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Introduction Outline

Law Outlines > U.S. Income Tax Law Outlines

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Introduction A. Goals of Tax System i. Raise revenue to fund govt operations a. But note some see this primarily as distortionary and bad b. But if you believe fixed amounts needed to fund govt, then every $ we cut somewhere has to come from elsewhere. ii. Simplicity a. Rule complexity: Don't want rules to be so complex that people can't follow them

1. But, note that the downside to simplicity is that if it's easy to understand the rules, it can be easy to work around them!
b. Compliance complexity: Don't want enforcement costs to erode tax revenues c. Transactional complexity: need lawyers and accountants (transaction costs) iii. Administrability Generally iv. Efficiency a. Efficient system maximizes welfare b. Neutrality: Neutral taxes (e.g., head taxes or taxes on perfectly inelastic goods) don't affect behavior.

1. DWL: Individuals are worse off, but the public is no better of. c. Distortions to labor/leisure tradeoff (could go either way).

1. Income affect: people might work more to make up for income lost to taxes.

2. Substitution affect: People might substitute more leisure for work as they get to keep less of the wages (Romer paper shows this is not as pronounced as you might think). d. Capitalization: tax advantages of one product vs another are often priced in. v. Fairness a. Vertical Equity: Does not literally mean equality. Vertical equity is concept that those with greater ability to pay should pay more.

1. **Income used as a proxy for ability to pay. Note, could also use wealth.

2. Progressive: higher earners have higher tax burden a. Utilitarians prefer progressive system b/c of declining marginal utility of income.

3. Regressive: lower earners pay higher percentage rates

4. Flat (proportionate): Everyone pays the same percentage. b. Horizontal equity: Even-handedness in application. Similarly-situated people (e.g., same income) should be treated similarly. This is couples equality that leads to marriage penalty/bonus.

1. Imputed Income problem: p 118 has nice illustration where different treatment of imputed income vs child care/petcare/homecare will lead her to choose homemaking even though working would create more social benefits, and we as society generally gain from specialization and trade (e.g., paying dog walkers so you can go be a lawyer). ? DWL

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