During the first half of the semester we’ve often discussed the importance and cited examples of...

During the first half of the semester we’ve often discussed the importance and cited examples of “stealth tax” provisions in our US federal tax law. Briefly explain what is meant by a “stealth tax” provision, how it impacts an individual’s US federal income tax liability and cite one (1) example of stealth income tax provisions currently in our US federal tax law.

Expert Solution

Stealth tax : Meaning

Stealth taxes are a type of tax levied in such a way that it is largely unnoticed, or not recognized as a tax. Governments use stealth taxes to increase their revenue, while being inconspicuous to taxpayers.

Stealth taxes are sometimes built into the prices of products so that consumers do not see how much tax they are paying. In comparison to income taxes and property taxes, stealth taxes are smaller and less visible. Because of their lower visibility they attract significantly less attention than income or property taxes. Governments find stealth taxes easier to collect than other types of taxes because the government collects them at the point of sale and they do not depend on a taxpayer’s income level. In addition to the implementation of new taxes or the raising of existing taxes, the term stealth taxes can also refer to the removal of existing tax breaks.

When a stealth tax takes the form of a sales or excise tax, it's also considered regressive since lower-income individuals will pay a higher proportion of their disposable income in taxes than higher-income individuals.

Example of Stealth Income Tax: Tax on Social Security retirement benefits

About half of all Social Security beneficiaries owed some income taxes on their benefits in 2014, according to the Congressional Budget Office (CBO).

The higher a retiree’s income, the higher the percentage of Social Security benefits paid in taxes.

Beneficiaries with incomes below $40,000 owed less than 0.5% of their benefits in federal income taxes in 2014, according to the CBO.

Those with incomes over $100,000 owed 21% of their benefits in taxes. A taxpayer in the highest income tax bracket would pay 33% of their benefits in federal income taxes.

Note that Social Security benefits originally were tax free. Congress imposed taxes on some Social Security benefits in two stages, in 1984 and 1994, to arrive at the current law.

ekkarill92 answered 1 year ago

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