The Municipal Status Quo vs. Federal Income Tax Reform

Abstract

The United States of America‘s Internal Revenue Code currently defines income conceptually as being made up of consumption and change in wealth (aka savings). From this equation a U.S. federal income tax has emerged that has been widely panned as inefficient and confusing. Attacks upon this approach to taxation are plentiful and have led to increasing demand for a theoretical tax proposal which could collect revenue reflecting how taxes ‘should’ work. One popular format for changing the federal income tax includes a complete overhaul of the equation by removing change in wealth from the taxable side of the equation, resulting in C = I - ΔW, leaving only consumption to be taxed.With various radical changes to the Federal Income Tax (such as the Fair Tax, Flat Tax, and Value Added Tax or VAT,) researchers would be hard pressed to understand how such a radical change to the Federal Income Tax would affect the nearly 90,000 total local governments as measured by the U.S. Census Bureau in 2007. This working paper seeks to expand knowledge of students and practitioners of the federal income tax as to the importance in considering local governments in their policy reforms as these actor’s decisions, when aggregated, have a substantial effect upon the U.S. as a whole. While some of the paper focuses on changes of less grandiose ambitions, it is appropriately understood that the focus of this research deals with how radical consumption tax proposals of the Flat Tax, Fair Tax, and Value Added Tax, in the place of a federal income tax, would affect local governments, but particularly municipal governments, from a financial and political perspective.