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88 IRET Policy Bulletin i (2004)

handle is hein.taxfoundation/iretpbul0047 and id is 1 raw text is: September 10, 2004 No. 88 TAX INCIDENCE, TAX BURDEN, AND TAX SHIFTING: WHO REALLY PAYS THE TAX? EXECUTIVE SUMMARY The current tax system imposes heavier taxes on income used for saving and investment, and on the formation of human capital, than on income used for consumption. These tax disincentives to save and invest, to work and take risks have consequences. They lead people to under-save and over-consume, and to work less and play more. These adverse effects strongly urge us to dispose of the current income tax structure and replace it with a flat rate tax that is neutral in its treatment of saving and consumption. A tax system that is saving-consumption neutral would lead to a significant increase in income across the board. The tax biases against saving and investment and the current system's steeply graduated tax rate structure were introduced for the purpose of improving social equity. It has been assumed that the added layers of tax on income used for capital formation would do little economic damage, would harm only the wealthy, and would provide significant income redistribution. It has become apparent, however, that most of the taxes that seem to fall on those who supply physical capital, intellectual capital, or special talents to the production process may actually be shifted to ordinary workers and lower income retirees in the form of reduced pre-tax and after-tax incomes. The political battles over proposed tax changes often turn on the question of who would gain and who would lose. Answers to such questions are supposedly presented in so-called burden tables prepared by the Treasury, the Joint Committee on Taxation, the Congressional Budget Office, and tax researchers. The adverse economic consequences of non-neutral taxation and graduated tax rates, and the resulting adverse impact on social equity, are not displayed in the burden tables. With bad information, the public and the Congress are left with a bad tax system and a sub-optimal economy. The burden tables claim to show the distribution of the tax burden across taxpayers or households of varying income levels. In fact, the tables try only to show the initial incidence of a tax or a tax change on the after-tax incomes of those assumed to pay it. They do not examine Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1710 Rhode Island Avenue, N.W., 11th Floor * Washington, D.C. 20036 Taxation (202) 463-1400 * Fax (202) 463-6199 * Internet www.iret.org

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