This assignment is the first of a three-part process. Parts II and III will be completed in Units VII and VIII respectively.
PUA 5305, Public Finance and Budgeting 1 Cou rse Learning Outcomes for Unit VI Upon completion of this unit, students should be able to: 2. Discuss the ethical implications on the budget process at the federal, state, and local levels. 2.1 Assess ethical practices of funds appropriations. 5. Evaluate a model budget. 5.1 Analyze taxation impact on budgets. 5.2 Assess the distribution of income on budgets. 8. Apply practical methods to reconstructing finance and budgeting techniques. 8.1 Identify financial policy internal/external opportunities and challenges. Re quired Unit Resources Chapter 11 : Taxation, Prices, Efficiency, and the Distribution of Income Chapter 13 : The Theory of Income Taxation In order to access the following resource, click the link below. Spivak, L. E. (Producer), Cox. R. (Director), & Lockhart, R. (Director). (2007). Ronald Reagan on state and Federal income taxes [Segment 3 of 9 ) [Video file] . Retrieved from https://libraryresources.columbiasouthern.edu/login?auth=CAS&url=https://fod.infobase.com /PortalPl aylists.aspx?wID=273866&xtid=39075&loid=55218 The transcript for this video can be found by clicking the “Transcript” tab to the right of the video in the Films on Demand database. UNIT VI STUDY GUIDE Taxation PUA 5305, Public Finance and Budgeting 2 UNIT x STUDY GUIDE Title Unit Lesson Which groups of Americans earn the most income? Which groups of Americans pay the most taxes? Are taxes fair? Do taxes matter? These questions have fueled tax debates for decades. Distributing the tax burden fairly is a major policy issue. Two center pieces of the 2012 Presid ential election debates were (1) Bush ’s tax cuts that lowered all federal income tax rates and (2) Mitt Rom ney stating that there are 47% of Americans who pay no income tax (Haidt, 2012). Both of these centerpieces were front burner issues. Opponents of Bush’s tax cuts argued that higher -income Americans benefited from the policy . Proponents of Bush’s tax cuts argued that lower -income Americans were not harmed by policies . Ideas and perception regarding equitable tax treatment influence preferenc es for redistributive policies. As indicated previously in the course, government budgets are financed through the co llection of taxes. Taxation impacts government’s efficiency and income distribution (Hyman, 2014), Therefore, t axes influence the budget decision -making process of gov ernment and individual citizens (Hyman 2014). Characteristics of taxes can include simpli city, eff iciency, certainty, and equity (Cheney, 2012). The c ollection of taxes allows government to achieve short and long – term objectives. Therefore, generating sufficient revenue is necessary to fund gove rnment’s expenditures. Hence , the tax structure b ecomes very important. Major tax structures , as indicate d previously, are progressive, regressive, and proportional. These structures are applied to personal earnings, purchases, property values, and business profits. The conventional thought is that taxes must be utilized for the common defense and general welfare of citizens. Other reasons for taxes influencing government’s decision -making include encouraging or discouraging certain business practices . Public leaders can implement financial policies such as tax breaks or credits to encourage business behavior to stimulate research in a developing fi eld such as renewable energy. For example, the Obama administration implemented a federal incentive for wind and solar power projects ( Lobsenz, 2009). The incentive takes the form of a tax depreciation or credit based on investment or production. The Solar Investment Tax Credit (ITC) encourages purchasing and installing solar systems in homes. The benefit includes a tax credit that reduce s personal income taxe s. Likewise, p ublic leaders can choose to create financial policies that discourage a business activity through levying higher taxes to make it less appealing. For example, an accepted strategy to lower the use of nicotine products i s the application of a tobacco tax. Research indicates that increasing price and taxes of tobacco products reduce s the percentages of smokers among males, Blacks, Hispanics, and lower -income smokers; reduces the negative birth defects of newborns as well a s reduces other health problems; minimizes the likelihood of children becoming smokers; and reduces second hand smoke exposure among nonsmokers (Bowser & Canning, 2013). Photo of Navy personnel watching a presidential debate (Barnes, 2012) PUA 5305, Public Finance and Budgeting 3 UNIT x STUDY GUIDE Title Taxation influen ce s citizens’ decision s regarding consumption, which result s from an individual action or behavior (Hyman, 2014). Therefore, it is plausible to say that taxes carry excess burdens for most. Many citizens substitute one action for another as a response to taxes. For example, citizens’ response s to gasoline prices and taxes resulted in less travel, delaying purchases o f new cars, and increasing purchases of more fuel efficient vehicles (Beresteanu & Li, 2011). The U. S. Government supports consumer purchase s of hybrid vehicles in the form of federal income tax de du ction s. Utilizing policy tools such as tax deduction empo wers officials to maintain control over externalities that exist with vehicle use such as pollution. Taxes can cause a loss in efficiency through externalities (Hyman, 2014). Many argue that taxes are growth -reducing. Citizens’ decisions regarding taxes a re fueled by the perception of fairness and the idea that certain conditions will yield a better result for the required amount of effort or money . For example, citizens may decide to relocate from one geographical area to another based on tax -rate dispari ties. Likewise, businesses may opt to discontinue operations in areas of tax disparities because it will