Handbook on Taxation

W.Bartley Hildreth

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351564274
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

A groundbreaking reference, this book provides a comprehensive review of tax policy from political, legal, constitutional, administrative, and economic perspectives. A collection of writings from over 45 prominent tax experts, it charts the influence of taxation on economic activity and economic behavior. Featuring over 2400 references, tables, equations, and drawings, the book describes how taxes affect individual and business behavior, shows how taxes operate as work and investment incentives, explains how tax structures impact different income groups, weighs the balanced use of sales, property, and personal income taxes, traces the influence of recent tax changes, and more.

1

Introduction

W. Bartley Hildreth

Wichita State University, Wichita, Kansas

James A. Richardson

Louisiana State University, Baton Rouge, Louisiana

In the United States, the federal, state, and local governments collected approximately $2.3 trillion in taxes in 1995, or about 31.3 percent of gross domestic product. Total taxes paid to federal, state, and local governments amounted to about $8,850 per capita. Some of these taxes, such as gasoline taxes, are connected to the construction and maintenance of roads used by the persons paying the tax; other taxes, such as the personal income tax, are used to pay for general public services, which are not necessarily connected to the public services received by the person paying the tax; and still other taxes, such as the payroll tax, are based on implicit social contracts in which a younger generation will support an older generation in retirement with the understanding that as the younger generation becomes older another younger generation will support it.

Federal, state, and local tax receipts are large, any way you count them. Taxes fund major public programs from roads and highways to education to insurance benefits for the elderly for both medical care and retirement. Economic behavior can be and is affected by the tax policy of federal, state, and/or local governments. No one has found a tax that people like to pay, hence taxes are legal mandates. Taxes are definitely necessary. Public services are demanded by private citizens. Public activities are essential to the well-being of a civilized society—law and order, enforcement of contracts, maintenance of the national security, and other such traditional needs for government. As the economy has grown and the population has expanded, government services become more essential in creating a pleasant environment in which everyone can work and live together. Taxes are a fact of life. Taxes matter.

We fuss about taxes; we suggest ways of making the administration of taxes more acceptable to the average citizen, such as the reform of the Internal Revenue Service at the federal level; we debate different ways of taxing ourselves; however, when it is all said and done, the fact still remains: federal, state, and local governments will still collect an amount of taxes that will equal over 30 percent of the nation’s gross domestic product.

The Handbook on Taxation brings together prominent tax experts providing information and analysis on significant tax issues relating to state and local governments, the federal government, and international tax questions. The focus is mainly on the tax itself, not what the tax is funding. The focus is not just on the ability of the tax to raise funds for public programs—although that is unquestionably the primary function of most taxes—but also on the effects of taxes on individual and business behavior—that is, the side effects of any tax on the willingness to work or invest, the willingness of a firm to locate within a particular locality, the efforts and attempts by individuals and businesses to circumvent the tax, and the impact of a tax structure on different income groups within a society. The purpose of the handbook is to locate information about state and local tax issues, federal tax issues, and international tax comparisons in one place. These chapters have significant references so that additional research can be accomplished fairly easily if a person wants to investigate a specific topic more completely. The handbook offers at the very least a starting point on almost any major research topic relating to taxation, and in many cases it may offer a person everything that is required for his or her needs.

The handbook begins with a discussion of the legal and constitutional basis of taxation; the underlying economic principles on which taxes should be based, including the analysis of a balanced tax system for state and local governments with approximately an even use of sales, property, and personal income taxes; and the political implications of taxation. In the end, a tax structure is a political statement about what tax structure the people in a democratic society will accept. Every economic principle that may be highlighted as the “best” method of getting the tax system to work most efficiently and equitably must be tempered by the political realities of the day.

From this perspective, a nation’s, state’s, or locality’s tax structure suggests a great deal about the community at large. The choice of taxes reveals the preferences and priorities of the citizens of the governmental unit. The yield of the tax structure at a given time connotes the level of public expenditures found acceptable to the citizens of the governmental unit, especially at the state and local levels. The yield of the tax structure over time suggests the cyclical characteristics of the national, state, or local economy. In other words, much can be said about the federal, state, or local economy by carefully and critically examining the underlying tax structure. The archeologist discovers the secrets of past civilizations by digging through ruins; economists can discover the realities of our current civilization by combing the tax codes. The handbook leads us through the major issues we should be looking for as we dig through the federal, state, and local tax structures.

The handbook next focuses on state and local taxation, with the emphasis on the major sources of state and local tax receipts, including the sales tax, property taxes, and the personal income tax. These three taxes form the foundation for the funding of most state and local governmental programs. Second, the focus is on business taxation, a major issue in state and local governments since state and local governments have as a major concern the enhancement of economic development. Such concerns are heightened by the fact that resources are mobile. Taxing a mobile resource may be a short-term pleasure, but a long-term disaster. Third, other sources of state and local revenues are discussed; namely, mineral revenues, a major source for some state governments, and gambling revenues, which are quickly becoming the nation’s methods of taxation that nobody seems to mind.

