Impacts of Taxation on Public Revenue Sources

Issues with Taxation

Public revenue is a problematic subject that has many different theories pertaining to the most efficient means of collection and the best sources from which to collect. When one discusses public revenue, the concept of taxation becomes the largest subject, which is due to the fact that taxation is the largest source of public revenue. Public revenue sources are therefore affected by factors such as demographics, per-capita income, fiscal policy, laws, local economies, and census data.

The necessity for a functioning government and sustainable programs dictates the need for public revenue. Most people agree with this concept but differ on the specific sources of public revenue and the means of determining these sources. The two most widespread forms of public revenue are indirect and direct taxation (Davis et al, 2009). These two sources provide the majority of government revenue at both the federal, state, and local levels. As the factors affecting these sources are examined, the problems of fairness, sustainability, and practicality become apparent (Davis et al, 2009).

When one examines direct taxation such as income tax or property tax, the burden of taxation is placed solely on the individual being taxed. This is a large portion of public revenue, especially income tax; however there is a serious problem that occurs within this revenue source that is caused by demographic issues. At the state level, demographics dictate that certain areas pay disproportionately higher amounts of income tax while other areas pay little to no income tax. This is a problem because it represents unfairness in the taxation system in which middle class and rich people pay the largest amount of taxes to support programs(Davis et al, 2009). Many of these programs such as welfare support poor segments of the population and the people who are supporting the programs through direct taxation do not benefit from these programs. The problem is also a problem of sustainability. By collecting from sources directly, local economies become burdened by the taxation. For example, middle class neighborhoods pay the largest percentage of property taxes which makes them responsible for supporting the most amounts of programs and services (Davis et al, 2009). This is not a sustainable system unless combined with other forms of taxation because one demographic cannot support the population.

Direct taxation is also a problem because the rich are able to take advantage of circumstances which enables them to pass their tax burden onto the poor or middle class. For instance, landowners are able to rent their land or extra home which passes the property tax onto the renter (Davis et al, 2009). In this manner, the sources public revenue become unevenly displaced within society.

Due to these issues with direct taxation, one would be inclined to believe that indirect taxation would be a fairer and more efficient means of public revenue, but this form of taxation presents its own set of problems. For instance, the use of sales tax seems fair because it forces everyone to pay a tax based on percentage of purchase. This system however, makes the largest portions of the population responsible for public revenue, which in many cases is the middle to lower class (Davis et al, 2009). But beyond the argument of fairness, the major problem of indirect taxation is the problem of collection. Often elaborate systems for taxation must be designed in order to track and collect the revenue and this can be costly.

Just like direct taxation, indirect taxation also burdens local communities. Poorer neighborhoods are less capable of absorbing the burden of increased sales taxes and this places these communities at a disadvantage (Davis et al, 2009). The indirect tax method becomes more problematic when one takes into account the fact that local communities burdened by a sales tax are the communities which the tax is supposed to provide programs and assistance.

As one can see, the indirect taxation method and direct taxation method of gaining public revenue presents many problems for policy makers. Today, the burden of taxation in the United States is divided between these two methods in an attempt to spread the tax burden evenly across the population. But part of the problem with these public revenue sources is the fact that the determination of tax amounts are often based upon faulty calculations (Davis et al, 2009). For example, the decision to raise or lower taxes is not just based upon necessity but also on the ability of citizens to pay. One of the tools used for this decision making process is per capita income. Per capita income represents the mean income of all US citizens per person. It is an average based upon income sources and is used to represent the growth or decline in personal real income or standards of living. If per capita income has grown than the decision to tax might be implemented due to the fact that individuals can afford to pay the new tax. However, per capita income is not a realistic number because it is often overinflated (Holcombe & Lacombe, 2011). One of the largest problems with per capita data is that it is calculated in part from census information which does not take into account illegal aliens and those individuals working for cash (Holcombe & Lacombe, 2011). As well, studies have shown that taxing often leads to significant decreases in per capita income growth (Holcombe & Lacombe, 2011).

There are many issues attached to the sources of public revenue. Issues of fairness and of efficiency seem to be at the forefront and create a complex set of problems for policy makers. As a result of these issues the government has developed fiscal policies. Fiscal policy is the use of taxation to affect the economy at a macroeconomic level. So when the economy begins to slow down and unemployment rises, the government will often lower taxes in order to stimulate spending. Fiscal policy is a tool that has developed as a means of balancing the economy. By controlling public revenue in this manner the government attempts to moderate the fairness and efficiency of public revenue while at the same time maintaining the value of the dollar.

While there are other sources of public revenue such as service charges and fines, the bulk of public revenue comes from taxation. The need for public revenue is essential to the operation of government and its programs. Although the system is not perfect, it is one of the most efficient means of providing public service.

References

Davis, C., Davis, K., Gardner, M., McIntyre, R., McLynch, J., & Sapozhnikova, A. (2009, November). Who pays? a distributional analysis of the tax systems in all 50 states 3rd edition.

Holcombe, R. G., & Lacombe, D. J. (2011). The effect of state income taxation on per capita income growth. Public Finance Review, 39(5), 483–526.

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