1. Choose 3 changes in the federal and/or state tax code. These could deal with anything, but some examples would be changes in tax rates, changes in personal exemptions, changes in rules for itemized deductions, changes in the treatment of pension income, changes in corporate tax rates, etc. Explain the changes.
Who will these changes impact? Clearly for the pension income change in Kentucky those who earn less than 31,000 in pension income are unaffected, as are those who earn more than 41,000 in pension income. Really, the only change is for people making between 31,000 and 41,000 in pension income.
Who is likely to benefit from this change? Who is likely to be harmed by this change? So, can increase the standard deduction and reducing personal exemptions lower taxes or filing costs for some taxpayers? Will some pay a larger amount? Be sure to explain this carefully. Do other changes impact this answer? That is, how does changing the standard deduction and tax rates matter?
What are the simplicity issues? Does this change make the tax law more or less complicated? If we are thinking about a broad base and low rates, does this further that goal?
What are the equity issues involved? Does this change make an impact on horizontal equity? Does this change likely make the tax code more or less progressive? Does that vary depending on other characteristics of taxpayers?
2. Think of tax deductions/exemptions/credits:
We talked about rephrasing the question in regards to deductions and credits. We talked about defending why people should be treated differently by the tax code based on these particular circumstances.
For itemized deductions…why should a taxpayer have the ability to reduce their taxable income by the amount of money that they:
Pay in mortgage interest?
Pay in state and local taxes?
Give to charity?
If the rationale is an externality, how does this tax provision help “internalize the externality?” If these are Federal deductions, at some level all taxpayers pay more in taxes in order for these tax deductions to be given. Do all taxpayers benefit from the externality?
Are these deductions progressive or regressive? Should that matter? Think about how a deduction/credit operates. Who is likely to receive large benefits from the ability to deduct mortgage interest? Or charitable contributions?