Section 4- Part 1-2 Flashcards
Government Borrowing
Government borrowing is constrained by constitutions and statutes, bond covenants and debt policies. Credit-rating agencies exercise informal, but highly effective, influence on state and local government borrowing practices. Frequently, new debt issues cannot take effect until approved by voters through referendum.
Grants and shared revenues, two types of intergovernmental assistance, create accounting and reporting requirements for the grantor and grantee. Government grants may be classified as project grants (sometimes called discretionary grants) or formula grants, and the latter may be further defined as categorical grants or block grants.
Tax Policies (Cover)
- Tax Equity
- Ability to Pay
- Benefit Received
- Collection Efficiency
- Socio Economic Goals
- Tax Expenditure
- Dedicated Taxes
Tax Policies
Taxes are the major form of government revenue. Taxation is involuntary and often controversial. Thus, taxation is a highly political topic. A variety of legal safeguards are established to constrain taxation.
There are also political and socio-economic constraints on taxes.
Tax Equity
Principle that taxes should treat taxpayers fairly. When applied to income taxes, horizontal equity means different taxpayers with the same income level pay the same amount of taxes, and vertical equity means taxpayers with different income levels pay different amounts of taxes.
Ability to Pay
Individuals with higher incomes pay a higher proportion of their taxable income due to a higher tax rate. In contrast, sales taxes are regressive: A single sales tax rate applies to everyone. Generally, lower-income individuals pay a higher proportion of their income in sales taxes
Benefit Received
“Benefit received” is also a factor in deciding whether a specific group should bear a specific tax burden. For instance, if a municipality is renovating sewer lines on a specific street, it may levy an additional tax on residents of that street, rather than the entire community.
Collection Efficiency
Lawmakers consider collection efficiency when setting tax policies. This means that the cost of collecting the tax should be minimal compared to the revenue generated.
Ex:An example sometimes used to illustrate the “efficiency” principle is non-taxation of state and federal real estate.
Social and Economic Goals
Social and economic goals affect tax policies. For instance, Social Security payroll taxes arise from the goal of ensuring a minimum level of income for elderly citizens. State and local governments often use tax policy to encourage business, hoping this will lead to new jobs and an expanded tax base.
Tax Expenditures
Provision of tax law or regulation that uses tax deductions, tax credits, or income exemptions to encourage certain behavior by individuals or businesses. Called tax expenditure because it achieves, through the tax system, certain political, economic or social goals that the government would otherwise have to expend monies to accomplish.
Dedicated Tax
dedicated tax is levied for a specific purpose and the proceeds are deposited into an account restricted to that purpose.
One example is the federal payroll tax. Proceeds are deposited in the Social Security Trust Fund and can only be used to fund Social Security.
Tax Types: Income Taxes
Income Tax traits
Relative Advantages
Income Taxes
Tax based on income and levied on individuals or corporations. Used most often at national and state levels, though some states allow local governments to impose income taxes.
Income Tax Characteristics
Income taxes are broad-based taxes. (The base is all income, before certain deductions and credits take effect.) Graduated tax rates, exemptions and deductions are applied to enhance horizontal and vertical equity. As a result of these provisions, income taxes are usually progressive. Corporations, like individuals, are legal entities and thus subject to income taxes.
State and local governments often “piggyback” on federal income tax in calculating tax liabilities. The federal adjusted gross income (from federal tax forms) is the starting point.
Taxing authorities often use income taxes to influence behavior. For example, home ownership is thought to foster social benefits, so interest on home mortgages is deductible. It is considered desirable for corporations to invest in capital assets, so investment tax credits are enacted.
Relative Advantage
Income taxes have several relative advantages. They are generally less costly to administer than other taxes. (Consider that a real estate tax requires a physical appraisal of property values, and an estate tax requires legal proceedings.) Compliance levels tend to be high. Finally, income taxes respond to general economic conditions, such as inflation and recessions so that the tax impact varies with the economic fortunes of taxpayers.