Finally, state and local tax policy is addressed. Major state tax reforms are discussed; the use of taxes to accomplish certain objectives such as environmental protection and economic development is analyzed; and finally, the application of state and local policy to public school finance is discussed. Public education is a major component of state and local budgets, so it was determined that the analysis of the application of tax policy to this significant function of state and local government should be separately examined.

The federal government consumes more of the nation’s income than state and local governments combined. In that sense, federal taxes are likely to be more onerous and more controversial. An ongoing debate regarding the method of taxation, the structure of taxation, and ultimately the purpose of taxation continues. In 1981 the purpose of major tax legislation was simply tax reduction, the lowering of marginal tax rates, and a decline in the growth rate of expected tax collections from inflationary trends; in 1986 the purpose of federal tax reform was tax simplification and base broadening; in 1993, the purpose of federal tax changes was to raise revenues for the purpose of reducing the federal deficit by making the well-to-do pay a little bit more; and in 1997 the purpose of federal tax “reform” was targeting certain types of behavior such as saving and education and encouraging this behavior via tax breaks.

The discussion of federal tax policy is initiated with a chapter of reflections on the development of federal tax policy by Professor Emeritus George Break of the University of California at Berkeley and then an overview of the U.S. tax system, a chapter reprinted from a splendid book entitled Taxing Ourselves by Professors Joel Slemrod and Jon Bakija. The economic effects of recent changes in federal tax policy on microeconomic behavior, allocation of resources, and overall efficiency are discussed in one chapter, followed by an analysis of the impact of the 1986 tax changes on labor, investment, and savings. The use of federal tax policy as an incentive for motivating certain types of spending and behavior is analyzed, as well as the implications of replacing the federal income tax with a federal consumption tax. All of these chapters focus on the implications of the federal tax structure on individual and business reaction and behavior. The federal income tax is so dominant in the current economy that the income tax, both personal and corporate, affects the behavior of private individuals and businesses, something that in principle economists typically want a tax system to avoid. Any major change in the federal income tax code will also have an impact on the economic behavior of individuals and businesses. Part of the discussion of any tax structure is exactly what are you trying to accomplish with the tax code other than merely raising funds to support public programs. Federal tax policy also affects the distribution of wealth and income, and this dimension of the federal tax code is also discussed.

The use of the payroll tax to pay for pensions and health care for the elderly is discussed as well, as is the integration of the corporate income tax with the personal income tax. These are two very important issues, since many proposals to change the federal income tax dramatically do not include altering the payroll tax system, but almost all tax reform proposals do suggest the integration of the corporate income tax with the personal income tax, since in the end corporate taxes are paid by individual taxpayers. In addition, the payroll tax is a major source of federal revenues, and in a separate debate, is a major element of the discussion of proposed changes in the funding of universal pension benefits.

A number of taxes are collected by both the federal government and state and local governments, with these taxes being excise taxes, a tax on telecommunications, and estate and gift taxes. Each of these taxes is discussed since these taxes provide special issues. For example, the tax on tobacco may be used to discourage a smoking habit as well as to raise funds for public spending, and of course, if the tax truly discourages the behavior, then it will not raise the public funds. The telecommunications tax is becoming much more complicated because of the major changes in telecommunications technology. Taxing telecommunications is especially difficult for state and local governments, given the legal and constitutional issues of interstate commerce and the economic issues dealing with the mobility of resources. Finally, estate and gift taxes make up one more element in the overall discussion of the distribution of wealth and income, especially at the federal level, while at the state and local level estate and gift taxes encounter the complications of the intergenerational transfer of property and business. Also, states minimize or even eliminate estate taxes as an economic development instrument in their efforts to attract retirement communities. Once more, the tax code is multidimensional in its purpose and use.

Taxes are over 30 percent of the gross domestic product. Taxes require administration, but no system of tax administration includes a careful audit of everyone’s tax return. Voluntary compliance is an important component of any tax system, but voluntary compliance is greatly affected by the effectiveness and fairness of the administration of the entire tax structure. The issue of compliance and administration is discussed in the handbook. In addition, government budgets are planning documents that include proposals for spending and projections for revenues. Revenue forecasting is a crucial component of the budgeting process, hence a special chapter on revenue forecasting is included in this handbook. Finally, many special tax privileges, such as not having to pay taxes on a particular business activity, are now referred to as tax expenditures. The implication is that these deviations from the general tax code are equivalent to appropriating funds for a public purpose. Tax and revenue departments are required to estimate the “tax expenditures” associated with each of these tax privileges or special tax breaks. A chapter on such tax expenditures is also included in the handbook.

The handbook concludes with international tax comparisons for European countries, east Asian countries, including Japan, Korea, Taiwan, and China, and North American countries. These tax comparisons are becoming extremely significant, given the multinational business environment. Finally, a chapter on taxation in transitional economies is included since many countries are in the process of changing from a centrally controlled economy to more of a market-oriented economy. Major changes in tax structures will be required in such economic transformations. Once more, the message of the book is that taxes matter.

