Tuesday, September 20, 2005

Tax Reform

Mark Thoma points to a this useful document from the Feds on Tax Reform. Some quick excerpts from it:

Personal consumption taxes: A personal consumption tax would look much like the current individual income tax. Individuals would report their income from wages, interest, dividends, and so on. It would differ in that borrowed funds
would be included in the tax base, and funds that are saved or invested would be
deducted. The base is equivalent to that of other consumption taxes. Rates could
vary based on individual characteristics.

And this one concerning the effects of taxes on the labor/leisure trade-off. Note, marginal rates might not effect the primary earner but they have a big impact on the secondary wage earner.

Work versus leisure: TaxesÂ?both income and consumption taxesÂ?can affect the decisions that people make about how much time to devote to work or leisure in two ways. First, taxes may increase the incentive to work because workers must work more to maintain their after tax income. Second, taxes may reduce the incentive to work because workers earn less from an additional hour of work. The net effect may be no change to the overall supply of labor. However, even in this case, there is still an efficiency cost, which is determined by the second effect. By reducing hourly after tax earnings, income and consumption taxes distort decisions about how many hours to devote to work or leisure. Empirical research generally shows that at least for primary wage earners, decisions about labor force participation are not very responsive to taxes. However, decisions about labor force participation by secondary wage earners have been shown to be more responsive to changes in the tax system.

Keywords: ECO120, ECO305, Taxes, Fiscal Policy

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