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ECO 4113 FISCAL ECONOMICS
CHAPTER 10
1
Prof. Dr. Yeşim Kuştepeli
TAXES ON INCOME
TAXES ON INCOME
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The term income tax registers in most people’s minds
as the individual income tax, but several other kinds
of taxes are also based directly on income.
Prof. Dr. Yeşim Kuştepeli
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The income tax is the largest source of government
revenue.
The Social Security payroll tax and other payroll
taxes are also income taxes, as is the corporate
income tax.
Many local business license taxes are income taxes
because they are based on the firm’s gross receipts,or
income.
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WHY TAX INCOME ?
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Prof. Dr. Yeşim Kuştepeli
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For most of human history, taxes have been collected
where “tax handles” can be found -a visible asset,a
transaction,a border crossing.
Property taxes ,poll taxes, sales and excise taxes,and
tariffs or tolls have a much longer history than income
taxes.
In many cases, the choice of sales rather than income
tax as the primary revenue source reflected a high
degree of noncompliance with the income tax.
Income taxes depend heavily on the voluntary
cooperation of taxpayers and employers, backed by
threats of audit and penalties for at least some tax
cheaters.
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Progressive income taxes are the only major revenue source
with an elasticity greater than 1, that is, for which a %1
increase in income leads to more than a %1 increase in tax
revenue.
Prof. Dr. Yeşim Kuştepeli
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If, however, the government is able to generate the paper
trail necessary to administer an income tax, this tax has
certain significant advantages. It can be a highly productive
revenue resource.
This tax lends itself to fine-tuning both in terms of equity and
in terms of achieving social goals of encouraging desirable
activities.
It generates a regular flow of revenue to the government
through withholding, unlike the property tax,which comes in
all at once for most local governments.
It even provides information that enables tax collectors to do
a better job of enforcement on other taxes.
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MEASURING INCOME FOR TAX PURPOSES
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Wealth is a stock of assets, income is a flow of assets.
Prof. Dr. Yeşim Kuştepeli
There are several important relationships between
the stock of wealth in a household and the flow of
income.
1) wealth or assets generate income.
2)any flow of income into the household must by
definition either be consumed or saved, and any
consumption or saving must be financed by an inflow
of revenue from earnings,income from capital
(interest,dividends,rents), gifts,asset appreciation, or
increased debt.
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This definition would incorporate all flows into the
household minus any new debt incurred, because any
increase in debt reduces the household’s net wealth.
Prof. Dr. Yeşim Kuştepeli
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One possible definition of a household’s income is the
change in a household’s net wealth over the course of
a year plus consumption spending.
This definition of income is broader than most
governments would choose to use as a base for an
income tax, but it does provide a starting point from
which adjustments can be made. Adjustments are
made primarily for these three reasons: efficiency,
equity, and costs of collection/compliance.
Policy makers have to bear in mind that any
exclusion of categories of income from the base will
reduce the base and either reduce potential revenue
or require a higher tax rate to achieve the same
revenue.
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EFFICIECY ISSUES IN INCOME TAXATION
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An income tax will have a substitution effect that leads to
replacing taxed working hours with untaxed leisure time,
and an income effect because it now requires more working
hours to earn the same take-home pay.
Prof. Dr. Yeşim Kuştepeli
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Taxing income but not leisure is the fundamental source of
distortions in choice that results from any form of income
taxation.
Different tax payers will react differently to the imposition
of income taxes, but all of them will see some distortion of
their choices relative to what they would have done in the
absence of an income tax.
Creating exclusions or favoring certain sources of income
over others provides an incentive to arrange one’s sources
of income so as to minimize the tax liability.
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Prof. Dr. Yeşim Kuştepeli
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If dividends are taxable and capital gains are not,
there is an incentive for taxpayers to encourage firms
in which they hold stock to focus on creating capital
gains in the form of higher stock prices instead of
distributing net earnings of the corporation in the
form of (taxable) dividends.
If some financial assets receive highly favorable tax
treatment (such as municipal bonds or tax-deferred
annuities), funds will flow into those assets at the
expense of other assets with higher pretax returns.
These distortions of household decisions in response
to tax rules are among the most important efficiency
effects of income taxation.
If efficiency were the only goal ,the tax code would
use the broadest possible base for the income tax in
order to minimize such changes in behavior.
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The broadest possible base, however, is a difficult
standard to maintain when the tax collector must
deal with actual flows of revenue through households.
