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Reconstructing the Federal Tax System: A Guide to the Issues

2 min readBy: TF Staff

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Project Note No. 50

Executive Summary The need for taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revision is compelling. The present tax structure is in large part a legacy of the depression of the 1930’s and of World War II. Since then economic conditions have changed profoundly. The objectives of public policy have also changed. Yet there has been little adaptation of the tax system. Nor, unfortunately, is there solid basis for expecting total tax loads to go down enough to bring relief automatically.

The present period is probably unique in the history a Federal taxation. There have been few times when the deficiencies of the Federal tax system have been as vigorously discussed. Seldom have hopes for tax reduction run as high. Never has the discussion of tax changes ranged over so many aspects of tax and fiscal policy.

While there is widespread agreement that substantial changes need to be made in the Federal tax system, there are important differences of opinion as to the measures that should be undertaken to improve it. To many the problem is simply one of reducing rates. Others would seek merely to snake certain revisions or reforms in the present methods of taxing individual incomes. Still others believe that a basic overhaul of the entire system and the adoption of new forms of Federal taxation are needed.

The purpose of this study is to contribute to public knowledge and understanding of the issues involved in reconstructing the Federal tax system. No attempt is made in this study to formulate or propose a tax program. The objective of this study is simply to provide information that will help interested citizens and public officials to judge the alternatives in Federal tax revision.

This study does not analyze all of the issues which may enter the debates on tax changes. Many of the issues were reviewed in more detail in the Foundation’s earlier studies of Federal Excise Taxes (1956), Are High SurtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. Rates Worthwhile? (1957), Re-examining the Federal Corporation Income Tax (1958), The Federal Income Tax: Revising the Rate and Bracket Structure (1959), and Allocation of the Tax Burden by Income Class (1960).

The study is divided into three parts. Section I deals with the need for tax revision. Section IT sets forth the criteria for tax revision. The remainder of the study (Sections III-VI ) takes up in order the issues involved in revising the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , the corporation income tax, excise taxes, and other Federal taxes (principally estate and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. es and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es).

Tax Foundation wishes to acknowledge the assistance it received from Professor C. Lowell Harriss of Columbia University in the preparation of this study.