Personal income taxes is a very sensitive issue in economics and politics as well. It is after all, money which is taken forcibly from the income earners of the state. It is especially relevant today as the presidential election nears. Senator John McCain has made cutting income tax a cornerstone of his economic policy. While Senators Clinton and Obama have made overtures about reducing the tax burden, they do so by the way of tax credits, not by an outright reduction on income tax.
As said before, people care about income taxes since it is taken forcibly from them. I say forcibly since it is quite exceptional for a regular person to willingly give up a part of his income to the government. The justification for this deduction is that income taxes are used by the government to function as well as to provide public goods and services. In this case, the income tax becomes the shared burden of our civil society.
A problem arises when we consider the sharing of this burden. The US like many countries uses the system of progressive taxation. In this situation, higher income earners pay a larger percentage of income tax than lower income earners. The justification for this is that higher income earners can carry much more weight compared to lower income earners. However, opponents of progressive taxation view this differently, seeing it as society punishing its more productive members of society. Policy makers when deciding upon the rate of progressive taxation should make sure that they are not charging too much (and thus punishing the most productive citizens) and that they are not charging too little (and thus making the better-off citizens not “feel” their share).
Another issue when planning income taxes is the benefits principle. Under this principle, people who avail of more public goods should pay more income tax than those who avail less of public goods. The benefits principle is used as another justification for progressive taxation as the wealthy citizens of society benefit more from public goods than poorer citizens. As an example, wealthy citizens benefit more from fire protection as they have more expensive homes. A well-off citizen loses much more money should his house burn down compared to a poorer citizen. The same could be said for other public services such as police protection, roads, etc.
Another principle that should be considered in income taxation is the concept of horizontal equity. In theory, people who earn the same amount of money should pay the same amount of tax. However, in reality this is not true. A bachelor who makes $50,000 a year pays more tax than a father of two who earns the same amount of money. This is because the family man gets tax deductions due to many factors such as his two children, his marriage to his wife, whether he is sending one child to college, etc. Even if the bachelor and the father earn the same amount of money, they have different levels of disposable income as the father has to pay for tuition, raising two children, etc. As such, the government gives tax breaks as a form of consideration to the difference in living conditions between the two.
We recognize that in any real society, there will always be economic disparities between each and every individual. These disparities make it difficult for economic decision makers to allocate how each individual should carry the burden of paying for public goods. The issue of equity often arises during these times. However, each individual may have a differing opinion on the proper way of equitable distribution of burden. It is therefore necessary for each person to understand the critical principles underlying the personal income tax so that he or she may be able to make the right decisions when the proper time comes.
Mankiw, Gregory. Principles of Economics. 12th . Mason, OH: Thomson Higher Education, 2007.