Prof. Dr. Yeşim Kuştepeli
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Such a broad base would also make it possible to
collect the same revenue with lower rates, reducing
those distortions in income-leisure choices that rise
with the square of the tax rate.
Some kinds of income create greater challenges in
tracking and collecting than others.
If such unrealized capital gains were taxed, the
income tax collector would be forced to get into the
business of assessing the value of household assets
(including real estate), and the cost of administering
the income tax would rise astronomically.
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The result is a greater tax burden than would
occur if capital gains were taxed as they accrued.
Prof. Dr. Yeşim Kuştepeli
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If capital gains on assets are excluded from the
taxable income until the assets are sold, then
there is a “lumping” of income in a single
yearwhen an asset is sold, often pushing the
taxpayer into a higher tax bracket.
The tax treatment of capital gains is one of many
challenges for designing an efficient income tax.
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EQUITY ISSUES IN INCOME TAXATION
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All taxes raise issues of equity, but equity is a
bigger issue in income taxation than in taxation
of consumption or wealth.
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Both horizantal and vertical equity are important
issues in income tax design.
Prof. Dr. Yeşim Kuştepeli
Why?
1) it is possible to fine-tune the distribution of the
burden of the income tax more closely than most
other taxes,
2) because it is one of the few taxes that lends
itself to progressivity.
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Horizontal equity means treating people equally
when they are in equal economic situations.
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The definition of equal economic situations is closely
linked to equal annual income flow.
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The income flow is only a starting point in defining
equal situations, because other factors affect the
rtelative taxpaying ability of two households with the
same income flows.
There may be a difference in wealth, or household
size, or other obligations (medical expenses, caring for
aging parents, child care expenses,etc.) that should be
taken into account.
Such equity concerns account for a significant amount
of the volume and complexity of the current federal
income tax code.
Prof. Dr. Yeşim Kuştepeli
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In the case of the income tax, some would argue that
proportional taxation constitutes vertical equity.
Others would argue that vertical equity should be
viewed as a function of the tax system as a whole, not
just one particular tax.
Prof. Dr. Yeşim Kuştepeli
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Vertical equity means treating people with an
appropriate degree of difference based on differences in
their economic situation or ability to pay.
Because many other taxes in the system are regressive,
a progressive income tax serves as a counterweight in
the overall system, moving it toward proportionality.
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Progressivity can be built into an income tax in two
different ways.
1) to exclude a certain base amount of income from tax
through exemptions, exclusions, or deductions.
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The first method increases equity at the expense of
complexity, which means higher collection/compliance
costs.
The second method, progressive rates, may improve equity
at the expense of efficiency.
Progressive rate structures increase the distortions in
people’s decisions and cause them to accelerate or postpone
some of those actions on the basis of the tax bracket they
would find themselves in one year versus another.
Prof. Dr. Yeşim Kuştepeli
2) to have a graduated series of tax rates that apply to
increments of income.
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COLLECTION AND COMPLIANCE COST ISSUES
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On the other hand, making adjustments in the tax
base to accomodate horizontal equity concerns
makes the tax law more difficult to administer
and more confusing for the taxpayer to comply
with.
A progressive rate structure, which is put in place
in the interest of vertical equity, makes the tax
liability more difficult to compute.
Prof. Dr. Yeşim Kuştepeli
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Creating a broad tax base for efficiency reasons
requires more effort by both tax collectors and
taxpayers to keep track of a variety income flows,
increasing both collection and compliance costs.
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Other forms of income taxes, such as payroll taxes,
are simpler to administer and to comply with for a
variety of reasons.
In some cases, for local income taxes and Social
Security taxes, a single flat rate applies, and most of
the collection is through payroll withholding, often
without a need to file a return.
In the case of many state income taxes ,once the
federal return is complete, the additional effort
required to file a state return is very small.
Prof. Dr. Yeşim Kuştepeli
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The low collection cost is largely because much of the
cost is shifted to the taxpayer and the taxpayer’s
employer, who must maintain records and fill out
various forms in order to comply with the tax.
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DEFINING TAXABLE INCOME
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The process of determining federal income tax liability is
conceptually simple, even though the actual process may be
very time consuming.
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The taxpayer must then determine which of these income
sources need to be reported as income and which do not.
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Those kinds of income that are not included in gross income
are referred to as exclusions.
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Among the income sources that typically do not have to be
reported at all are insurance claims income, most employee
fringe benefits, scholarships, gifts received, and interest on
state and local bonds.
