The various economic concepts linked with the public policies and income taxes - Essay Example

?Essay: Economics Table of Contents Introduction 3 Answer Public Education Policy & Local Property Taxes 3 Answer 2: Population & Per Capita Taxes4 Answer 3: Valuation of Land 6 Answer 4: Corporate Income Tax 6 Answer 5: Economic System & Property Taxes in South Africa 7 Conclusion 9 References 11 Introduction This essay includes discussion over the various economic concepts linked with the public policies and income taxes. Firstly, the issue of financing the public education through the local property taxes has been and the impact it has had on the valuation of properties in various districts. Secondly, the impact of property taxes on the land valuation has been analyzed. This is followed by analysis of the incidence and burden of corporate income taxes in the short as well as long run. Lastly, an investigation into the role of property taxes in capital formation, national savings and foreign investments in South Africa has been discussed. Answer 1: Public Education Policy & Local Property Taxes In U.S., the usage of local property taxes in financing school education has been criticized as unconstitutional, which generates inequalities in public education expenditures across states. The reason for this is as those districts that have larger property tax bases per pupil, can generate any amount of revenue from lower tax rates as compared to those districts having smaller tax bases (National Research Council, 1999, p.58). Therefore, it is easier for rich jurisdictions to raise revenue for public education than the poor jurisdictions. The State of Virginia finances the public schools through a combination of federal, state and local funds. Also, there is contribution of private sector through partnerships with schools and their divisions. State’s General Assembly is responsible for apportionment of state’s funds for public education, through Appropriations Act. The sources of funds are retail sales, state lottery proceeds, tax revenues and other sources. The Constitution of Virginia requires the Board of Education (BOE) to prepare SOQ (Standards of Quality) for public schools. SOQ is the minimum school educational program, the divisions must provide. The General Assembly revises SOQ, determines SOQ costs and apportions these costs between localities and state. Funding on a per pupil basis is provided through the accounts of basic aid, career and technical education, special education, English as a second language, remedial summer school, fringe benefits for funded positions and sales tax of 1.125% for public education (Virginia DOE, 2011). Answer 2: Population & Per Capita Taxes The annual average cost per police officer is $30,000 for a small town. The population of the town is 1,000. The per capita cost of employing a police officer is $30. $30,000 ? 1,000 = $30 Table 1 shows the declining per capita cost of one police officer and increasing per capita taxes. The reason of such phenomenon can be understood as the population increases (column 1) and the costs per police officer remains stable the per capita costs will decline as the same costs can be assigned to increased number of people (column 3). Also, with the increase in population, the total tax collection will increase, although the per capita taxes will remain the same (column 7) if the tax rate is constant (column 6). The assumed tax rate is 30%. The costs of police officers are assumed to be financed by the revenues from taxes. Therefore, the remaining per capita taxes have increased with declining costs of per capita costs of police officer (column 8). Figure 1 shows the graphical presentation of these results. Table 1: Per Capita Taxes & Costs of Police Officer Figure 1 Answer 3: Valuation of Land Table 2: Market Price Calculation Rent Annuity $10,000.00 Market Rate of Interest 10% Market Price of Land $100,000.00     Property Tax 5% Annual Tax Value $5,000.00 After-Tax Market Value of Land $50,000.00 The market price of the land is calculated as ratio of the annual rent in perpetuity and the market interest rate. The market price of land is calculated to be $100,000 (table 2). If a 5% property tax is imposed the market value of land will be halved, as the property tax rate is half of the market rate of interest. Therefore, the new market price of land will be $50,000. If the sale of land yields $50,000 or more, there is an incentive to the land owner to sell the land and avoid the property taxes. Answer 4: Corporate Income Tax In the short run, the taxes do not affect the marginal revenue and marginal cost. Therefore, the firms have no incentive to change the output in response to the taxes. The profit maximizing output and the price of the product will remain unchanged. The output which maximizes the profit will also maximize the after-tax profits. This means that the firm cannot boost profits by reducing the output due to imposed taxes. Therefore, in the short run, they cannot shift the tax burden to the buyers and so, the burden will have to be borne by the owners or shareholders of the firm. Since, taxes do not affect the output and price, any change in tax policy will not affect excess burden and incidence of tax in the short run. In the long run, as a result of no income taxes on the corporate investments and assuming taxes in non-corporate sector, more than the efficient amount of investment will flow to the corporate sector and less than efficient amount of investments will flow to the non-corporate sector. This misallocation of investment is resulted from imposed taxes in one sector and lifting of taxes in the other sector. The tax-induced investment flow due to corporate income taxes affects wages and output prices in the long run. Answer 5: Economic System & Property Taxes in South Africa There have been recommendations by OECD for increase in reliance on taxation of properties such as land and building. The implied advantages are that land and buildings have little effects on the resource allocation in the economy as compared to other economic