The Encyclopedia of Taxation and Tax Policy / Preface

Far-reaching economic developments have forced policymakers, analysts, and the public they serve to revisit basic questions on the structure and level of the public's finances and government's role in determining both. These developments range from marketplace globalization and the accompanying difficulty of taxing mobile factors of production, a continuing shift to an economy based on services and communications instead of bricks-and-mortar manufacturing, a growth in e-commerce and electronic technology that can either erode or broaden tax bases and simplify or complicate tax administration, and an aging population that demands public expenditures but is less readily taxable by many conventional means.

Also at play are less sweeping and often arcane changes that nevertheless carry huge implications for taxes. For instance, the growing sophistication of tax planning can lead to both legitimate tax avoidance and illegal evasion. The advent of electronic money has caused a corresponding decline in the paper trails that allow transactions to be followed—for good or ill. And as taxes and the tax system grow more complex, policy changes are often legislated piecemeal, with little regard for the system as a whole or for their long-term effects.

Fortunately, these changes in the tax environment have been accompanied by dramatic advances in the knowledge of public finance economics. In the past 25 years, the frontiers of public finance theory have been expanded, and the literature on how to finance the public sector and how taxes work and affect behavior has burgeoned. Frameworks for public-sector decisionmaking have evolved (e.g., public choice theory, cost-benefit analysis, optimal taxation), and so have the tools (from sophisticated spreadsheet models and dynamic scoring techniques to the development and maturity of mathematical and statistical microsimulation techniques). Meanwhile, new fields are appearing. Although students of public finance have long examined state and local finances along with federal finances, not until the early 1960s did the knowledge base on fiscal decentralization and intergovernmental relations develop in earnest, and not until the 1990s did much of the new thinking about models for mutlitiered assignment of taxing powers, intergovernmental grants, and local public goods emerge.

Why does it all matter? From the scholastic writings of St. Thomas Aquinas (c. 1225-1274), who tried to resolve the issue of what makes a "just price," to those of the 19th century classical economists, particularly Smith, Malthus, Ricardo, and Marshall, who called their discipline "political economy," a core question has been what could be done to make public and private institutions responsive to people's needs and society as a whole better off.

In sum, the issues of taxation and tax policy combine the best human motives—paying for needed services that people acting privately have little or no incentive to offer—and, for some, the worst social organization—using government's power to commandeer part of one's income for collective pursuits. These motives and misgivings energize but also cloud broad debates on such issues as the "proper" criteria for distributing the tax payment responsibility, the structure of fiscal relationships among governments, and the art of forecasting and monitoring tax flows. They even permeate questions about details—for example, inventory accounting, trust fund finance, apportionment of multistate and multinational business income, the fair and efficient treatment of various business sectors, and tax shelters.

But whether the topics are as broad as the principles of just taxation or as narrow as the mechanisms of a tax credit for low-income housing, what pulls it all together and makes it important is that a system of taxation is more than a compendium of dry tax law and economic data. It is also an expression of community relationships among individuals and between the people and their governments.

Research on the first edition of this book this book began ten years ago when the National Tax Association (NTA)—a unique organization that represents a cross section of tax practitioners and administrators, policymakers, business executives, and academics—identified a major gap in the economic policy knowledge base: despite a wealth of scholarly literature, textbooks, and digital information, there is no "knowledge central"—no single source of rigorously peer reviewed but highly readable information on the key issues of public finance.

This gap prompted the best tax scholars and practitioners to put together the Encyclopedia on Taxation and Tax Policy. The goal is to provide a reference book on tax and tax-related public sector issues in a format that generalists and seasoned experts alike can use to get a quick and reliable introduction to a topic and specialists can rely on for the best thinking of other experts. For some, this volume will serve as a quick one-stop source for definitions concepts and topic overviews. However, others may want to read the book cover to cover to get an overview of the discipline and a sense of how various tax issues relate to one another.

The essays in this book cover the full range of U.S. tax issues. Entries included cover

(i) fundamental economic concepts and behavior (e.g., tax incidence, effects of taxes on labor supply, savings, portfolio choice);

(ii) more specialized economic and tax concepts (e.g., capital export neutrality, cost of capital, and tax illusion);

(iii) each type of tax levied (e.g., income, sales, property) and taxes levied in other countries or under consideration in the United States (e.g., a national value-added tax) and on non tax revenues;

(iv) important features of current taxes (e.g., deductions for charitable contributions, taxation of multinational corporations; circuit-breakers);

(v) tax measurement and accounting (e.g., revenue estimating and forecasting, basis, depreciation, deferral);

(vi) tax administration and related topics (e.g. tax evasion, intergovernmental cooperation, economic substance doctrine, property tax assessment);

(vii) techniques and tools of tax analysis (e.g. generational accounting, general equilibrium models, progressivity measures);

(viii) institutions (e.g., nature and role of congressional committees, federal and state tax offices, and public interest groups), and

(ix) important related public finance issues (e.g., budgets and budget processes, federalism).

Selecting the authors for each of the essays in this book was easy: the membership of the National Tax Association comprises the nation's top experts in public-sector economics. By drawing largely on NTA members, who combine a historical understanding of public financing with an up-to-date, "hands-on" perspective, the editors identified the best authors, who, in turn, helped compile the list of essay topics.

It was a pleasure to work with all the contributors to the Encyclopedia. All met their deadlines and gave priority to both updating their essays and preparing the 45 new entries, so revision went quickly. We are especially grateful to contributors who stepped in to update essays when the original authors could not and to those who amended entries at the last minute as new evidence came in and laws were revised. Further help and advice was also received from Gerald Bair, Joan Casey, Victor Chen, Wayne Eggert, William Fox, William Gorham, Steve Maguire, Frederick Giertz, Jennifer Gravelle, Sonya Hoo, Anya Arax Manjarrez, Sandy Navin, Theresa Plummer, Betty Smith, Eugene Steuerle, Emil Sunley, Frederick Stocker, and the members of the NTA's Board of Directors. A very special thanks goes our colleagues at the Urban Institute Press, who combined long hours of expert work with good judgment in order to make this second edition suitable for publication: Will Bradbury, Kathleen Courrier, and Scott Forrey.

The Editors

Joseph J. Cordes
Robert D. Ebel
Jane G. Gravelle

The Encyclopedia of Taxation and Tax Policy, Second Edition, edited by Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle, is available from the Urban Institute Press (paper, 6" x 9", 518 pages, ISBN 0-87766-752-7, $75.00). Order online or call toll-free 1-877-847-7377.