PA Unit VII Discussion Board Question

PA 5305, Public Finance and Budgeting 1

Course Learning Outcomes for Unit VII Upon completion of this unit, students should be able to:

5. Evaluate a model budget. 5.1 Analyze taxation impact on budget allocations. 5.2 Determine the internal and external challenges of public services and goods.

8. Apply practical methods to reconstructing finance and budgeting techniques.

8.1 Identify financial policy of a municipal stabilization fund.

Reading Assignment Chapter 14: Taxation of Personal Income in the United States Chapter 15: Taxation of Corporate Income

Unit Lesson The United States tax code has become unfathomably complex (Glastris, 2011). The federal tax code that impacted most Americans on April 15, 2015, was 74,608 pages long. “That is 187 times longer than the code was a century ago” (Russell, 2015a, para. 2). Tax reform can be viewed as simplifying the tax code through extending the tax base, which can be done by eliminating or lowering exemptions and deductions. Reform, experts suggest, should simultaneously reduce marginal tax rates (MTR) while creating a more progressive tax system (Common ground on tax, 2015). Although simplicity is the goal, some argue that it leads to unfair and/or unreasonable outcomes (Russell, 2015b). Many presidents have historically had success in shaping tax policy. A review of tax reform efforts can aid us in understanding the evolution of the United States tax code. Experts affirm that efforts to account for how the distribution and allocation from income tax impacts public budgets should be a central focus of government officials (Galper, Rueben, Auxier, & Eng, 2014). The 1981 Economic Recovery Tax Act cut marginal income tax rates significantly for all taxpayers from 70% to 50% of top tier earnings and from 14% to 11% for lower tier earnings (Silliman, 2008). Later in 1986, the income tax system was overhauled. Personal income tax rates and brackets were sharply reduced, and the elimination of many deductions, exclusions, and exemptions occurred (Hyman, 2014). Central tenants of the 1993 Deficit Reduction Act proposed an increase in gasoline taxes, an increase in income tax on wealthier Social Security recipients, and a marginal tax rate increase on upper earnings (Silliman, 2008). The 1997 Taxpayer Relief Act offered reductions such as middle-income credits for families with children as well as incentives for home investments (Silliman, 2008). Additionally, credits for college tuition expenses were approved. For example, the Hope tax credit was implemented. This credit was allowed to be applied to the payment of the first two years of college tuition and related expenses (Pirrone & Silliman, 2014). A second college credit included the Lifetime Learning tax credit, which allowed students to claim up to

UNIT VII STUDY GUIDE

Tax Reform

PA 5305, Public Finance and Budgeting 2

UNIT x STUDY GUIDE

Title

$2,000 for qualified education expenses (Pirrone & Silliman, 2014). In 2001, the Economic Growth and Tax Relief Reconciliation Act implemented a $1.3 trillion tax cut, including the reduction in what many referred to as the marriage penalty tax policy (Silliman, 2008). Approved in 2003, the Jobs, Growth, Tax Relief, and Reconciliation Act was designed to lower rates pertaining to capital gains and dividends (Silliman, 2008). Additionally, the act encouraged business investment. Similarly, the 2009 American Recovery Reinvestment economic policy encouraged spending, home and vehicle ownership, and jump started business sectors of the economy (Hyman, 2014). These and other basic tax rate reductions were set to expire at the end of 2010 (Hyman, 2014). However, because of the recession of 2007-2010, Congress opted to extend the tax cuts through the end of 2012. Due to the slowly recovering and

fragile economy, Congress enacted the American Taxpayer Relief Act in the latter part of 2012. This new legislation prevented a considerable tax rate hike for American citizens (Hyman, 2014). As a result, many local governments reevaluated their budgetary stabilization funds. Tax reform can affect the distribution of the tax burden (Hyman, 2014). Due to the complicated nature of the tax code, the income tax can lead to efficiency loss. Therefore, some tax reform efforts can trigger an additional burden on the economy. Taxpayers file federal and state income tax returns indicating income earned (Hyman, 2014). It may surprise many to know that although all income is required to be reported, not all income is taxable. Universally, taxable income represents earnings subject to income tax after allowable deductions and exemptions have been applied. Taxpayers must calculate their taxable income beginning with totaling gross earnings, which represent all income received including wages, salaries, interest income, dividends, rental income, profits, and unemployment compensation. Second, subtract allowable adjustments to arrive at the adjusted gross income. Third, subtract personal exemptions, which are a predetermined, set amount by the government. Personal exemption varies with the number of dependents. Fourth, subtract the standard deduction or itemized deductions, which yield taxable income. Other steps in completing tax forms include analyzing the tax liability. This is a specific tax rate that applies to the base on the tax bracket and the filing status. Filing statuses, according to Hyman (2014), are single, couples who are married filing jointly, couples who are married filing separately, and or heads of individual households. Additionally, tax credits could be available based on the gross income, such as the Earned Income Tax Credit (EITC). The EITC is a credit from the IRS to workers with dependent children. The EITC offsets payroll tax on wages for many low-income workers. Not only is income from individuals taxed, but revenue earned by businesses or corporations is also subject to taxation. However, sole owners of businesses file a tax form referred to as Schedule C. The income of business structures such as sole proprietorships and partnerships is treated as personal income to the owners of the business. The level of taxation of corporations influences where they locate. Countries with lower tax rates attract global businesses. Domestically and internationally, the United States’ economy plays a significant role in business development (Hyman, 2014). Many are familiar with the GM and Chrysler government bailouts. Some suggest that corporate tax reform will generate budget revenue, rather than more bailouts (Minter, 2014). For example, some argue that refurbishing the corporate tax code is the solution to generating a wider tax base (Desai, 2012). An interesting concept to note is a stockholder’s income resulting from dividends is subjected to double taxation (Hyman, 2014). Business profits can be determined by subtracting costs from receipts for a specified time frame, typically one year.

