Taxation and Spending

Most people want the government to do something for them, whether it's agricultural price supports, veterans' benefits, or Medicare. None of these things are free, and the government taxes its citizens to raise the money to pay for the programs. Until 1913, the revenue of the federal government came mainly from protective tariffs, which are taxes on goods imported into the country, and from the sale of public lands. But the tariff policy caused high prices, and the federal graduated income tax was instituted through the Sixteenth Amendment to make up for receipts lost when goods were too expensive to purchase.

Types of taxes

Many policy analysts believe that one purpose of government is to redistribute wealth. The terms used to describe methods of taxation reflect these values. Taxes that place a heavier burden on the wealthy are called progressive taxes. One example is the income tax, which (at least in theory) imposes a higher tax rate on those making more money. Property, inheritance, and capital gains taxes are also usually progressive. Many voluntary taxes are regressive taxes, which is to say the poor provide government with a disproportionate share of the revenue. Examples include gasoline taxes, as well as sin taxes such as those on liquor, cigarettes, and gambling. Some taxes are neutral, hitting everyone equally — such as the sales tax, in which everyone pays the same tax percentage when buying a product. Nevertheless, analysts usually call the sales tax regressive, in part because it does not "steal from the rich and give to the poor," and in part because a larger share of income goes toward necessary purchases for a working-class family than for a rich one.

Tax-reform efforts

Not paying taxes is illegal, but the government offers numerous loopholes that individuals and corporations may use to reduce their tax burden legally. Although the technical details can be quite complicated, the basic idea is simple: The government gives tax breaks to individuals and companies who act in a manner that policymakers want to encourage, such as buying a home, adding equipment in a factory, placing kids in child care, or entertaining clients at restaurants and sporting events. In the early 1980s, these tax deductions were sometimes so generous that large corporations did not pay any income taxes at all, leading some to conclude that the income tax system was not progressive so much as haphazard.

Proposals for tax reform include closing loopholes, simplifying tax filing, and changing tax rates. Under the 1986 Tax Reform Act, the number of tax categories was reduced, rates were lowered, and many allowable deductions were eliminated. These changes did not work as planned. Incoming tax revenue proved much less than first estimated under the law, and President George H. W. Bush was unable to keep his "no new taxes" pledge, which became a factor in his defeat in 1992. Under President Bill Clinton, tax rates were lowered for the poorest Americans and raised for the wealthy to make the system more progressive. George W. Bush made taxes the cornerstone of his administration's domestic policy. Critics argue that the tax cuts during his first term contributed to the deficits and primarily benefited higher-income Americans. Besides cutting income taxes, lower rates on the estate tax, sometimes known as the "death tax," and capital gains tax were put into effect. Conservatives have long supported reducing the capital gains tax, a tax on income from the sale of real estate or stock. The argument here is that taxpayers would reinvest the savings, providing money for economic expansion.

In addition to tinkering with the tax rates or eliminating loopholes, there have been calls for radical changes in the tax code. One proposal is the flat tax, which Steve Forbes made the basis for his campaign in the 1996 Republican primaries. A flat tax is a single low rate for all Americans, irrespective of income, coupled with an elimination of all exemptions. Adoption of the flat tax, proponents claim, would allow individuals to file their taxes on a postcard and eliminate the need for the Internal Revenue Service. A value-added tax (VAT), effectively a national sales tax, would tax an item at each stage of its production.