General Income Tax Research Articles

Tax Rates and Tax Collections: The Basic Analytics of Khaldun-Laffer Curves

This article describes the relation between tax rates and tax collections for three different types of taxes: unit excises, ad valorem excises, and general income taxes. The tax rate-tax collections relationship is currently the subject of widespread discussion, but the determinants of the shape of the function have not been clearly specified. This article presents mathematical and graphical expositions of the linkage between supply and demand for taxed commodities and the tax rate-tax collections relationship. The tax collections function will often, but not always, be shaped as it is commonly drawn; its shape is uniquely determined by the underlying supply and demand functions in the taxed market. Whether a tax rate change will increase or reduce tax collections is always an empirical issue which depends on the values of items identified by the theoretical analysis in this article.

Status Goods and Luxury Taxes

Economists generally have condemned such taxes as imposing an in comparison with more broadly based general sales or income taxes. Also, it is alleged that any desired income redistribution could be obtained with more efficiency (and perhaps greater equity) through a progressive income tax (1). However, this paper will show that taxes on an important group of luxuries, status goods, do not necessarily impose an excess burden. Indeed taxes on these goods actually impose a burden lower than the yield of the tax, making such taxes a highly desirable source of revenue. A status good is one whose utility derives at least partially from the amount the purchaser pays for it. In most cases this is because display of the good serves to demonstrate that the user can afford it. Examples are gold jewelry, fur coats, and certain luxury automobiles. In other cases the good serves to show that the purchaser cared enough to spend what the good cost. Examples would include engagement rings, the sending of floral decorations for funerals, and many courtship expenditures. It is necessary to make clear that consumer preference for status goods is not due merely to use of price as a guide to quality. As Scitovsky and others (2) have pointed out, consumers frequently lack the information to appraise complex goods adequately and are forced to assume that the higher priced goods also have the highest quality. However, for a status good price is more than an aid to judging the potential utility of the good, it is part of the utility of the good. The desired effect on other people, or on the owner's self-esteem would be less if the good was less expensive. Evidence comes from a variety of social sciences that many goods are consumed not merely because of the physical pleasure they bring, but because their consumption provides evidence that the purchaser is of the class that can afford such expensive goods. There is an extensive sociological literature (3) which shows that society can be divided into a series of classes, the most obvious differences between which are in the level of income, (other determinants of class such as occupation, educational level, and amount of inherited wealth are normally reflected in differences in

Shifting of the Life Insurance Company Income Tax

While there have been many studies dealing with the Federal taxation of life insurance company income, none of them has considered the question of the incidence of this tax. In this study an attempt is made to measure statistically the impact of the Federal income tax upon the gross profit of a group of stock life insurance companies. A linear multiple regression model is applied to company data obtained from the New York Insurance Reports for the period 1952 through 1965. It is found that for the period under study, 150 percent of the burden had been shifted. This result is comparable to the finding of 136 percent shifting reported by Richard A. Musgrave and Marian Krzyzaniak in their research project which applied a similar model to a group of industrial companies. Both of these are at variance with other industrial studies which have found little or no corporate income tax shifting. The Federal Government has taxed life insurance companies on the basis of income since 1909. Due to the nature of the life insurance company, an income tax developed for the ordinary industrial corporation is quite unsuitable. Since 1921 the Federal Government has recognized the unique nature of the life insurance industry and has endeavored to find a taxing formula for the life insurance industry that would be equitable and fair. This task has not been easy. Many scholars have studied the question of the taxation of life insurance companies but none of them has considered the question of the incidence of an income tax on life insurance companies. As a guide for public policy, the question of the incidence of a tax is of the utmost importance. If a tax is shifted, then the impact of the tax may fall on a quite J. J. Launie, Ph.D., is Associate Professor of Finance in San Fernando Valley State College. He is President of the Western Association of Insurance Professors and was formerly staff consultant to the California Tax Advisory Commission. This paper was presented at the 1969 Annual Meeting of A.R.I.A. different group than the legislature intended. The question of the shifting of an income tax has been considered, but few empirical studies have been undertaken and these have all been studies of industrial corporations. In considering the incidence of a tax upon an individual, both the income sources and income uses must be considered. That is, the tax may change the prices the individual pays for products and it may also change the prices the individual receives from the sale of his services in the factor market. It can be seen that this concept of incidence deals with changes in the real income or wealth of the individual. The modern corporation income tax belongs to the general category of taxes upon net receipts or profits. The traditional theory of incidence holds that at least in the short run, and most likely in the long run also, a general net receipts or income tax has no effect on prices. Reference has been made in the traditional theory to the crucial role played by the marginal firm. The costs of the marginal