Photo of a master sergeant receiving his master’s degree (Hale, 2012)

PA 5305, Public Finance and Budgeting 3

UNIT x STUDY GUIDE

Title

Tax preferences, options, or loopholes are available in the forms of exemptions, tax credits, exclusions, and deductions (Hyman, 2014). These options are justified through a general consensus that administrative tasks for certain taxes are not feasible. Justification for these options can be established because first, it is collectively accepted that the aforementioned options result in improving equity amongst taxpayers as well as stimulate private expenditures. Second, the result aids government in generating external benefits to the public (Hyman, 2014). For example, Hyman (2014) suggests that personal exemption amounts increase simultaneously with dependents. Therefore, most citizens, if not all, agree with the idea of providing tax credits for dependent children. Similarly, medical expenses can arise from a casualty or loss of wellbeing. Individuals that fall into this category are viewed as being less capable to pay (Hyman, 2014). Additionally, tax preferences can be justified to promote goodwill activities such as charitable donations and endeavors that produce affirmative externalities (Hyman, 2014). Furthermore, they act as proxies for

corrective subsidies, thereby helping to achieve efficiency (Hyman, 2014). For example, a business can apply for the Work Opportunity Tax Credit if it hires military veterans and active reservists. The Tax Increase Prevention Act of 2014 also includes the following tax credits and deductions for individuals and businesses: Native American employment credit and accelerated depreciation on Native American reservations, biodiesel and renewable diesel tax credits, energy tax credits and deductions, clothing donations to Goodwill, and monetary donations to charities (Battersby, 2015). Exclusions for taxable purposes can include income fringe benefits, in-kind services, capital gains, rental homes, interest on allowable bonds, and dividends (Hyman, 2014). However, tax expenditures can cause losses in efficiency and reductions in revenue collection. For example, Goodwill donations, legal itemized deductions, adjusted gross income, property taxes, and approved medical

expenses are commonly known as miscellaneous deductions (Hyman, 2014). Many experts view the current tax code as outdated, unfair, and inefficient (Glastris, 2011). However, income tax revenue will likely grow as a share of the economy (Saving & Viard, 2015). Ultimately, this growth will continue to exacerbate the need for tax code reform, hence promoting sustainability and fiscal growth.

References

Battersby, M. E. (2015). Tax increase prevention. Pit & Quarry, 107(8), 56-58. Common ground on tax reform. (2015). Business Week, (4413), 12. Desai, M. A. (2012). A better way to tax U.S. businesses. Harvard Business Review, 90(7/8), 134-139. Galper, H., Rueben, K., Auxier, R., & Eng, A. (2014). Municipal debt: What does it buy and who benefits?.

National Tax Journal, 67(4), 901-924. Glastris, P. (2011). Clean up as you cook. Washington Monthly, 43(3), 3. Hale. J. (2012). JLBM’s first combined college graduation DVIDS519916 [Photograph]. Retrieved from

https://commons.wikimedia.org/wiki/File:JBLM%27s_first_combined_college_graduation_DVIDS5199 16.jpg

Photo of a Goodwill store (Henderson, 2010)

PA 5305, Public Finance and Budgeting 4

UNIT x STUDY GUIDE

Title

Henderson, J. (2010, April 1). Goodwill Tapscott jeh [Photograph]. Retrieved from

https://commons.wikimedia.org/wiki/File:Goodwill_Tapscott_jeh.JPG Hyman, D. N. (2014). Public finance: Contemporary application of theory to policy (11th ed.). Stamford, CT:

Cengage Learning Minter, S. (2014). The auto bailout and US manufacturing: A house still divided. Industry Week, 263(6), 8. Pirrone, M. M., & Silliman, B. R. (2014). The impact of college tuition tax credits since 1998. Journal of

Business & Accounting, 5(1), 106-122. Russell, J. (2015a, April 15). Look at how many pages are in the federal tax code. Retrieved from

http://www.washingtonexaminer.com/look-at-how-many-pages-are-in-the-federal-tax- code/article/2563032

Russell, R. (2015b). Keeping the idea of reform alive. Accounting Today, 29(5), 14-16. Saving, J. L., & Viard, A. (2015). Are income taxes destined to rise? Fiscal imbalance and the future tax policy

in the United States. National Tax Journal, 68(2), 235-250. Silliman, B. (2008). Will the next president reform the tax code? CPA Journal, 78(11), 22-27.