Question

Describe the concept of tax progressivity. In that context, what do governments need to consider in devising a tax system? Given those considerations, what do governments in the U.S. choose to tax and why?

Describe the revenue sources used by each level of government in the U.S. as well as the principle differences between fees and taxes. Which of each is voluntary?

Answer 1

As per the concept of tax progressivity, a tax payer should make a higher payment of taxes if he earns more income and lower tax payments in case of less earning. This ensures that the impacts of income inequality get reduced by taking the burden off the lower income people to pay for the things a society needs in order to function. Factors to be considered by the government in devising a tax system- 1) Administrative costs 2) Compliance costs 3) Tax incidence 4) System design 5) Reliability of the revenue flow 6) Growth of revenue 7) Location effects Considering the above, in US, there are separate federal, state & local governments with imposition of taxes at each of these levels. There are different taxes on income, sales, capital gains etc. Federal and state taxes are completely separate, each having its own authority of charging taxes. The federal government does not have the right to interfere with the state taxation. Each state has its own tax system which is different from other states, which indicates that the tax system in US is quite complex and complicated. Sources of revenue used by each level of government in the US Federal government Individual income taxes 2) Corporate income taxes 3) Estate taxes