Prof. Dr. Yeşim Kuştepeli
The first step is to determine gross income-income from all
sources,including wages, salary, rents, royalties, pensions,
interest, dividends, self-employment earnings, gifts and
scholarships.
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From gross income to taxable income there is a series
of steps called adjustments, exemptions, and
deductions.
Adjustments are those additions or subtractions that
are made to get from gross income to adjusted gross
income.
Adjusted gross income is not yet the basis for tax
computations ,but this figure is important,because it
is used to determine various limitations on exclusions
and tax credits and ceilings on certain deductions.
Prof. Dr. Yeşim Kuştepeli
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Partial exclusions include a portion of Social Security
benefits for higher income households (lower income
households get to exclude all Social Security benefits).
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For people whose income is modest and comes
almost entirely from wages or salary, and who
have no self employment income or other
complications, the determination of adjusted
gross income is very easy.
Prof. Dr. Yeşim Kuştepeli
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Among the adjustments made at this point are
subtractions from gross income of contributions
to various kinds of retirement saving plans, part
of health insurance premiums, job-related
moving expenses, rent and royalty expenses, selfemployment health insurance and half of self
employment tax, and alimony payments.
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DETERMINING TAXABLE INCOME
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At this point,the filing status of the taxpayer
becomes a factor in determining how much is
subtracted from adjustable gross income to arrive
at taxable income.
Filing status options are joint (a married couple
filing a combined return, whether both or just
one had income), head of household (a person
who has at least one dependent child living with
him or her), single, or married filing seperately.
Prof. Dr. Yeşim Kuştepeli
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The next step in the process is to convert
adjusted gross income to taxable income, which
is the income figure used to compute tax liability.
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These two components,which are available to
every taxpayer, exclude a base amount of income
from taxation.
Exemptions and deductions would make the
income tax progressive even without a series of
graduated tax rates.
Prof. Dr. Yeşim Kuştepeli
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The two components of the difference between
adjusted gross income and taxable income are
personal exemptions and either standard or
itemized deductions.
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A FLOWCHART FOR CALCULATING FEDERAL
INCOME TAX
STOP! COMPUTE TAX LIABILITY HERE!
Tax Liability
- Withholding
- Other credits
+ Other taxes due
= Tax due or refund
Prof. Dr. Yeşim Kuştepeli
Start with sources of income
- Exclusions
= Gross income
± Adjustments
= Adjusted Gross Income
- Exemptions and deductions
= Taxable income
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Itemized deductions consist of various taxpayer
expenditure that Congress has favored with
special tax treatment.
The major categories are health expenses over a
certain percent of income, state and local taxes
paid (mostly income and property taxes, but not
sales taxes), interest on mortgages and student
loans, charitable contributions, and unreimbursed
employee business expenses over a certain
percentage of income.
Prof. Dr. Yeşim Kuştepeli
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Standard and itemized deductions serve several
important public policy purposes.
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COMPUTING TAX LIABILITY
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Here filing status becomes very important, because
there are different tax rates and schedules for married
filing seperately, single, married filing jointly, and
heads of households, again reflecting some difficult
equity decisions in designing the tax structure.
One of the most common sources of confusion in the
income tax is the difference between the average rate
and the marginal rate.
The marginal rate is the tax rate applied to the last
lira of taxable income, while the average rate is simply
the tax due as a fraction or percentage of taxable
income.
Prof. Dr. Yeşim Kuştepeli
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Having arrived at taxable income, the next step is to
determine taxes owed.
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Some taxpayers, generally high income, manage to
reduce their taxable income through extensive use
of itemized deductions or other tax preferences
such as tax exempt interest income, tax-sheltered
business losses, and accelerated depreciation.
The alternative minimum tax was designed to
increase equity by ensuring a fair contribution
from these higher income taxpayers, but it also
increased the complexity of the tax system
considerably from the standpoint of both collection
and compliance costs.
Prof. Dr. Yeşim Kuştepeli
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For some taxpayers, a second computation, called
the alternative minimum tax, is necessary.
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THE LAST STEP:WHO OWES WHOM?
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The difference will be either the amount of owed, (in
which case the taxpayer will write a check and attach
it to the return or arrange to pay via a credit card) or
the amount due as a refund, which will probably take
six to eight weeks to arrive if everything was done
correctly.
Most taxpayers who have any liability have already
paid a part of their taxes either through payroll
withholding (the most common method), or through
quarterly filings of estimated tax, or both.
