Introduction During his presidential campaign, Barack Obama stated that he would consider doubling the top tax rate on capital gains. Shortly after taking office, he proposed raising the top tax rate on capital gains by only one-third. Are there any practical limitations on how high governments can raise tax rates in hopes of obtaining more tax revenues? This chapter helps you understand the relationship between tax rates and tax revenues.
The body of laws and rules governing the assessment and collection of U.S. federal taxes expands at an average rate of 1,000 words per day?
To obtain the funds required to finance their operations, governments collect taxes from many different sources (property tax, sales tax, income tax, etc), hence the multitude of words written into a variety of statutes governing taxation.
The value of goods, services, wealth, or incomes subject to taxation
The proportion of a tax base that must be paid to a government as taxes
Policy Example: Will U.S. Consumers Pour Their Dollars into a Federal VAT?
U.S. States have levied sales taxes by applying tax rates to the dollar amounts that businesses receive on sales of goods and services.
Recently, congressional leaders have suggested a new federal value-added tax (VAT), which are applied to every stage of an item’s production, so that the final price that a consumer pays would reflect the various federal VAT rates imposed during a good’s production.
If the disincentive effects of higher tax rates are small, static analysis may give a fairly accurate estimate of the change in tax revenues resulting from a tax rate change
As tax rates escalate, members of the public have a greater incentive to remove their activities from the tax base; a dynamic analysis would be necessary to determine the overall effect on government revenues
Figure 6-2 States with the Highest and Lowest Sales Tax Rates
Why Not … follow the example of states such as Maryland by creating a “millionaires” tax bracket with extra-high tax rates applied to incomes exceeding $1 million per year?
The year after Maryland established a special millionaires tax bracket with a combined state and city tax rate of almost 10 percent, more than one-third of all the millionaires—people with annual incomes exceeding $1 million—responded by switching their formal residences to other lower-tax states, such as Florida and South Carolina.
As a result, Maryland received almost $100 million per year less in taxes from millionaires.
International Policy Example: Ireland Collects Plenty of Corporate Taxes with a Low Rate
Ireland’s corporate profits tax is only 12.5 percent, as compared to nearly 40 percent for the United States.
The nation’s lower corporate profits tax rates boosted corporate profits and consequently tax revenues.
During the 2000s, the Irish government collected an amount of corporate profits taxes equal to 3.6 percent of Ireland’s national income, while corporate profits taxes in the United States were 2.1 percent of U.S. annual income.