Question

The City of Chicago faces the prospect of significantly increased expenditures to address its unfunded pension liabilities for both the city itself and for the Chicago Public Schools. The city has already increased property taxes for its own pensions in the last year. Many have speculated that there is going to be even larger increases needed in the property tax in the future for city residents. One of your readings this week debated an increase in the property tax versus implementing a city income tax to fund these liabilities. Based on your understanding of the five principles of tax policy, assess this debate and make a recommendation for which funding source should be used.

Answer 1

1. Fairness: Similarly situated taxpayers should be taxed similarly. The concept of horizontal equity provides that two taxpayers with equal abilities to pay should pay the same amount of tax. If a taxpayer has a greater ability to pay than another taxpayer, the concept of vertical equity comes into play, which means that the person with the greater ability to pay should pay more tax.
2. Competitive: States and cities should have lower tax rates making there state more competitive than their neighbors. In case of higher taxes, people and business would find a better bargain in other state to set up their business and other state will lose its competitiveness.
3. Transparent: A tax structure that is simpler and easier to understand will be friendlier to taxpayers. Tax system should have less hidden conditions and should be simpler.
4. Limited: Taxes should only be collected to finance the essential functions of state government like schools and hospitals. Some of this can be earned through right pricing of the service at the hands of the user.
5. Appropriate government revenues: Tax systems should have appropriate levels of predictability, stability and reliability to enable the government to determine the timing and amount of tax collections. A dynamic and flexible tax system is necessary in order to adapt to changing needs and technological and commercial developments.

	Property tax	Income tax
Fairness	It is not fair to increase the property tax so early since it was already increased last year.	A slight increase in income tax may fetch the same result
Competitive	With higher property taxes, lot of real estate investment will be lost to other states which may lead to lower overall increase in property tax.	Income tax is best way to tax the source of the income rather than indirect method such as VAT, property tax.
Transparent	Should avoid any complex conditions	Should avoid any complex conditions
Limited	Property tax may be the right means for funding schools since most of the parents would own the properties they live in.	Not all income tax payers are using schools.
Appropriate government revenues	Timing needs to be set and a pre defined frequency and matrix should be prepared for property tax to be increased.	Income tax should be used in case any other source is not left.

Finally property tax should be increased since most of the users of schools are parents who use schools for there kids. It would be unfair to charge everyone who is not using the service.