Question

What are the various types of taxes used by governments? Who are the actors that make funding decisions? How are they accountable to the public? How does the public influence this process? Why is taxing and spending so controversial?

Answer 1

The government does not have its own money. Its receipts come from individual income taxes, corporateincome taxes, estate and gift taxes, social insurance taxes and excise taxes. All U.S. government spending can be divided into three categories: mandatory spending, discretionary spending and interest on federal debt.

There are mainly two types of Taxes, direct tax and indirect tax which are governed by two different boards, Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC).

The three types of tax system 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. ... The second tax, the progressive tax, imposes a higher percentage rate of taxation on those with higher incomes.

Primarily through the supply side. High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. But tax cuts can also slow long-run economic growth by increasing deficits. The long-run effects of tax policies thus depend not only on their incentive effects but also their deficit effects.Economic activity reflects a balance between what people, businesses, and governments want to buy and what they want to sell. In the short run, demand factors loom large. In the long run, though, supply plays the primary role in determining economic potential. Our productive capacity depends on the size and skills of the workforce; the amount and quality of machines, buildings, vehicles, computers, and other physical capital that workers use; and the stock of knowledge and ideas.

To some, tax expenditures are spending items that do not belong in the tax code. To others, they are merely a way of reducing taxes, and repealing them would amount to a tax increase.

Most tax expenditures perform very much like spending programs, which means they may serve or harm the public depending on whether they serve a legitimate public purpose in the most efficient manner possible. But the identification and measurement of tax expenditures are controversial.

Subsidies and expenditures in the form of tax breaks reduce the measure of net tax revenue instead of increasing measured spending. Thus, they give the appearance of reducing government’s size. For this reason, tax subsidies have strong political appeal. In fact, tax expenditures are an alternative way for government to intervene in the economy and, like direct spending, must be financed through higher taxes or reduced spending elsewhere.

Imagine, for instance, a new government program that provides tax credits for energy production at a cost of $5 billion per year, and finances it by raising income tax rates. To pay for the energy tax credit, the government would have to raise tax rates enough to collect an additional $5 billion—no different than what it would need to do if the subsidies for energy production were provided by a US Department of Energy grant instead of by tax credits.

Here’s the conceptually tricky part: tax expenditures are defined as deviations from a baseline tax system. In the example above, it is straightforward to see the equivalence between an energy tax credit and a spending program. Often, however, the definition and estimated magnitude of tax expenditures are a matter of judgment because what belongs in the baseline tax system itself reflects the judgment of analysts.

Since the government began regular reporting of tax expenditures in the 1970s, the baseline against which tax expenditures are measured generally has been a version of a comprehensive income tax. But there have always been exceptions, often for income that is difficult to assess. For example, income often, but not always, has been counted only when realized, so that the deferral or exclusion from tax for unrealized capital gains is not counted as a tax expenditure, but some forms of deferral of receipts by business are. Also, the US Department of the Treasury, but not the congressional Joint Committee on Taxation (JCT), includes net imputed rental income from homeownership in its baseline used for estimating tax expenditures.

If the current income tax were replaced wholly or partly by a consumption tax, as some economists and political leaders favor, some provisions now classified as tax expenditures would no longer be regarded as such. For example, under a comprehensive consumption tax system, the tax base would be consumption, not income. Thus, the deferral of earnings contributed to retirement savings accounts and the exemption of income earned within those accounts would not be considered tax expenditures. Most other tax expenditures, however, including the deductibility of home mortgage interest, charitable contributions, and state and local taxes, as well as the exemption of employer contributions to health insurance plans, would still be so classified.

In other cases, estimating the size of a tax expenditure requires some judgment. For example, under an income tax, firms can recover the costs of capital investment over time with depreciation deductions that reflect the decline in the value of their assets. But what is the right measure of depreciation in an inflationary economy? For these and other items, the JCT and the Treasury use different definitions of what would be included in a normal or comprehensive income tax. Therefore their classification and measurement of some tax expenditures differ.

In addition, estimates by the Office of Management and Budget and the JCT can differ from each other depending upon when the two estimates were prepared. A special case occurred in 2018, when the JCT estimates (published in May 2018) included the effects of the 2017 Tax Cuts and Jobs Act, while the Office of Management and Budget estimates (published in February 2018, but based on Treasury estimates first released in October 2017) did not include changes from the act.