Prof. Dr. Yeşim Kuştepeli
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Finally, the tax form asks the filer to figure out how
much has already been paid, what other kinds of
taxes need to be figured in, and what credits might
apply.
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Taxpayers who are self-employed or who have other
kinds of income not subject to payroll withholding
(interest, dividends, rents, royalties, consulting,
taxable pensions etc.) usually find it necessary to file
an estimated tax form each quarter and send in a
payment.
Prof. Dr. Yeşim Kuştepeli
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Payroll withholding not only guarantees the
government a steady flow of revenue but also reduces
the visibility and pain of the annual ritual of settling
accounts with the federal government.
Tax credits are different from deductions because
the value of a tax credit is closer to being equal for all
taxpayers, whereas the value of an itemized
deduction is greater to a person in a 35% tax bracket
than to one in a 15% tax bracket.
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The child care credit is one of the larger individual
income tax credits.
The most significant credit, is the Earned
Income Tax Credit (EITC).
The EITC represents a step in the direction of a
negative income tax, an idea that was
popularized by economist Milton Friedman in the
1970’s.
Prof. Dr. Yeşim Kuştepeli
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The higher credit rates are provided for lower
income households, adding a bit of progressivity to
the credit in order to encourage lower income
families to seek out and use quality child care
services.
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Up to a certain income level, households would receive
a payment from the government that diminished as
their income rose.
At a certain treshold level, the subsidy would become
zero, and dollars earned above that amount would be
subject to taxation.
The EITC offers tax relief or cash payments to working
households up to an income ceiling, phasing the credits
out as income rises.
Prof. Dr. Yeşim Kuştepeli
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A negative income tax was originally proposed as an
alternative to welfare that would be much less costly to
administer and that would gradually reduce the
subsidy to lower income households as income
increased, rather than facing an abrupt cutoff.
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TAX EVASION, AVOIDANCE, AUDITS
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Tax avoidance means arranging your affairs so as to
minimize your tax burden by incurring deductible
expenses,investing in tax-exempt bonds, putting
money in tax-deferred retirement savings, or other
legal techniques.
Prof. Dr. Yeşim Kuştepeli
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Tax evasion means falsifying information on your tax
return in order to reduce your tax liability, or even
not filing at all.
There are also activities that fall in the gray area,
sometimes called “tax avoision.”
The probability a taxpayer will have to undergo an
audit is low, particularly for taxpayers with moderate
income and few deductions, credits, or exclusions.
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DIRECTIONS FOR REFORM
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Taxation of capital gains is a perennial issue.
Prof. Dr. Yeşim Kuştepeli
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The gradualist/marginal school of tax reformers
always has a laundry list of improvements in the
income tax code to increase efficiency, improve
equity, and reduce collection or compliance costs
while maintaining adequate revenue.
Capital gains are taxed at a lower effective rate
than income from other sources.
Some tax reformers would like to eliminate the tax
on capital gains altogether.
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While the same can be said for other sources of income
(your salary increase each year is at least partly
compensation for inflation), the bunching of capital
gains at the time asset is sold can kick the taxpayer
into a higher tax bracket.
This bunching effect is part of the rationale for a lower
marginal tax rate on capital gains.
Proponents of special treatment for capital gains
income also argue that encouraging investment in
assets that are likely to create capital gains constitutes
an incentive to invest, which encourages economic
growth.
Prof. Dr. Yeşim Kuştepeli
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Proponents of both special treatment and elimination
argue that capital gains consist largely of inflation
rather than real increases in income.
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CORPORATE INCOME TAXES
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There is relatively little difficulty in identifying
and deducting firms’ expenditures for labor,
utilities, supplies or raw materials, capital
equipment, land, buildings or rented property,
and interest on borrowed money.
However some other expenses fall into a gray
area that looks like tax avoidance or even tax
evasion.
Prof. Dr. Yeşim Kuştepeli
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The corporate income tax is very complicated to
administer because of the problems in defining
allowable expenses that can be deducted. These
definitional issues also have the potential to
distort firms’ decisions.
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Three particular areas of controversy in relation
to these allowable expenses are
1)depreciation of capital equipment
Prof. Dr. Yeşim Kuştepeli
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some questionable provisions have been inserted
into the tax code that inflate deductible expenses
beyond what normal cost accounting would
suggest is appropriate.
2)consumption type expenditures
3)the incentive to borrow rather than to finance
new or expanding firms with equity (stock)
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DEPRECIATION
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The rules on the timing of depreciation can affect the
amount of tax owed and favor some kinds of capital
over others, or capital over other inputs.
