Course Learning Outcomes for Unit VI
Upon completion of this unit, students should be able to:
2. Discuss the ethical implications on the budget process at the federal, state, and local levels.
2.1 Assess ethical practices of funds appropriations.
5. Evaluate a model budget.
5.1 Analyze taxation impact on budgets.
5.2 Assess the distribution of income on budgets.
8. Apply practical methods to reconstructing finance and budgeting techniques.
8.1 Identify financial policy internal/external opportunities and challenges.
Required Unit Resources
Chapter 11: Taxation, Prices, Efficiency, and the Distribution of Income
Chapter 13: The Theory of Income Taxation
In order to access the following resource, click the link below.
Spivak, L. E. (Producer), Cox. R. (Director), & Lockhart, R. (Director). (2007). Ronald Reagan on state and
Federal income taxes [Segment 3 of 9) [Video file]. Retrieved from
https://libraryresources.columbiasouthern.edu/login?auth=CAS&url=https://fod.infobase.com/PortalPl
aylists.aspx?wID=273866&xtid=39075&loid=55218
The transcript for this video can be found by clicking the “Transcript” tab to the right of the video in the Films
on Demand database.

Unit Lesson
Which groups of Americans earn the most income? Which groups of Americans pay the most taxes? Are
taxes fair? Do taxes matter? These questions have fueled tax debates for decades. Distributing the tax
burden fairly is a major policy issue. Two centerpieces of the 2012 Presidential election debates were (1)
Bush’s tax cuts that lowered all federal income tax rates and (2) Mitt Romney stating that there are 47% of
Americans who pay no income tax (Haidt, 2012). Both of these centerpieces were front burner issues.
Opponents of Bush’s tax cuts argued that
higher-income Americans benefited from the
policy. Proponents of Bush’s tax cuts argued
that lower-income Americans were not harmed
by policies. Ideas and perception regarding
equitable tax treatment influence preferences
for redistributive policies.
As indicated previously in the course,
government budgets are financed through the
collection of taxes. Taxation impacts
government’s efficiency and income
distribution (Hyman, 2014), Therefore, taxes
influence the budget decision-making process
of government and individual citizens
(Hyman 2014). Characteristics of taxes can
include simplicity, efficiency, certainty, and
equity (Cheney, 2012). The collection of taxes
allows government to achieve short and longterm objectives. Therefore, generating
sufficient revenue is necessary to fund
government’s expenditures. Hence, the tax structure becomes very important. Major tax structures, as
indicated previously, are progressive, regressive, and proportional. These structures are applied to personal
earnings, purchases, property values, and business profits. The conventional thought is that taxes must be
utilized for the common defense and general welfare of citizens. Other reasons for taxes influencing
government’s decision-making include encouraging or discouraging certain business practices.
Public leaders can implement financial policies such as tax breaks or credits to encourage business behavior
to stimulate research in a developing field such as renewable energy. For example, the Obama administration
implemented a federal incentive for wind and solar power projects (Lobsenz, 2009). The incentive takes the
form of a tax depreciation or credit based on investment or production. The Solar Investment Tax Credit (ITC)
encourages purchasing and installing solar systems in homes. The benefit includes a tax credit that reduces
personal income taxes.
Likewise, public leaders can choose to create financial policies that discourage a business activity through
levying higher taxes to make it less appealing. For example, an accepted strategy to lower the use of nicotine
products is the application of a tobacco tax. Research indicates that increasing price and taxes of tobacco
products reduces the percentages of smokers among males, Blacks, Hispanics, and lower-income smokers;
reduces the negative birth defects of newborns as well as reduces other health problems; minimizes the
likelihood of children becoming smokers; and reduces secondhand smoke exposure among nonsmokers
(Bowser & Canning, 2013).
Taxation influences citizens’ decisions
regarding consumption, which results
from an individual action or behavior
(Hyman, 2014). Therefore, it is plausible
to say that taxes carry excess burdens for
most. Many citizens substitute one action
for another as a response to taxes. For
example, citizens’ responses to gasoline
prices and taxes resulted in less travel,
delaying purchases of new cars, and
increasing purchases of more fuel
efficient vehicles (Beresteanu & Li, 2011).
