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Federal Income Tax
Rutgers University, Newark School of Law
Blank, Joshua D.

I.                GOALS OF A TAX SYSTEM

Revenue is the primary goal of taxation.
Two primary considerations in determining who should pay: efficiency and fairness.

A.     Efficiency

Neutrality: the more a tax changes behavior, the less efficient it is. If the tax has no effect on behavior, it is neutral.
Elasticity of response: the degree of change in behavior because of the tax. 
Highly elastic response leads to a large change in behavior for even a small tax. 
Highly inelastic response means even a large tax might not affect behavior
Tax on inelastic goods is an efficient tax
Income effect: tax on income might encourage people to work more to have the same amount of money without tax
Substitution effect: people substitute non-taxed leisure activity for work to pay less tax by earning less.
Real incidence: person who bears the burden
Nominal incidence: person who writes the check
Market shifts the burden of a tax by affecting the price of an asset
Tax capitalization is the mechanism by which the market responds to differing tax treatments of economically identical transactions.
If market has erased any advantage in owning the tax-favored asset, then congressional repeal of the tax provision providing an apparent benefit would not operate to equalize taxpayers. (e.g., home mortgage interest deduction).
Deadweight loss
Hidden cost of tax; loss in welfare caused by the changes in behavior of people who avoid the tax.
People who change behavior to avoid the tax – individual is worse off for foregoing the activity, but the public is no better off as a result.
An efficient tax system must minimize deadweight loss.
Complexity is unacceptable if:
Tax system’s enforcement costs are greater than the revenues collected through enforcement
Taxpayers cannot understand the law and comply even if they want to
Lots of smart lawyers and accountants spend time finding loopholes
Simplify by reducing deductions and exclusions, by refusing to make distinctions between different kinds of taxpayers and different kinds of income
Price of simplicity is often reduced fairness.

e poor, even if it produces a loss in overall societal utility. 
Economic justice is about rights and obligations, not consequences or welfare
Robert Noziak, libertarian, focuses on historical entitlement and free choice for individuals in the market. Rejects redistribution on fairness grounds.
Many theories of distributive justice may underlie a system of taxation. Tax system may contain compromises reflecting a variety of fundamental attitudes about the state’s role in distributing economic resources.
Horizontal and vertical equity
Vertical equity is about the differences in tax burdens on people in different economic situations.
Horizontal equity is a subset of vertical equity. Once we determine the criteria allowing the state to extract a greater tax from some rather than others, then people who are the same, according to those criteria, pay the same amount of tax.