values of efficiency, prosperity, and
fairness. (3). The value of freedom understood
as positive freedom also requires an
affirmative state.
42
III. THE ATTACK ON THE AFFIRMATIVE STATE
2. Core defenses of the Affirmative State (1).
Democracy as a value the issue here is the
appropriate scope of state activity for a robust
democratic society (2). Expansive public goods
and economic regulation are necessary for the
values of efficiency, prosperity, and
fairness. (3). The value of freedom understood
as positive freedom also requires an
affirmative state.
43
III. THE ATTACK ON THE AFFIRMATIVE STATE
2. Core defenses of the Affirmative State (1).
Democracy as a value the issue here is the
appropriate scope of state activity for a robust
democratic society (2). Expansive public goods
and economic regulation are necessary for the
values of efficiency, prosperity, and
fairness. (3). The value of freedom understood
as positive freedom also requires an
affirmative state.
44
III. THE ATTACK ON THE AFFIRMATIVE STATE
  • 3. Three-pronged attack on the Affirmative State
  • Attack on the legitimacy of Taxation
  • Constant reiteration of the idea that taxation
    is oppressive, that the government is taking away
    your money.
  • (2) Attack on the intentions of Government
  • Big Government is oppressive it wants to
    dominate, regulate and control your lives for the
    benefit of bureaucrats politicians and
    bureaucrats are corrupt.
  • (3) Attack on the competence of government
  • Big Government is filled with red tape,
    incompetence, stupid regulations that generate
    great inefficiencies.

45
III. THE ATTACK ON THE AFFIRMATIVE STATE
  • 3. Three-pronged attack on the Affirmative State
  • Attack on the legitimacy of Taxation
  • Constant reiteration of the idea that taxation
    is oppressive, that the government is taking away
    your money.
  • (2) Attack on the intentions of Government
  • Big Government is oppressive it wants to
    dominate, regulate and control your lives for the
    benefit of bureaucrats politicians and
    bureaucrats are corrupt.
  • (3) Attack on the competence of government
  • Big Government is filled with red tape,
    incompetence, stupid regulations that generate
    great inefficiencies.

46
III. THE ATTACK ON THE AFFIRMATIVE STATE
  • 3. Three-pronged attack on the Affirmative State
  • Attack on the legitimacy of Taxation
  • Constant reiteration of the idea that taxation
    is oppressive, that the government is taking away
    your money.
  • (2) Attack on the intentions of Government
  • Big Government is oppressive it wants to
    dominate, regulate and control your lives for the
    benefit of bureaucrats politicians and
    bureaucrats are corrupt.
  • (3) Attack on the competence of government
  • Big Government is filled with red tape,
    incompetence, stupid regulations that generate
    great inefficiencies.

47
III. THE ATTACK ON THE AFFIRMATIVE STATE
  • 4. Four types of anti-Affirmative State
    transformations
  • 1. Cutbacks of publicly funded programs
  • Less funding for higher education, therefore
    higher tuition
  • Less funding for medical research
  • Less funding for job training, public housing,
    etc.
  • 2. Deregulation
  • Weaker regulations of toxic waste
  • Weaker regulations of logging
  • Weaker regulations of product safety
  • 3. Lax enforcement
  • Fewer inspectors of health safety
  • Fewer auditors on taxes
  • Fewer food quality inspectors
  • 4. Privatization
  • Prisons
  • Military subcontractors food, mercenaries
  • Public utilities privatized

48
III. THE ATTACK ON THE AFFIRMATIVE STATE
  • 4. Four types of anti-Affirmative State
    transformations
  • 1. Cutbacks of publicly funded programs
  • Less funding for higher education, therefore
    higher tuition
  • Less funding for medical research
  • Less funding for job training, public housing,
    etc.
  • 2. Deregulation
  • Weaker regulations of toxic waste
  • Weaker regulations of logging
  • Weaker regulations of product safety
  • 3. Lax enforcement
  • Fewer inspectors of health safety
  • Fewer auditors on taxes
  • Fewer food quality inspectors
  • 4. Privatization
  • Prisons
  • Military subcontractors food, mercenaries
  • Public utilities privatized

49
III. THE ATTACK ON THE AFFIRMATIVE STATE
  • 4. Four types of anti-Affirmative State
    transformations
  • 1. Cutbacks of publicly funded programs
  • Less funding for higher education, therefore
    higher tuition
  • Less funding for medical research
  • Less funding for job training, public housing,
    etc.
  • 2. Deregulation
  • Weaker regulations of toxic waste
  • Weaker regulations of logging
  • Weaker regulations of product safety
  • 3. Lax enforcement
  • Fewer inspectors of health safety
  • Fewer auditors on taxes
  • Fewer food quality inspectors
  • 4. Privatization
  • Prisons
  • Military subcontractors food, mercenaries
  • Public utilities privatized

50
III. THE ATTACK ON THE AFFIRMATIVE STATE
  • 4. Four types of anti-Affirmative State
    transformations
  • 1. Cutbacks of publicly funded programs
  • Less funding for higher education, therefore
    higher tuition
  • Less funding for medical research
  • Less funding for job training, public housing,
    etc.
  • 2. Deregulation
  • Weaker regulations of toxic waste
  • Weaker regulations of logging
  • Weaker regulations of product safety
  • 3. Lax enforcement
  • Fewer inspectors of health safety
  • Fewer auditors on taxes
  • Fewer food quality inspectors
  • 4. Privatization
  • Prisons
  • Military subcontractors food, mercenaries
  • Public utilities privatized

51
III. THE ATTACK ON THE AFFIRMATIVE STATE
  • 4. Four types of anti-Affirmative State
    transformations
  • 1. Cutbacks of publicly funded programs
  • Less funding for higher education, therefore
    higher tuition
  • Less funding for medical research
  • Less funding for job training, public housing,
    etc.
  • 2. Deregulation
  • Weaker regulations of toxic waste
  • Weaker regulations of logging
  • Weaker regulations of product safety
  • 3. Lax enforcement
  • Fewer inspectors of health safety
  • Fewer auditors on taxes
  • Fewer food quality inspectors
  • 4. Privatization
  • Prisons
  • Military subcontractors food, mercenaries,
    detention
  • Public utilities privatized
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