Ch. 9 Taxes

Taxes

1. What is the decision being made in this cartoon?2. Are these two things controllable?

Economic Impact of Taxes

• Taxes and other forms of govt. revenue influence the economy by affecting• Resource allocation• Consumer behavior• National productivity and growth

Resource Allocation

• Taxes are directly related with the movement in the market.

• They are levied on goods/services and production.

• This directly affects supply, demand, and equilibrium price.

Behavior adjustment

• Taxes are used to either help out or punish consumers• Homeowners get tax breaks on mortgages• Sin taxes are levied on alcohol, tobacco,

etc.

Productivity and Incidence of Tax

• Taxes affect productivity because of the taxation of income.

• They change the incentives to save, invest, and work.

• The final burden of the tax can be measured by supply and demand.

• It is much easier for the producer to shift the burden of the tax to the consumer.

The Criteria for Effective Taxes

• Equity- Fairness is so important for effective taxes. The goal is to try and avoid loopholes so everyone gets to pay a fair share.

• Simplicity- Laws should be written so both the payer and tax collector can understand them.• Individual income tax-complex• Sales tax- simple

• Efficiency-should be relatively easy to administer and reasonably successful at generating revenue.• Individual income tax—very efficient• Tall taxes are not so efficient.

Two Principles of Taxation

• Benefit Principle—Those who benefit from govt. goods should pay in proportion to the amount of benefits they receive.

• Ability to Pay—people should be taxed according to their ability to pay, regardless of the benefits that they receive.

Types of Taxes

• Proportional tax- imposes same percentage rate of taxation on everyone.

• Progressive tax- imposes a higher tax on people with higher incomes.

• Regressive tax- imposes higher rate on low incomes.

Individual Income Taxes (Fed.System)

• The 16th amendment allows Congress to levy taxes.

• Govt. collected nearly 45% of its income from individual income tax.

• It is paid through payroll deduction over time.

• It is a progressive tax and has a provision for indexing. Indexing keeps workers from paying more in taxes due to inflation.

FICA

• Employers and employees share the burden of paying these taxes.

• You see a deduction in your check for both Medicare and Social Security.

• Social Security is a 6.2% flat tax rate.• Medicare is taxed at a 1.45% rate.

Other Federal Taxes

• Excise Tax is levied on things like gas and liquor.

• Estate taxes are levied when property is transferred form one individual to another.

• Gift taxes are made on donations, the giver is the person responsible for this tax.

Corporate Tax and Duty

• Corporations have to pay taxes on income and this accounts for the third largest category of taxes.

• Customs duties are levied on goods brought into the United States.

• About 1% of federal revenue is collected through miscellaneous fees.

1. Who is this man working for?2. What is this cartoon saying about the government?3. How is irony incorporated in this cartoon?

State Govt. Revenue sources

• Intergovernmental revenue is the largest form of state revenue. This is funds collected by one level of govt. and redistributed to another level.

• Sales taxes are the second largest form of state revenue.

• Other forms of revenue comes various state supported sources such as university tuitions, interest earnings, etc.

Local Government revenue

• Local govts. receive the largest part of their revenue from intergovernmental revenues. Intended for education/welfare.

• Property taxes raise a significant amount of revenue for local govt.

• Public utilities and state owned liquor stores raise the third largest form of revenue for local govt.

Tax Reform

• Tax reform (1981)—Reagan proposed the Economic Recovery Tax Act to reduce taxes for many business owners.

• Businesses received tax relief in the form of accelerated depreciation which allowed a reduction in federal income tax payments.

• They also received tax credits on investment.

Tax Reform (1986, 1993)

• In 1983, more than 3,000 millionares paid no income tax.

• Congress passed a tax reform that reduced brackets to two.

• Added surcharge to tax higher income more.

• Govt. spending was high.

• Omnibus Budget Reconciliation Act was passed so the govt. could balance the budget.

• Added two more marginal brackets.

Tax Reform in 1997 and 2001

• Taxpayer Relief Act was passed to help out many individuals.

• Taxes were cut across the board due to a high surplus in revenue.

• Added a 10% bracket and lower the percentile for the top two brackets.

• High child tax credits were added as well.

The Value Added Tax

• People want to shift the tax from income to consumption.

• (VAT) is placed on the value added to each stage of production.

• Production of g/s would be taxed as the product is passed from producer to consumer.

Advantages vs. Disadvantages

• Hard to avoid because the tax collector levies on total amount of sales less the cost of inputs.

• Is widely spread• Easy to collect• Would affect

people’s behavior.

• Is invisible to consumer.

• Would compete with state sales taxes.

Advantages vs. Disadvantages of Flat Tax

• Simplicity offered to taxpayer.

• Closes most loopholes• Reduces the need for

tax accountants.

• Removes many of the behavior incentives already built into tax code.

• No one knows exactly what rate is needed to replace the revenues already collected from the current system.