Question

Do you feel eliminating income tax and applying a consumption tax will broaden the tax base? Why, or why not? What is one thing that you have learned about public finance and budgeting that you want to make sure you carry forward into a career in public administration?

Answer 1

The only practical way to cut tax rates without increasing the deficit is by broadening the tax base – increasing the amount of economic activity subject to full taxation. Ideally, federal taxes would be levied on all consumption that occurs in the economy. In practice, significant portions of national consumption are not included in the tax base, through deductions, exclusions, and other preferential tax treatment. Broadening the tax base consists of ending tax preferences to raise revenue.

Deviations from a consumption base can be sorted into two categories: consumption that is left untaxed or taxed at a preferential rate, and consumption that is double-taxed or taxed at a higher rate. Broadening the tax base consists in removing preferential tax treatment and, by doing so, increasing tax revenue. In contrast, proposals that exacerbate disadvantageous tax treatment should not be considered base broadeners, even if they increase revenue.Deviations from a consumption base can be sorted into two categories: consumption that is left untaxed or taxed at a preferential rate, and consumption that is double-taxed or taxed at a higher rate. Broadening the tax base consists in removing preferential tax treatment and, by doing so, increasing tax revenue. In contrast, proposals that exacerbate disadvantageous tax treatment should not be considered base broadeners, even if they increase revenue.

Thus, a tax increase on capital gains and dividends would move the tax base further from the ideal, and should not be considered a base broadening measure. Similarly, proposals to lengthen depreciation schedules would place a higher burden on future consumption than present consumption, by raising taxes on the costs of producing future consumption

The cap on the Social Security payroll tax treats one class of income more favorably than other income, thus deviating from an ideal consumption base. So, eliminating the cap on the Social Security payroll tax would broaden the federal tax base and increase overall revenue.

he public budgets are different from other forms of budgets in many ways; here the voters delegate the power of spending their money to the politicians or the elected representatives. Now having understood the concept of budget in the last article,

1. Balanced Budget: As suggested by the name a balanced budget is that which has no deficit or surplus. The revenues coming are equal to the expenditures.
2. Revenue Budget: It is just the details of the revenue received by the government through taxes and other sources and the expenditure that is met through it.
3. Performance Budget: This type of budget is mostly used by the organizations and ministries involved in the developmental activities. This process of budgeting, takes into account the end result or the performance of the developmental program thus insuring cost effective and efficient planning. With the increasing developmental challenges and awareness regarding the usage of tax payer’s money, new methods of budgeting are required of which the performance based budgeting has emerged as a transparent and accountable method.

The budgets in the parliamentary kind of system similar to what exists in a country like India become a tool of political negotiations where the budgeting powers are delegated to the Finance Minister of the country.

In a single party government, the entire party shares the same views regarding the spending of the resources however; the disagreement arises when individual members may differ on the cost of the distributive policies and would want the government funds to be diverted to their respective electoral constituencies.

In a coalition government, the differing opinions are tackled through compromise and contracts approach where the coalition parties keeps the check on the budget process ensuring that it lies within the boundaries of the agreed contract. The infamous fallout between the ruling UPA and the Trinamool Congress over the Railway Budget last year is worth citing in reference to the current discussion.

In the presidential kind of system too, the executive plays a somewhat similar process. A significant change that happened in US regarding the budget process was the Budget Enforcement Act passed in 1990s under the Bush administration, which protected the budgetary parameters against later modifications once cleared in the budget summit between the president and the legislature.