By
nEW
The Design of the Tax
System
The notorious 1920s
gangster and crime boss was never convicted for his many violent crimes. Yet eventually he did
go to jail for tax evasion. He had neglected to heed Ben Franklin’s observation
that in this world nothing is certain but death and taxes.
When Franklin made this
claim in 1989 the average American paid less than 5 percent of his income in
taxes and that remained true for the next hundred years. Over the course of the
20th century however taxes became ever more important in the life of
the typical U.S. citizen. Today all taxes taken together including personal
income taxes corporate income taxes payroll taxes sales taxes and property
taxes use up about a third of the average American’s income. In many European
countries the tax bite is even larger.
Taxes are inevitable
because we as citizens expect the government to provide us with various goods
and services. The government can sometimes improve market outcomes. When the
government remedies an externality such as air pollution provides a public good
such as national defense or regulates the use of a common resource such as fish
a public lake it can raise economic well-being. Yet the benefits of government
come with costs. For the government to perform these and its many other
functions it needs to raise revenue through taxation.
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