Taxation is one of the most essential revenues for any government. Gruber (2005) points out that taxation aims at raising revenue to finance government expenditure on administration and social services. It is also a means of reaching a list of social objectives depending on the society. Policy makers refer to taxation as a means of redistributing wealth, which in the end work towards reducing inequalities in the society pertaining income and wealth.
According to Gruber (2005), taxes in the United States are imposed at various levels including property, income, payroll, imports, sales, and others. Payroll taxes, imposed by both the federal and state governments, include Medicare taxes, as well as Social Security. A progressive tax is that which the rate of tax increases proportionally to the taxable base. This may apply to individual taxes or the whole system. The opposite is known as a regressive tax.
Gruber (2005) indicates that Medicare tax is the amount withheld by an employer, which goes to cover the cost of running the Medicare program. Employers collect from their employees and forward to the Internal Revenue Service. On the other hand, excise tax is an inland tax of the sale or production for the sales of goods. It is levied on some goods that are produced or sold within the territories of a country. On the other hand, customs duties are taxes on importation.
It is evident that, in the United States, as well as worldwide, economic hardships and increased expenditure are putting pressure on the taxpayers. Some policy makers have proposed a tax hike mix that would seek to increase revenue, as well as budgets cuts to reduce the expenditure, or reformation of entitlement, for example, the Social Security. Healthcare costs have escalated because of an ageing and costly workforce, and the growing middle class, which has significantly changed their lifestyle to suit a more westernized one. Eating of junk food is evident in this lifestyle and hence a rise in diseases such as obesity. Policy makers have called on the government, to focus on preventive measure to cut down costs that go along with treatment.
Several players are involved in taxation policy. They include taxpayers (employers, employees, individuals or families), the federal and local governments, and unincorporated associations, or foreign lenders. Employers are essential because the FICA act compels them to withhold some amount of the employee’s salaries, match the employee’s amount and in the end contribute to the Social Security Trust Fund. The fund takes care of the employees later in life when they are retired. The employers also take part in the tax policy because they are the ones giving employment; hence, they determine the salary and the amount of returns.
Interest groups, which may be political or special interest, play a crucial role in the taxation debate. They always demand public expenditure, and may even determine tax systems that suit them and the society. A number of these interest groups include high and middle-income earners. It is evident that there is a link between interest groups demand and the structure of tax systems.
Conlan & Wrightson (1990) note that while political groups have been focusing on government expenditure and not tax policy, economists have narrowed down to how taxes affect the economy. According to Conlan & Wrightson (1990), relationships between interest groups and the government always differ when it comes to tax policy depending on the structure of their political relationships. Involving interest groups in policymaking ensures that there is a balance in policy outcomes.
Over the past decades, a number of notable privileges have been granted to these interest groups thereby resulting in the expansion of the tax base, as well as a decrease in tax rates of many taxpayers. Interest groups are essential in that they protect their privileges and avoid being oppressed. They play an extremely significant role in taxation policy.
The government, on the other hand, is essential since it is the large employer of policy makers. They make tax policies that would end up in other policy outcomes besides raising revenue. In general, the government oversees the tax system ensures that it caters for the interest of its taxpayers. The tax system has to be predictable, stable and simple. The government should also be able to respond quickly to any circumstance that may result to a change of the tax system.
Conlan & Wrightson (1990) assert that the government ensures that there is discipline on policy makers and provides certainty for taxpayers regarding the timing or process for the announcement of any tax policy change. The government is also responsible for providing the momentum in case the tax system needs to be simplified. A credible government should recognize the value that businesses have on predictability. Therefore, it should be committed to giving the much needed clarity and certainty on the way forward. The government is then expected to set out its policy objectives, and guide the reform agenda.
Taxpayers are equally significant players in the tax policy. The attitude and compliance nature of taxpayers goes a long way into determining the tax policy. They are the ones who pay the different types of taxes. Taxpayers range from individuals to business entities, trusts, estates, or other, different types of organizations. Lately, foreign lenders have also begun playing a major role in influencing the tax policy of any country. Globalization has made countries influence each other’s economy. These foreign lenders can influence such economic measures as budgets cuts or taxes placed on imports and exports.
Tax policies are different because they largely depend on the political nature of a country or style of taxation. According to Aaron & Galper (1986), the government is largely influenced by the politics of the day. Politics goes a long way into influencing how and why the government would choose one solution for its tax problems and leave out the other. As an example, Mellon (1924) points out that, the Social Security Tax in the United States has ever been justified as an insurance contribution and not real tax. Therefore, the government can decide whether a tax policy should remain in place or make marginal adjustments. However, a government has to listen to its people and other stakeholders before adjusting the tax policy and hence come into friction with a number of institutions or policy makers such as politicians.
On the other hand, taxpayers also have a huge influence on the political nature of a tax policy. They hold the government responsible for any failures in implementing tax reforms. Aaron & Galper (1986) point out that the public at large can be dissatisfied with the way tax issues are handled; hence, call for reforms. Over the years, taxpayers have called for reforms depending on the economy of the day or culture. For example, previous generations have been placing emphasis on equity while the younger generation value efficiency more than before. Politics and tax policy are inseparable because more often than not, politicians would want to implement values that brought them into power. Different political cultures have tried time over time to exert their influence over the choice of tax policies.
In conclusion, it is significant to note that ideas concerning policy are usually formed in institutional, political and economic contexts. Policy choices made in an era will affect future policy measures. Political leaders represent the masses and act as agents who bring forward new policy ideas. However, it should be noted that policies and ideas are not neutral; they may be advantageous to some interest over others.