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CHAPTER 18 Taxation in the United States and

Around the World.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523


18.1 Types of Taxation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524
Taxes on Earnings 524
Taxes on Individual Income 525
Taxes on Corporate Income 525
Taxes on Wealth 525
Taxes on Consumption 525
Taxation Around the World 525

18.2 Structure of the Individual Income Tax


in the United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527
Computing the Tax Base 527
Tax Rates and Taxes Paid 529
Application: The Coming AMT Timebomb 530

18.3 Measuring the Fairness of Tax Systems.. . . . . . . . . . . . . . . . . . . . . . . . . . 532


Average and Marginal Tax Rates 532
Vertical and Horizontal Equity 533
Measuring Vertical Equity 534
Application: The Political Process of Measuring Tax Fairness 534
18.4 Defining the Income Tax Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 536
The Haig-Simons Comprehensive Income Definition 536
Deviations Due to Ability-to-Pay Considerations 537
Deviations Due to Costs of Earning Income 538
Application: What Are Appropriate Business Deductions? 538

18.5 Externality/Public Goods Rationales


for Deviating from Haig-Simons.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540
Charitable Giving 540
Spending Crowd-Out Versus Tax Subsidy Crowd-In 541
Consumer Sovereignty Versus Imperfect Information 543
Housing 543
Empirical Evidence: The Social Benefits of Homeownership 545
Tax Deductions Versus Tax Credits 546
Application: The Refundability Debate 547
Bottom Line: Tax Expenditures 549

18.6 The Appropriate Unit of Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550


The Problem of the Marriage Tax 550
Marriage Taxes in Practice 552

18.7 Conclusion.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554


Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554
Questions and Problems.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555
Advanced Questions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556