impact sustainability. Improving the perception of fair taxation includes political leaders utilizing revenues to deliver goods and services, lowering tax rates, encouraging investment, and increasing employment and wages. Lowering taxes allows citizens to keep their earnings and spend the money on goods. Some may be familiar with the Buffett rule proposal endorsed by President Obama. W arren Buffet, a m ulti – billionaire, stated that he pays a lower tax rate than his secretary. The Buffet rule seeks to increase federal tax rates on the wealthiest citizens (Cheney, 2012). Furthermore, supporters of the rule emphasize that citizens earning $1 million yearly should not pay a lesser portion of their earnings in taxes than those in the middle -class bracket (Kenny, 2012). Proponents of the tax increase suggest those earning higher incomes can afford to pay more. Their mantra was supported with the idea that this rule will achieve more fairness in the tax code. Opponents argue that the rule would not solve budget deficits. Additionally, opponents argue that the tax would not improve public goods and services. The tax rate for middle class Americans, according to th e Obama Administration, has basically remained stagnant. Examples of existing tax disparities, such as the one between Warren Buffet and his secretary, erode citizens’ trust. More specifically, gross tax disparities leave citizens frustrated because these do not reflect America’s values of fairness. The lump -sum tax is considered an alternative. This is a non -fluctuating tax (Hyman, 2014). Additionally, lump -sum taxes would be the same for all citizens. Hyman suggests this tax is very efficient because it increases a citizen’s desire to work. Others suggest lump -sum taxes stimulate efficiency because they reduce tax avoidance. For example, let’s consider the head tax. Similar to the lump -sum tax, a head tax requires citizens to pay a set amount yearly. Howe ver, this alter native is limited because of its fixed nature. The lump – sum approach does not account for ta xpayer modifications such as the capacity to make payments, increases or decreases in wages, consumption behaviors , and pricing . A price distorting tax alters the price of goods, which results in an excess tax burden (Hyman, 2014). Citizens subjected to price distortion tax, rather than a lump -sum tax, experience a loss of well -being (Hyman, 2014). An important concept to make note of is t he shifting of a tax . This concept transfers the burden of paying taxes from those legally liable to others. The dichotomy of this concept is illustrated in the forward and backward shifting approach. Forward shifting asserts that the seller is liable for the tax resu lting from an increase in price. However, the burden of paying taxes is shifted from the seller to the buyer. Backward shifting asserts that the buyer is liable for the tax resulting from a decrease in price. However, the burden of paying taxes is shifted from the buyer to the seller. Graphic depicting gas prices in September 2014 (US DOE EIA, 2015) PUA 5305, Public Finance and Budgeting 4 UNIT x STUDY GUIDE Title Taxation can have negative impacts on savings. Oftentimes, income that is saved and invested is penalized by the tax code (Hyman, 2014). Unlike the lump -sum tax, fluctuating tax rates on personal income reduce the desire to w ork (Hyman, 2014). Taxation on personal income, according to Hyman (2014), increases the likelihood of individuals to shift away from work. In contrast, others argue that modifying tax rates does not have a substantial impact on citizens’ decisions regardi ng how much to work (Huang, 2012). Depending on the investment, savings can be subjected to as many as four layers of tax. Saved income is taxed more than consumed income. Proponents of lower taxes argue that tax policies can negatively impact savings and investments. Counter arguments, such as the Buffet rule, suggest tax increases will have little effect on savings and investing (Huang, 2012). Although individuals have contrasting views regarding the impact of taxation, a shared perspective suggests that changes to the tax code are typically rare. Universally, taxation is accepted across the board from most national and sub -national governments. Income and property taxes generate the most operational revenues. However, debates regarding the approach to taxation continue to evolve. References Barnes, D. (2012, October 4). Flickr – Official U.S. Navy imagery – Deployed sailors watch a presidential debate [Photograph]. Retrieved from https://commons.wikimedia.org/wiki/File:Flickr_ – _Official_U.S._Navy_Imagery_ -_Deployed_Sail ors_watch_a_presidential_debate .jpg Beresteanu, A. & Li, S. (2011). Gasoline prices, government support, and the demand for hybrid vehicles in the United States. International Economic Review, 52 (1), 161 -182. doi:10.1111/j.1468 – 2354.2010.00623.x Bowser, D. & Canning, D. (2013). The effect of health improvements due to tobacco control on earnings in the United States. Applied Economics . 45 (36), 5021 -5030. doi:10.1080/00036846.2013.815310 Cheney, G. A. (2012). W hat is a ‘fair’ tax system. Financial Executive , 28 -31. Haidt, J. (2012). The new culture war over fairness. Time , 180 (17), 25. Huang, C. (2012, April 24). Recent studies find raining taxes on high -income households would not harm the economy. Retrieved from http://www.cbpp.org/research/recent -studies -find -raising -taxes -on -high – income -households -would -not -harm -the -economy Hyman, D. N. (2014). Public Finance: A contemporary application of theory to policy (11 th ed.). Stamford, CT: Cengage Learning. Kenny, C. (2012). We’re all the 1 percent. Foreign Policy , 192 , 1 -3. Lobsenz, G. (2009). Obama: Boost tax credits for clean energy manufacturing. Energy Daily , 2. US DOE EIA. (2015, January 14). US gas prices September 2014 [Graphic]. Retrieved from https://commons.wikimedia.org/wiki/File:US_gas_prices_September_2014.png