Title: Income Sensitivity of a Simple Personal Income Tax
Abstract: HE personal income tax has risen in imT portance in many state and local tax systems over the past two decades and has become the mainstay of the American federal tax structure. The shape of the present federal structure effected through the revolutionary modifications of World War II contrasts sharply with that of state structures, which arose in response primarily to depression fiscal problems. This sharp increase in relative and absolute size of yield fromn the personal income tax coupled with the current collection of a substantial fraction of it through withholding has endowed it with major significance as an automatic fiscal stabilizer. Such a position warrants a more precise appraisal of its automatic contribution to economic stability. The automatic contribution to stability of even a fairly simple personal income tax rests in the first instance on the way tax liabilities respond to income changes a function of the tax base and the rate structure. The income sensitivity of the tax base depends on the distribution of income changes, on the manner in which gross taxable income is defined, on the kind and amount of deductions that are permitted in arriving at net taxable income, and on the system of exemptions for the income earner and his dependents. Tax liabilities are then determined by applying to this base either a single bracket or multiple bracket rate structure. Consumer spending decisions as based on disposable income may, however, be more responsive to tax yields than to tax liabilities, and it is obvious that it is consumer reaction to the tax that determines ultimately its automatic effects. Tax yields may, of course, differ markedly from tax liabilities. Their sensitivity to income changes will be determined by payment requirements by the speed with which liabilities are liquidated. We restrict ourselves in this paper to the measurement of the liability response of a simple personal income tax to changes in personal income. The simple tax considered is one imposed at a proportional rate on income after exemptions (similar to the first bracket of the federal income tax). While a major portion of the agrgregate response of the existing multiple bracket personal income tax is contained in this first bracket,2 a complete picture of the tax must include an analysis of the higher brackets as well.3 Moreover, while we here relate tax liabilities to personal income, ultimately they must be related to changes in national income or product. We are simply developing here one of the several building blocks needed to get a complete picture. In the next section we consider the conclusions of existing studies; in the subsequent section we present our data and findings; in the last section some of their implications.
Publication Year: 1959
Publication Date: 1959-08-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 11
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