Allowing a firm to write off the cost of capital
equipment much more rapidly than the actual decline
in its economic value (accelerated depreciation) is
regarded as an incentive to invest in new equipment.
This tax expenditure distorts the firm’s decisions
between buying new equipment and repairing old
equipment, and discriminates in favor of capitalintensive firms compared to other kinds of corporations.
Prof. Dr. Yeşim Kuştepeli
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Capital equipment that has a useful lifetime of more
than one year must be depreciated over several years.
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DISGUISED CONSUMPTION
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Where stockholders are ineffective at making
management accountable, management may enjoy
a variety of “perks” that are actually consumption
disguised as allowable business expenses.
Prof. Dr. Yeşim Kuştepeli
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A second area of long-standing controversy is that
of distinguishing between expenditures made in
order to produce the firm’s product or service and
those that are disguised consumption, particularly
for the owners of privately held corporations or
stockholders in closely held corporations.
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DEBT VERSUS EQUITY FINANCING
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When firms need additional capital,they have three
possible sources
Borrowing(debt)
Issuing stock(equity)
Using retained earnings
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If there were no tax distortions, market forces
would establish an appropriate balance between
these three methods.
Prof. Dr. Yeşim Kuştepeli
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The third distortion that arises from the treatment
of allowable expenses is the deduction for interest
paidon borrowed funds.
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If additional shares of stock are issued,t hose added
shares dilute the value of existing equity(stock),
reducing the value of each outstanding share.
Prof. Dr. Yeşim Kuştepeli
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Using retained earnings means forgoing what those
funds could earn in a competitive market place, so
the opportunity cost of using internal capital for
investment should be the same as external
borrowing.
Pressure from stockholders to maintain the value of
their holdings will discourage management from
over using equity rather than debt financing.
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Corporations put themselves in a riskier
financial position with high debt-to-equity ratio,
because stockholders have no choice during bad
times but to wait it out, while bondholders have
an enforceable claim to payment that could drive
a firm into bankruptcy.
Prof. Dr. Yeşim Kuştepeli
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The effect of the corporate income tax is to tilt
the balance in favor of issuing bonds (borrowing
or debt financing) rather than stock (equity
financing), because interest paid to borrowers is
deductible from the corporate income tax, but
dividends paid to stockholders are not.
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WHO PAYS THE CORPORATE INCOME TAX?
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The burden must fall in some combination on owners
(stockholders), workers, and consumers of the firm’s
product, because those constitute all the possible parties
to any activities in which the burden can be shifted.
If (1) all firms were corporations
(2) all owners were individual tax payers
(3) all relevant markets were highly competitive
then the corporate income tax would become a tax on
capital.
Prof. Dr. Yeşim Kuştepeli
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The incidence of the corporate income tax has been a
source of debate among economists for years.
40
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In the long run, the supply of financial capital is highly
elastic and flows freely between countries and between
business firms and other borrowers.
To offer the same rate of return as others who are competing
for funds, corporations would require a higher pretax return
in order to generate the same after-tax return.
Prof. Dr. Yeşim Kuştepeli
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In the short run, all of the burden of the tax would fall on
the owners of the fixed supply of capital, who would receive
a reduced return on their investment, much like owners of
land who are faced with a property tax.
They would move up their demand curve for capital,
acquiring less capital by only choosing those investment
projects with much higher rates of return.
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Corporations may invest less in capital per worker than
they would otherwise.
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Capital is both a substitute and a complement to
workers.
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Less capital investment may mean more workers, but
less productive ones (since each worker has less capital
to workwith), and hence lower wages.
In this way some of the burden of the corporate income
tax may fall on workers in the long run.
Prof. Dr. Yeşim Kuştepeli
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One effect of the corporate income tax may be to
encourage firms to be organized as partnerships or
proprietorships (or one of the special forms of
corporations provided for in the tax law) in order to
reduce their tax burdens.
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A second effect may be that the higher cost of
capital to corporations translates into higher
prices for their products relative to those of
noncorporate firms,shifting some of the burden of
the corporate income tax to buyers of products
produced by the corporate sector.
Prof. Dr. Yeşim Kuştepeli
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The result is a less efficient mix of kinds of
business organizations than would otherwise
occur.
As long as markets are competitive on both a
national and international scale, the main burden
of the tax falls on shareholders.
