Taxes and Government Spending ( Chs . 9/10)

1. Taxes and Government Spending (Chs. 9/10) Test and Notebook Due on Wednesday, April 9, 2008 ****SHORTER UNIT!!!!****

2. The government uses taxes to operate. • Taxes are levied on personal income and property. • Taxes are levied on the federal, state, and local level. • Not all taxpayers have to pay all taxes. • Refusing to pay taxes can result in criminal investigation. Taxes: A Way of Life

3. Resource allocation • Taxes levied on a product causes an increase in price; this can affect supply and demand • Luxury items are taxed heavily – tend to be less available • Consumer behavior • Tax codes reward taxpayers for some behaviors (owning a home, having a family, giving to charity); and punish them for others (sin taxes - smoking, alcohol, and gambling). • Taxes limit purchases because take home income is decreased. • National productivity & growth • Change incentives for saving, investment and working • Business may reconsider their growth against their tax liability • Incidence of tax – who gets the tax burden • Companies will adjust production and employment according to taxes; consumers will purchase less – both are passing their burden to each other. How do taxes affect the economy?

4. Benefit of Principle of Taxation • Those who benefit the most should pay taxes directly proportionate to the amount of benefits they receive. • Limitations • Those who use government assistance have the least about of ability to pay. • Can be difficult to judge who is getting most benefit • Ability-to-pay Principle • People should be taxed according to their ability to pay • Takes into account society can not always measure the benefits of government spending. • Assumes higher incomed persons can afford to pay more The Principles of Taxation

5. 1. Equity • Taxes must be impartial. • Eliminate as many loopholes (oversights that allow some to avoid paying taxes) as possible. • 2. Simplicity • Need to be understandable (hahahaha). • 3. Efficiency • Easy to administer and collect • Needs to raise enough revenue to be worthwhile Criteria for Effective Taxes

6. Proportional Tax • The same percentage on everyone. • Example: Property Tax • Progressive Tax • Higher tax rate as income/value increases. • Example: Federal Income Tax • Regressive Tax • Though it may be a fixed amount, tax rate is actually higher on low income than higher income. • Example: Sales Tax Types of Taxes

7. Individual Income Tax • Withheld from Payroll deductions, or if self-employed, saved and paid quarterly • Responsibility of Internal Revenue Service • Every individual or family must file a tax return detailing their income and expenditures for their year. • Pay a progressive tax based on their adjusted gross income (after deductions & exemptions are met). • FICA (Federal Insurance Contributions Act) • Social Security – government benefits for elderly, disabled. • Medicare – medical assistance for elderly • Corporate Taxes • Levied on corporate profits • Individuals employed by corporations must file personal income tax returns • Excise Taxes • Taxes on consumption of specific good or item • Examples: liquor, gasoline, public utilities • Estate and/or gift taxes • Transfer of property between persons when no legal sale has occurred. • Customs Duties/Import Taxes • Taxes paid on manufactured goods being brought into the US from other countries Federal Tax System

8. State Government Revenue Sources • Intergovernmental Revenues • Portions of tax revenues that are collected by one level of government and distributed to another. • Example: Welfare, education, highways, etc. • Sales Tax • Tax paid on items a consumer purchases • Personal Income Tax • Corporate Income Tax • Local Government Revenue Sources • Property Taxes • Taxes on possessions such as homes, land, automobiles, buildings. • Usually used to fund schools, road maintenance • Sales Taxes • Additional Income Taxes – usually major metropolitan areas State and Local Taxes

9. Tax Cuts for the Wealthy • Reduction of overall rates • Trickle Down Theory – tax cuts for corporations will result in economic growth and new jobs. • Capital Gains –taxes on the profits from the sale of an assets should not be as high • Tax Cuts for the Middle and Working Class • Reduction of Rates • Increased access to government services to offset standard of living costs • Earned Income Credit – those who are actually employed have smaller tax liability than those who aren’t. • A Value Added Tax – a manufacturing tax added at each stage to passed on to the consumer – higher product price (of which a % would be taxes) would replace personal income tax. • Pros: Almost impossible to avoid – taken at the register; wide spread; may encourage saving among consumers; • Cons: Difficult to see – may not catch unfair taxes because they are more inconspicuous; it would be the equivalent of a federal sales tax • Flat Tax – one rate across the board regardless of income • Pros: Simple, no need for itemizing/deductions; eliminates bureaucracy • Cons: Definitely easier on people with higher incomes Current Tax Issues