E VERYONE ’ S FAVORITE …….. TAXES !!!. T HE R OLE OF G OVERNMENT Two typical microeconomic roles of government in a market economy are: provision of public.

EVERYONE’S FAVORITE……..TAXES!!!

THE ROLE OF GOVERNMENT

Two typical microeconomic roles of government in a market economy are: provision of public

goods and services redistribution of

income

THE DILEMMA

Markets produce too few public goods The government determines the amount to

produce through looking at benefits and costs

WHAT ARE TAXES?

Taxes- a mandatory payment to the government

Revenue- is government income from taxes and other sources.

Criteria for taxation Equity Simplicity Efficiency

TAX INFO

Taxes was firstly introduced in Ancient Egypt as records show that the pharaoh would collect taxes from the people of Egypt for the kingdom.

What is tax? Tax is derived from the Latin word ‘taxare’ meaning ‘to estimate’

Tax is levied (imposed) directly on people or corporations.

Tax is the main source of revenue of every country which it can distribute in different types of expenses like defense, education, public health, etc.

CHALLENGE QUESTION #1

Why are taxes needed and what do they provide?

Taxes are needed because market economies will not naturally produce public goods and services. Taxes provide public goods and services such as a military or public education.

TAX BASES Who is taxed?

Individual income tax Corporate income tax Sales tax Property tax

How are they taxed? Tax Structure Regressive- the wealthier you are, the percent of tax

you pay goes down EX: Social Security Tax Progressive- the wealthier you are, the percent of tax

you pay goes up EX: Income Tax Proportional- (flat tax) everyone pays the same

percentage of tax. EX: Sales Tax

CHALLENGE QUESTION #2

Which tax structure (progressive, regressive, flat) best demonstrates the principle of redistribution of income?

Progressive- Take from the rich and give to the poor

HOW DO TAXES IMPACT SOCIETY?

Resource Allocation- can change the way resources are distributed

Productivity and Growth- can hamper or spark growth

Economic Behavior- through tax incentives the government can compel the tax base to behave the way they want them to. EX: Cigarette taxes

FEDERAL TAXES

How do you pay? Individual income tax is the largest source of

income for the federal government Paid through a payroll tax that is deducted from a paycheck

as withholding, or money taken from a worker’s pay before the worker receives it.

The amount of money owed is based on taxable income, the portion of income subject to taxation.

Each year, taxpayers must file a tax return, a form used to report income and taxes owed to various levels of government

FEDERAL TAXES

FICA- Federal Insurance Contributions Act- is a payroll tax imposed to fund Social Security and Medicare.

Social Security – gives aid to older citizens, children who have lost a parent, and the disabled.

Medicare- national health insurance program mainly for citizens under 65.

FICA is the second largest source of federal tax revenue

FEDERAL TAXES

Unemployment taxes- unemployment compensation is a program funded by federal and state taxes and is administered by the state. Gives aid to people who have been fired for a certain amount of time

CHALLENGE QUESTION #3

How do people pay their income and FICA taxes?

It is deducted from each paycheck

FEDERAL TAXES

Corporate Income Tax- is tax on corporate profits

Country

Corporate Tax

Rate in 2000[1]

Rank in 2000

Corporate Tax

Rate in 2006

Rank in March 2006

Japan 40.9 3 39.5 1United States[2]

39.4 6 39.3 2

Germany 52 1 38.9 3Canada 44.6 2 36.1 4France 37.8 7 35 5Spain 35 11 35 5Belgium 40.2 4 34 7Italy 37 9 33 8New Zealand

33 16 33 8

Greece 40 5 32 10Netherlands

35 11 31.5 11

Luxembourg

37.5 8 30.4 12

Mexico 35 11 30 13Australia 34 14 30 13Turkey 33 16 30 13United Kingdom

30 21 30 13

Denmark 32 18 28 17Norway 28 26 28 17

OTHER FEDERAL TAXES Estate tax- a tax on property transferred to others on the

death of the owner. Gift tax- a tax on assets given by one living person to

another. Made to prevent people from giving away large estates prior to death Does not include charitable gifts, or gifts of less than $13,900 annually

Excise tax- is a tax on the production or sale of a specific good or service

Taxes on things the that have an inelastic demand (gas) “Sin tax”-Taxes on things the government wants to discourage (cigarettes)

Customs duty- is a tax on goods imported into the United States

User fee- is money charged for the use of a good or service Ex. Tolls on bridges, entrance fees for parks, etc.

FEDERAL GOVERNMENT SPENDING Mandatory Spending- programs that require that

the federal government pay back the contributions previously taxed from the citizens. Entitlements- social welfare programs (Social Security,

Medicare, Medicaid, Food Stamps) Discretionary Spending- spending on programs

like defense, roads, schools, and running the government.

CHALLENGE QUESTION #4 & 5

4. If we increase our military spending because we go to war with Cuba, is that discretionary spending or mandatory spending? Discretionary

5. Due to the war with Cuba, if we want to decrease our spending for Medicare is that discretionary spending or mandatory spending? Mandatory

FEDERAL GOVERNMENT SPENDING (CONT.)

Federal budget- the plan for spending federal tax money

Fiscal year- a 12 month period for which an organization plans its expenditures.

The President proposes his budget which is prepared by the Office of Management and Budget.

Congress works from the budget and appropriates money

Methods Transfer payments- payments of those who provide nothing in

return EX: Social Security, Welfare Grants in aid- a transfer payment to state and local

government for certain projects EX: Federal Highway Funds

STATE AND LOCAL TAXES Sales tax- all but 4 states take a percentage of

the price of an item sold, usually luxury or non-essential items. (Indiana- 7%)

Excise tax- taxes on cigarettes, alcohol, fuel Income tax- most states also charge income

taxes. Not Texas and Florida Property tax- a tax assessed by a tax assessor

that is a percentage of real estate or other property

Balanced budget- Many states have constitutions that say they cannot spend more money than they have

Expenses Education is the largest major expense for states

MUNICIPAL SPENDING

At the city level, taxes pay for these things Schools Public Safety- Police and Fire Public Welfare- health departments and medical

care for the needy Other- Roads, Parks, Public Utilities, Snow Removal,

Public Transit, Sewage, and trash removal.

COSTS AND BENEFITS

Adjusting government spending according to costs and benefits Example: President must increase military

spending out of political necessity, but needs to reduce spending in other programs such as education to limit the deficit (spending more money than is received).