Tax Simplification through Cumulative Averaging

Complications in the enactment and administration of income tax laws as they generally exist at present arise very largely from the need to answer four types of questions: (x) Is it income? (2) Whose income is it? (3) What kind of income is it? and (4) When is it income? A surprisingly large proportion of the questions that arise and generate involuted legislation and complicated administrative rulings have to do with the last two of these questions, questions which essentially have little to do with the basic philosophy of the income tax, and which fundamentally should be irrelevant to the assessment of a properly designed income tax. The question as to the kind of income that an item represents has to do very largely with the special favors extended to income designated as capital gains. This is not the place to attempt to answer all of the varied and intricate specious arguments advanced in favor of such special treatment.1 Suffice it here to say that the one argument that has some semblance of substance in the context of a general income tax assessed annually at progressive rates, to wit, that gains accumulated over a long period and realized in a single year may subject the taxpayer to unreasonably high bracket rates if no allowance is made, is largely vitiated as soon as there is available an adequate averaging of income, so that the effective rate ultimately depends not on the income of a single year but on the general level of income over a period of several years. The difficulty heretofore with such averaging devices has been that either they were not fully effective in overcoming the disadvantages of lumpy income, or they required extensive record keeping, or fairly elaborate computations, or gave undesirably capricious results in special cases. Cumulative averaging, or perhaps more descriptively, cumulative assessment, is a method of averaging that is at once simple, complete, and free from capricious impacts, and its adoption should completely overcome whatever rational hesitation there may be to the elimination of capital gains as a special category of income, allowing receipts in this form to be treated on the same basis as any other.2 The question as to when an item is income is one that in the long run has little if anything to do with a taxpayer's over-all ability to pay, and in any properly designed tax should be a matter in which neither the taxpayer nor the Treasury should have any substantial interest. The fact that under the present law the timing of income

Constitutional Law. Taxation. General Income Tax as Reduction of Judges' Salaries during Term of Office

Constitutional Law. Taxation. General Income Tax as Reduction of Judges' Salaries during Term of Office

The Colwyn Committee and the Incidence of Income Tax

I. Introductory: the Committee's work as a whole, 641. — II. Testimony of business men that a general income tax is added to prices, 643. — Refutation by economists, 645. — Statistical analysis by W. H. Coates of the Inland Revenue Department, 647. — III. Assumptions based on some special relation between cost of production and price, 651. — Absolute statement of marginal cost theory erroneous, 652. — Criticisms of Mr. Robertson examined, 657. — IV. Subsidiary arguments: (1) Relation to quantity theory of money; (2) At what rate does a progressive income tax become a part of costs? (3) Dilemma in relation to foreign trade, 662. — V. Distinction between incidence of an income tax and a commodity tax sustained, 666. — Indirect influences on price, 667.

Illinois Rejects New Constitution

Illinois Rejects New Constitution. On December 12, 1922, the people of Illinois rejected a proposed new constitution by a vote of about 900,000 to 200,000. A former note in this REVIEW (Vol. 15, p. 258) called attention to the earlier stages of the Illinois constitutional convention, and indicated the issues that were then important in the work of that convention. The convention assembled on January 6, 1920, and did not complete its labors until September 12, 1922. The most important new features of the rejected constitution are the following: (1) The present constitution of Illinois provides for a general property tax, and does not permit classification of property for this purpose, or the use of an income tax. The proposed constitution would have permitted the substitution of an income tax on intangibles for the general property tax upon this property; and would also have authorized a general income tax on all net incomes, in addition to other taxes. (2) The proposed constitution consolidated the courts of Cook County, simplified to some extent the organization of courts in other parts of the state, and gave the supreme court power to make rules of pleading, practice, and procedure. (3) Under the rejected constitution Chicago would have been given power to frame its own charter, and would also have received powers of municipal home rule. (4) Under the present constitution, representation in both houses of the general assembly is based upon population; but no reapportionment has taken place since 1901, and Cook County with 47 per cent of the population has but 37 per cent of the representation in the two houses. Under the rejected constitution Cook County representation was to be permanently limited to one-third in the state senate. In the house of representatives all parts of the state were to be represented in proportion to the number of votes they cast for governor. The cumulative plan would have disappeared and members of the house of representatives would have been elected from single districts. In future constitutional conventions Cook County was to be limited to 45 out of 121 members.

Frankfort-On-The-Main: A Study in Prussian Communal Finance

Reasons for the selection of Frankfort-on-the-Main for special study, 160. — Important changes introduced by the Kommunalabgabengesetz, 153. — Provisions of the K. A. G. on the apportionment of the local tax burden among the several kinds of taxes, 155. — Restrictions placed upon the communities in the levying of general income taxes, 157. — The taxes on incomes from land, buildings, and trade, 158. — Rules on the disposition of the proceeds of the several taxes, 161. — The Prussian Income Tax, 163. — The general tax rate, 169. — The special tax of Frankfort, 170. — The introduction of taxes on real estate, based on market value, 173. — The Frankfort special tax on unimproved properties (Landsteuer), 174. — The house tax (Haussteuer), 176. — The super-tax, a survival of a tax on rentals, 176. — The Frankfort Wabrschaftsgeld, a combination of transfer tax and increment value tax, 178. — The imperial increment tax (Reichszuwachssteuer), 185. — Its non-adaptability to purposes of imperial taxation, 187. — The Prussian trade tax (Gewerbesteuer), 187. — The Frankfort special ordinance, 189. — The Betriebssteuer, 191. — The department-store tax (Warenhaussteuer), 193. — Other taxes, 195. — Percentages of the total tax returns contributed by the chief taxes, 196. — No special tax on incomes from capital investments, 197. — Fees and special assessments, 199.