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15.4 Taxation and Spending

Tax collecting is regarded as one of the oldest activities of government. In the new constitution of 1787, it was clearly provided that congress "shall have power to lay and collect taxes, duties, imposts and excises." The Sixteenth Amendment in 1915, authorized Congress "to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." Raising revenue is one of the traditional objectives of taxation, since most new tax measures aim at financing new or expanding governmental activities. However, apart from the financial objectives of taxation. Thus the protective tariff is an example of a non- financial tax, having as its aim, the protection of domestic industry against competition from goods manufactured in foreign countries at law prices, by placing a high tax on their import into the U.S.

15.4a Types of Taxes

Progressive taxes and Regressive taxes are the two main kinds of taxes. Taxes, such as the graduated income tax, which hit hardest those who are most able to pay, and hardly touch those at the bottom of the income ladder, are considered to be Progressive taxes. However taxes, such as the general sales tax which is levied against the sales of all goods, are regarded as Regressive taxes, because they hunt the poor man more than the rich man, since the former uses all his earnings to buy goods. Regressive federal taxes are levied on tyres, gasoline, airline tickets, liquor and tobacco. Heavy taxes on a particular commodity such as liquor tobacco, may have the effect of discouraging consumers from buying it such taxes are also referred to as sin taxes.

15.4b Tax-reform Efforts

Several reactions arise owing to the wide impact of taxes on a variety of individuals and groups. Business representatives may oppose new taxes on corporations. Small businessmen may complain that existing taxes favor big business. Spokesmen for tobacco growers, transportation interest, the wine and spirits industry, movies, telephone companies and candy-makers may argue that a proposed tax discriminates against them. Labor may demand a lighter burden for low-income groups and higher taxes on business. Thus efforts are made to carry out tax avoidance by reducing gross income through reduction. Tax-sheltered annuities, mortgage interest and itemized business expenses are some methods to achieve a reduction in gross income. The rich use tax loopholes to secure legitimate deductions and thus obtain a smaller share of the tax burden.

The Tax Reform Act of 1986 reduced the number of tax categories, lowered the votes, and eliminated several allowable deductions. However, these changes brought in much less incoming tax revenue than estimated. Thus George Bush could not keep to his pledge of "no new taxes." However the system was made more progressive under Bill Clinton, by lowering tax rates for the poorest Americans and raising them for the wealthy.

Several proposals have been made to change the tax code radically. The flat tax is one such proposal aiming at levying a single low rate for all Americans, irrespective of income, along with an elimination of all exemptions. Another suggestion is a value-added tax (VAT) that taxes an item at each stage of its production. The capitalists have often sought to end or reduce the capital gains tax, a tax on income from the sale of real estate or stock, so as to enable tax payers to reinvest the savings and thus provide funds for economic expansion.

15.4c Spending Tax Revenue

The course of economic development in the country, is greatly influence by the federal government, in spending public funds collected by the Treasury department. Government expenditures have increased for several reasons. The rising cost of national defense is one reason. Again, there has been an expansion of government functions of maintaining roads and highways and providing public education. Further, demands for public services such as police and fire protection, inspection of food, the promotion of public health and sanitation and traffic control is the result of the growth of cities. Government has also assumed new functions such as relief and social security measures to promote, encourage and regulate industry, agriculture and labor.

Generally, most of the money is spent for national defense. In 1993, sixteen percent of the budget went for military expenditure, fourteen percent covered interest on the national debt, while forty-five percent of the budget went on direct payments to individuals through social security, Medicare, AFDC, and veterans’ benefits.

When the government’s expenditures exceed its revenues, a deficit occurs. When the government expenditures cannot be covered by insufficient tax receipts and other governmental revenues, the government borrows funds from banks, corporations, government agencies, and individuals. This leads to an increase in the public debt. Interest has to be paid on loans borrowed by the government. Hence, interest payments have become a regular part of government expenditure.

The financial activities of government can maintain the national economy on an even keel, if they are well administered. Government directly affects the incomes and activity of millions of Americans through its contracts with private businesses, for the purchase of equipment and supplies, by financing the construction of buildings and housing, by making benefit payments to veterans and other groups, as well a by paying salaries to its employees.


15.0 - Introduction
15.1 The Goals of Economic Policy
15.2 Theories of Economic Policy
15.3 The Federal Budget
15.4 Taxation and Spending
15.5 International Economic Policy

Chapter 16

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