2

Legal and Constitutional Foundations of Taxation

Ann J. Gellis

Indiana University, Bloomington, Indiana

I. INTRODUCTION

The power of the state to tax its citizens is inherent in the concept of sovereignty as an essential requirement for the support of the functions of government. Unless curtailed by law, this power is absolute. It is the constitution of a government to which we must turn to see if any restrictions exist on this otherwise unlimited right of state sovereignty (Cooley, 1876; Harvard Law School, 1963). The importance of the power of taxation as a stabilizing or destabilizing factor in the relationship between the government and the governed is nowhere made more clear than in our own political history of independence from Britain, in which the issue of “taxation without representation” was a rallying cry of revolt. Historians trace some of the American preference for low taxation to this initial colonial experience (Becker, 1980; Brownlee, 1996, pp. 10–21). The colonists not only suffered from the external imposition of taxes; they also had local and provincial taxes to pay. There was much debate in the pre-Revolution colonies as to the kind of taxes to impose and, of course, the level of taxation.

The principles that taxation ought to be fair, and that to be fair, the burden should be based on the person’s ability to pay, were espoused by the colonies, as they were in eighteenth century England, but these principles were not necessarily put into practice. In both England and the colonies, poll, property, and excise taxes were common methods of revenue raising (Becker, 1980, pp. 3–10; Benson, 1965). Landed interests were successful to various degrees, however, in shifting the burden of taxation to the less propertied by preferring the poll or head tax or using methods of assessment of property that did not take value into account (e.g., per-acre taxes). The New England colonies also used what were known as “faculty taxes” (or occupation taxes) to reach the income of the commercial and professional classes (Becker, 1980, p. 11). These, too, were generally set at a determined amount, independent of actual income. In instances in which value was used to measure the tax, assessments were at best uneven in application, a complaint that has continuously dogged the property tax. Tension over taxes was exacerbated after the Revolution because of the heavy debt incurred by the colonies to fight the British (Becker, 1980, pp. 219–229). Against this background, we find in the federal Constitution a number of restraints on the exercise of the power to tax that reflect both the prior experiences of the colonists with taxes and the political compromises for the establishment of a national government.

Our federal system of government rests on the constitutional theory that the individual states that form the federal government are the original sovereigns (Grad, 1970, p. 27). The powers of the national government are only those granted to it by the states. This principle of federalism is enunciated in the Tenth Amendment (U.S. Constitution, 1791): “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States, respectively, or to the people.” The federal Constitution thus is referred to as a constitution of “grant.” This is in contrast to state constitutions, in which the thrust is to restrain the otherwise unlimited and absolute powers of the states; hence, state constitutions are referred to as constitutions of “limitation” (Gillette, 1994, p. 209; Hurst, 1950, p. 241). At the bottom of the federal structure of American government are local governments. These political organizations are treated solely as creatures of the states, and enjoy no sovereignty under the federal Constitution (Grad, 1970, p. 42). For these governments, the power to tax must be found either in the state constitution or in specific state legislation. Traditionally, states have guarded carefully their power of taxation by circumscribing the power to tax of its local governments.¹

The difference in the nature of the sovereignty of the states and the federal government; the far greater involveme...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication Page
• Preface
• Table of Contents
• Contributors
• 1. Introduction
• 2. Legal and Constitutional Foundations of Taxation
• 3. Economic Principles of Taxation
• 4. Politics and Taxation
• 5. Sales Taxes
• 6. The Real Property Tax
• 7. The Personal Property Tax
• 8. Personal Income Tax
• 9. Principles of Business Taxation: How and Why Should Businesses Be Taxed?
• 10. Corporate Income and Franchise Taxes
• 11. State Severance Taxes
• 12. User Charges, Impact Fees, and Service Charges
• 13. Gaming in the United States: Taxation, Revenues, and Economic Impact
• 14. State and Local Tax Reform
• 15. Taxation and Economic Development: The State of the Economic Literature
• 16. Environmental Taxes and Fees
• 17. Tax Policy and Public School Finance
• 18. Reflections on the Development of Federal Tax Policy
• 19. An Overview of the U.S. Tax System
• 20. The Economic Effects of Comprehensive Tax Reform
• 21. Effects of Tax Reform on Labor Supply, Investment, and Saving
• 22. Federal Tax Policy: Tax Provisions as Incentives
• 23. Replacing the Federal Income Tax with a Consumption Tax
• 24. Federal Income Tax Policy: Issues of Distribution and Equity
• 25. Federal Payroll Taxes: Pensions and Health Care
• 26. The Corporate Income Tax: Impact and Incidence
• 27. Excise Taxation
• 28. Taxation of Telecommunications and Electronic Commerce
• 29. Taxation of Estates and Gifts
• 30. Tax Compliance and Administration
• 31. Revenue Forecasting and Estimation
• 32. Tax Expenditures
• 33. European Countries
• 34. Taxation in East Asian Countries: Japan, Korea, Taiwan, and China
• 35. Taxation in North America
• 36. Tax Systems in Transition Economies
• Index