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CASE AGAINST THE CORPORATE INCOME TAX
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When the shareholders receive part of that income as
dividends, it becomes part of their personal income
and is subject to individual income tax.
When the corporation retains (and reinvests) part or
all of its profit or net income, that reinvestment should
increase the value of the shares of stock.
Prof. Dr. Yeşim Kuştepeli
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Corporations are owned by their shareholders.
When the shareholder sells the stock,the capital gain
(increase in the value of the stock) is taxable income.
The issue for many people involves both efficiency and
equity.
44
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It is for this reason that there has been at times a
limited divident exclusion on the individual income
tax, and favorable treatment of capital gains.
The alternative proposal is called full integration of
the individual and corporate income tax so that
corporate profits are taxed only once.
If they are taxed at the source, then any distribution
or capital gain from sale of stock should be exempt
from individual income taxes, or should only be taxed
to the extent that the taxpayer is in a higher tax
bracket than the corporation.
Prof. Dr. Yeşim Kuştepeli
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When dividends and capital gains are both taxed as
ordinary income to stockholders, an additional tax on
corporate net income amounts to double taxation.
45
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One of them is the proposed flat tax, which
seperates individual income tax from all kinds of
business income, including proprietorships,
partnerships, and corporations,which are taxed
seperately with a parallel business tax.
Full integration assumes that all stockholders are
individual taxpayers .
Prof. Dr. Yeşim Kuştepeli
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A variety of ways are available for achieving
integration.
A significant amount of corporate stock is held by
entities that either pay no taxes or can defer taxes
for very long periods of time.
46
CASE FOR THE CORPORATE INCOME TAX
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A second reason is that corporations benefit from government
services ranging from fire and police protection to educational
services, and various kinds of infrastructure.
The corporate income tax can be regarded as a way to make
corporations pay some or all of the cost of these inputs into
production.
The problem with this second argument is that here is a weak link
between the value of services received and the corporations’ net
income or profit.
Prof. Dr. Yeşim Kuştepeli
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There are some valid arguments for taxing corporate net income.
One is a matter of convenience. Tax collectors needs “tax
handles”-visible flows of funds, assets, transactions-to latch onto
that provide a measure of ability to pay. Corporate net
income,which must be disclosed to stockholders each year, is a
good tax handle.
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A third argument is that taxation of corporate
income or profit adds a degree of progressivity
to the overall tax system, because shareholders
come from the uooer end of the income spectrum.
Closely related is the argument that if this tax is
indeed a tax on capital, it helps to counterbalance any
burden of the Social Security payroll tax that falls on
the employer rather than the employee.
Absent a tax on capital, the firm may have an
inefficiently strong incentive to substitute capital for
labor.
Prof. Dr. Yeşim Kuştepeli
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Firms that use substantial amounts of public services
but generate no profit contribute nothing toward the
cost of these services, while highly profitable firms
contribute heavily even if they use very few services.
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Many corporations enjoy some degree of market
power.
Unlike normal profit, which is just enough to keep the
owners’ capital invested in the business, or temporary
profit, which serves as a signal to expand output and
a reward for a fast response, monopoly profit serves
no socially useful function.
Taxing monopoly profit is attractive from the
efficiency standpoint (no undesirable changes in
economic behavior) as well as equity (since owners of
firms with monopoly power are generally owned by
higher income individuals).
Prof. Dr. Yeşim Kuştepeli
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Fourth, opposition to the corporate income tax is
based on an unrealistic assumption of highly
competitive markets.
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If there were no corporate income tax, then under the
present system capital gains that result from
reinvesting retained earnings would not be taxed
under the individual income tax until they were
distributed as dividends (which might never happen) or
the shareholder realized the gains by selling the stock.
The possibilities are unlimited for deferring this
income, perhaps until death,when it might never be
taxed unless the estate is very large.
The corporate income tax makes sure that a
substantial annual flow of income is taxed in the year
for which it is earned,rather than after long delays, or
in some cases, not at all.
Prof. Dr. Yeşim Kuştepeli
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Finally, although dividends are taxed in the year
in which they are distributed, capital gains are
another matter.
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SOCIAL SECURITY TAXES
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It is not a pure tax, nor is it a pure insurance
premium, although a recipient of Social Security
does need to make payments for a specified
number of quarters to be eligible for benefits, and
the value of benefits is somewhat related to the
level of contributions.
Prof. Dr. Yeşim Kuştepeli
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Because the tax is only on wages and cuts off at a
maximum ,the Social Security tax is moderately
regressive.
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