As the spine of this paper, the article that has been selected is authored by Jeanne Sahadi which was published in CNNMoney on March 3, 2016. The topic of this web article is the about the Taxes, particularly, the tax policy that has been introduced by the candidate for the American Elections of Presidency 2016 from Democratic Party: Hillary Clinton. The article is basically a critical review of Hillary’s tax policy that she has presented before the public during her election campaign. The author illustrated the practical implications of this tax policy and analyzed its economic aspects. As the core of Hilary’s tax policy is to bring the rich under a wider tax shell, this notion and its impacts on the complexity level of tax code and on the rich as well are discussed in detail.
Taxes and tax policy are most critical topics that have significant importance in microeconomics. There are three types of taxes that a Govt. can impose on its people: i.e. progressive taxes, regressive taxes and proportional taxes. The effects of each of these types over consumer consumption patterns, Govt. revenues and overall economy are different. However, according to Hillary’s policy of bringing the rich in wider tax rangrefers to implement progressive taxes which often make the tax code more complex. While on the other hand, the Govt. always try to increase its revenues by collecting taxes from public in order to run the country. Thus, it has to play its role by doing tax reforms with an objective to impose a just, fair taxes over the people. This paper would narrate the types of taxes that Govt. may impose and their practical implication, particularly in context of demand and supply elasticity of goods.
Tax is a something defined as a levy of a charge imposed by the Govt. of a country or state over the taxpayer; who may be an individual or any other entity on certain bases defined by the law of that country. Those who are fond in activities like tax evasion or resist to pay tax are punishable by law. The core purpose of tax is to collect revenue to state expanses(Alchin 1982). These state expanses are incurred over defense, education, health and many other types of developments and welfare activities by the Govt. There is a long list of the levies that are imposed by different Governments are over the world; mainly includes income tax, sales tax, property tax, corporate tax, payroll tax, inheritance tax, transfer of property tax, value added tax, custom and excise taxes and many others. However, these all can be sorted out into two categories as under
The type of taxes in which the tax money is collected directly from that person or entity upon whom the tax was imposed is called the direct taxes(Little 1951). That person or entitycannot transfer or shift the tax burden on anyone else. Thus, the tax, whose initial burden and incidence of tax cannot be changed is called Direct Tax(Busarieva 2014). Income tax and property tax are the example of Direct taxes. The person who earns some money or owe some property is to pay the tax initially and ultimately and he cannot shift his burden to anyone else.
The type of tax whose payer does not ultimately bears the burden of tax is called the indirect tax. The payer of the tax shifts its burden to some other party or person in the tax system of the economy(Datey 2008). Thus, in indirect taxes, the initial burden and tax incidence remains on different persons. Sales Tax, With Holding Tax and Value added taxes are the types of Indirect tax. These are,mostly, paid by the producers of commodities, however, those producers shift the tax burden over the ultimate consumer of the good.
Tax is basically a transfer of resources from private to the public sector on basis of some predefined criteria(Aliev, 1932). However, there has remained a different point of view presented by number of economists on defining the systems under which the transfer of resources should be done between the private sector and the public sector and how to widen the tax shell in order to increase the governments’ revenues to incur its wide range of expenses. Another factor that always has been considered by the economists is the justice, equality and fairness of tax system for all the income groups of an economy.
Economists are of the view that it is important to have equality in the tax system than that of uniformity. The tax burden should be different over the different earning groups of the society. The levy or the tax burden should be less on the lower income group than that of higher income group(Benham 1942). So, if there would be uniformity in the tax system, the economy would lack in justice and equity for different classes of society(Fisher 1996). With this notion, there have been defined following three types of tax imposition:
This is such a tax system under which the low income groups are to bear more tax burden than that of higher income group. Under this tax system, the taxable income is calculated on bases of the assets owned by a person or an entity regardless of its tax paying ability(Decoster et al. 2010). Thus, although the rate of tax is same for the rich and the poor, but as the poor has lessor ability to pay taxes so they bear more tax burden. Sales Tax, Value Added Tax and Property Tax are the examples of this type tax.
It is the type of tax structure in which the tax burden remains same on all the income groups of an economy. The taxable amount of these taxes are calculated on the basis of a flexible parameter with a fixed tax rate. Thus, those who will have larger amount of the parameter upon which taxable amount is to be calculated would pay more and others will pay less, and ultimately, the tax burden remains same on both of them. Income tax, if fixed at rate of 10%, is a type of Proportional tax in which those with higher income pay more tax amount than that of those whose income is less. These types of taxes are also known as flat taxes.
This tax system is the most practiced tax system and have found to be the just and fair and adds a big portion to the overall revenue of the government. Under these taxes, the levy and ultimately the tax burden on the high income group is larger than low income group(Li and Sarte). Thus, as the wealth of a person or an entity increases, the tax liability also get increased. The examples of progressive taxes are Income Tax and Corporate Tax, whose rate also keeps on increasing with increase of the income or profit(Pechman 1985). When, income tax is defined in terms of slabs and rate for the upper slab is higher than the lower slab, thus, increases with increase of the income, in this case the levy would be known to be progressive tax and those with higher income would bear greater tax burden.
The most effective method used by the governments to increase the tax revenues is to intervene through the progressive taxes in the economy. To do that, the tool they mostly used is to increase the tax levy on the luxury commodities, import commodities and those ones, whose demand is price inelastic
There are some commodities whom demand does not get effected by subsequent increase in there price. Thus, the people would continue to purchase the goods at even higher price, or only a little decrease in the quantity demanded of the commodity would occur(O’SULLIVAN et al. 2013). These are the goods which are to be considered by Hillary, on which she would increase the levy in order to increase the tax revenues.
Demand is that quantity of a product for which consumer desires and is willing to pay a certain amount at a particular time
Demand price Elasticity:
It is defined as a tendency of change in the quantity demanded of a commodity due to change in its price (Tellis G 1988). If the price get increased in is a behavior of the consumer that he will decrease his demand of the commodity and vice versa.
Price Elastic Demand:
If the price of a commodity gets changed and its quantity demanded will so change more than the change in price, the elasticity of product would known be known as price Elastic(Gardiner and Dixit 1987). All the lavish products like chocolate, sport material, soup prices, and newspapers are mostly elastic and get decreased with increase in price
Price Inelastic Demand:
There are certain commodities in the market whose quantity demanded does not changed with respect to the change in their price. That is, people would not stop buying the commodities having inelastic demand, even if their price increases. Petrol, FMCG, Cigarette, Jewelry, tap water, railway tickets and all other products created under monopoly, whose quantity demanded remains unchanged with change in their price.
If government would tax those commodities whose demand is riceelastic, then the increase in demand would ultimately decrease the consumption of that commodity, making no increase in tax revenue as end result. Thus, government always prefer to tax the commodities with price inelastic demand (Sandmo, A 1975). It is because, even after increase in its price, the consumer would not decrease its consumption and there would be a subsequent increase in the tax revenue
Although, Progressive taxes are always welcomed by many economists, but there is a school of thought which is against progressive tax structure. This school of thought is of the view that increase in the tax burden over the rich would cause demotivation in this class and it would ultimately shift its resources to those countries where they are levied with less tax burden. Thus, as the end result the economy of the country would get weaken. So it is recommended for the Hillary and her policy makers to bring those sectors of economyunder the tax net which are enjoying tax rebates even with strong financial position, else than putting subsequent tax burden on corporate sector and high income group.