5 - TAXES AND GOVERNMENT SPENDING

Abstract

This chapter discusses taxes and government spending. Federal income tax has a distinctive characteristic of its progressive structure. A progressive tax takes a larger percentage from high-income recipients. Payroll taxes comprise the second largest source of tax revenue. Economists believe that the burden of the payroll tax lies with the employee, regardless of how the tax is levied. Taxation imposes a cost on voters; therefore, political entrepreneurs have a strong incentive to minimize the perceived burden. According to the shortsightedness effect, costs that are immediate and identifiable would be less popular with political entrepreneurs than costs that are difficult to identify and bear in the future. The political entrepreneurs should be expected to adopt a tax policy that would push the taxation burden into the future and that would minimize the cost of government as perceived by the voter. When marginal tax rates are high, taxes reduce the amount of income that an individual loses if his work time is reduced. This reduction in the price of leisure might induce some individuals to retire earlier, forego working a second job, or decline a promotion involving more hours of work. Most empirical studies indicate that the impact of the income tax on labor supply has been minor. If this is the case, the incidence of the tax would lie with the individual taxpayer.