assets. This is because there is less or zero effect on the decisions of economic resource suppliers to supply labor, invest in physical, financial or human capital, innovate and produce products comparable to the other forms of taxes. Property values involve less cyclical fluctuations, and therefore generate more predictable revenues than the tax revenues from labor and corporations. The real estate and land are immobile and highly visible assets, so it is more difficult to evade taxes. In the times when the other tax bases are increasingly becoming mobile due to international operations, the property tax base provides a stable tax base (OECD, 2010, p.109). If the property taxes are appropriately designed and implemented, they are likely to encourage increased accountability of the government, especially in financing local government. Property tax was an important local tax in South Africa before 1994 in apartheid era. Except some instances in Indian and colored townships, it was levied by white urban local authorities. The property tax referred to taxes on owners of immovable property i.e. land and improvements. Currently, property taxes are the annual taxes payable on the market value of the property existing within the municipal boundaries. There have been many reforms in property tax, as it is constitutionally guaranteed source revenue for local government in South Africa. Tax system is considered a means of financing public expenditures but it also enables achievement of other objectives such as social and economic progress. Taxes affect the decisions of household savings, industrial production, employment, investment and innovation. The property tax, being the recurrent tax on immovable property, is the least distortive form of tax and therefore, can be an effective instrument as growth-oriented tax reform. Government uses such instruments as a means of achieving fiscal policy objectives. Property taxes are generally progressive, as the value of land and real estate tend to rise over time (Delaney & Whittington, 2011, p.133). If properly implemented, it can become a stable source of revenue for the South African state, local and municipal government, which it can utilize to promote economic development through financing public infrastructure investment and development expenditures that benefit businesses established in those districts. The concept has been called Tax Increment Financing (TIF) (Johnson & Man, 2001, pp.102-103). This will boost the economic growth, capital formation and foreign investment, if the income tax rates are reduced along with proper implementation of property taxes. In addition to the property taxes, South Africa can implement the following measures: 1. The capital is formed in three ways, through savings, mobilization of savings, and conversion of savings into physical assets. There is a close link between the savings and capital formation. The banking institutions play a major role in mobilizing the household savings towards the corporate sector. Therefore, government should encourage savings by increasing savings interest rates on term deposits. The government should adopt expansionary monetary policy. This way the savings will be channelized towards corporate sector that will facilitate capital formation. 2. South African Government can encourage foreign investments through simplified procedures and speeding up the investment approval process. It can provide financial and fiscal incentives to the foreign firms In addition to these measures South Africa should continue its regional trade agreements and foreign trade agreements. Conclusion An attempt has been made in this essay to understand the economic aspects of the public policies and income taxes. In the first part, the discussion of issue of financing the public education through local property taxes has revealed that such a practice has resulted in inefficient taxation system leading to higher tax rates in poor jurisdictions and lower tax rates in rich jurisdictions. In Virginia, where the sources of funds for SOQ program are retail sales, state lottery proceeds, tax revenues etc. The relationship between the increasing population, per capita taxes and per capita costs of funding police officer has shown that per capita taxes can increase with the rise in population, despite the declining per capita cost of police officer. The impact of local property taxes on land valuation has revealed that land value declines with rise in property tax rate. The corporate taxes do not have any effect on the incidence on the firm’s owners and cannot be shifted to the buyers in the short run. The long run impact of corporate tax elimination leads to more than efficient investment towards corporate sector. The investigation of role of property taxes in capital formation, national savings and foreign investments in South Africa is very important as the government can generate stable and incremental revenues through the local property taxes and utilize them in infrastructure development and corporate investment through fiscal policy. In addition to the fiscal policy, the government, through expansionary monetary policy can boost savings, investments and capital formations. Overall, the taxation policy, if developed and utilized in an appropriate manner, can lead to sound economic growth. References Delaney, P.R. & Whittington, O.R. (2011). Wiley CPA Exam Review 2012, Business Environment and Concepts (9th ed.). Hoboken, NJ: John Wiley & Sons. Johnson, C.L. & Man, J.Y. (2001). Tax increment financing and economic development: uses, structures, and impacts. Albany, NY: SUNY Press. National Research Council. (1999). Making money matter: financing America's schools. Committee on Education Finance, Helen F. Ladd & Janet S. Hansen, (Eds.). Commission on Behavioral and Social Sciences and Education. Washington, DC: National Academies Press. OECD. (2010). OECD Economic Surveys: Czech Republic 2010. Czech Republic: OECD Publishing. Virginia DOE. (2011). VDOE: School Finance. Retrieved from http://www.doe.virginia.gov/school_finance/index.shtml Read More