The U.S. Government supports consumer
purchases of hybrid vehicles in the form
of federal income tax deductions. Utilizing
policy tools such as tax deduction
empowers officials to maintain control
over externalities that exist with vehicle
use such as pollution.
Taxes can cause a loss in efficiency
through externalities (Hyman, 2014). Many argue that taxes are growth-reducing. Citizens’ decisions
regarding taxes are fueled by the perception of fairness and the idea that certain conditions will yield a better
result for the required amount of effort or money. For example, citizens may decide to relocate from one
geographical area to another based on tax-rate disparities. Likewise, businesses may opt to discontinue
operations in areas of tax disparities because it will impact sustainability. Improving the perception of fair
taxation includes political leaders utilizing revenues to deliver goods and services, lowering tax rates,
encouraging investment, and increasing employment and wages. Lowering taxes allows citizens to keep their
earnings and spend the money on goods.
Some may be familiar with the Buffett rule proposal endorsed by President Obama. Warren Buffet, a multibillionaire, stated that he pays a lower tax rate than his secretary. The Buffet rule seeks to increase federal
tax rates on the wealthiest citizens (Cheney, 2012). Furthermore, supporters of the rule emphasize that
citizens earning $1 million yearly should not pay a lesser portion of their earnings in taxes than those in the
middle-class bracket (Kenny, 2012). Proponents of the tax increase suggest those earning higher incomes
can afford to pay more. Their mantra was supported with the idea that this rule will achieve more fairness in
the tax code. Opponents argue that the rule would not solve budget deficits. Additionally, opponents argue
that the tax would not improve public goods and services. The tax rate for middle class Americans, according
to the Obama Administration, has basically remained stagnant. Examples of existing tax disparities, such as
the one between Warren Buffet and his secretary, erode citizens’ trust. More specifically, gross tax disparities
leave citizens frustrated because these do not reflect America’s values of fairness.
The lump-sum tax is considered an alternative. This is a non-fluctuating tax (Hyman, 2014). Additionally,
lump-sum taxes would be the same for all citizens. Hyman suggests this tax is very efficient because it
increases a citizen’s desire to work. Others suggest lump-sum taxes stimulate efficiency because they reduce
tax avoidance. For example, let’s consider the head tax. Similar to the lump-sum tax, a head tax requires
citizens to pay a set amount yearly. However, this alternative is limited because of its fixed nature. The lumpsum approach does not account for taxpayer modifications such as the capacity to make payments, increases
or decreases in wages, consumption behaviors, and pricing.
A price distorting tax alters the price of goods, which results in an excess tax burden (Hyman, 2014). Citizens
subjected to price distortion tax, rather than a lump-sum tax, experience a loss of well-being (Hyman, 2014).
An important concept to make note of is the shifting of a tax. This concept transfers the burden of paying
taxes from those legally liable to others. The dichotomy of this concept is illustrated in the forward and
backward shifting approach. Forward shifting asserts that the seller is liable for the tax resulting from an
increase in price. However, the burden of paying taxes is shifted from the seller to the buyer. Backward
shifting asserts that the buyer is liable for the tax resulting from a decrease in price. However, the burden of
paying taxes is shifted from the buyer to the seller.
Taxation can have negative impacts on savings. Oftentimes, income that is saved and invested is penalized
by the tax code (Hyman, 2014). Unlike the lump-sum tax, fluctuating tax rates on personal income reduce the
desire to work (Hyman, 2014). Taxation on personal income, according to Hyman (2014), increases the
likelihood of individuals to shift away from work. In contrast, others argue that modifying tax rates does not
have a substantial impact on citizens’ decisions regarding how much to work (Huang, 2012). Depending on
the investment, savings can be subjected to as many as four layers of tax. Saved income is taxed more than
consumed income. Proponents of lower taxes argue that tax policies can negatively impact savings and
investments. Counter arguments, such as the Buffet rule, suggest tax increases will have little effect on
savings and investing (Huang, 2012). Although individuals have contrasting views regarding the impact of
taxation, a shared perspective suggests that changes to the tax code are typically rare.
Universally, taxation is accepted across the board from most national and sub-national governments. Income
and property taxes generate the most operational revenues. However, debates regarding the approach to
taxation continue to evolve.