Chapter 12 - Taxation

1. http://www.stlouisfed.org/education_resources/economic-lowdown-video-companion-series/episode-5-externalities/http://www.stlouisfed.org/education_resources/economic-lowdown-video-companion-series/episode-5-externalities/

2. Chapter 12 - Taxation

3. What are Taxes? • Taxes – money given to government • Help to run different institutions and services • Necessary to civilized groups; used for centuries • Four general rules to taxation (Adam Smith) • Equity – fairness in who pays • Certainty – should know what, when and how you pay • Convenience – should be an easy process for people • Efficiency – should be efficient in collection and use

4. Where do tax dollars go? • Federal government allocates tax revenue as follows: • Entitlements • Interest Payments • http://www.youtube.com/watch?v=0efqnvYz4YI • National Defense • State and Local governments allocate tax revenues as follows: • Public services & public safety • Education • Social welfare

5. Sources of Federal Revenue Individual Income tax Payroll Taxes Corporate Income Tax Excise Taxes

6. How Revenue is Spent • Revenue comes from 4 major areas • Fiscal year is from Oct 1 – Sept 30, when $ is used • Income, Payroll, Corporate Income and Excise Taxes • Federal gov’t doesn’t usually cover all expenses • Leads to deficit – current $17,234,132,052,323 • 2 types of spending – Mandatory & Discretionary • Mandatory – fixed spending by law • Entitlements – Social Security, Medicare, welfare, etc. • Discretionary – can change based on Congressional decisions • Largest amount spent on national defense. The rest is spent on: education, science, health care, foreign aid

8. State Gov’t Revenue and Spending • Get most of money from taxes • Property tax, state income tax, etc. • Also use tax referenda – vote must pass • Cannot raise taxes unless people vote for it • Lotteries – used as a major income source • State spending usually focuses on education, and public safety: law enforcement & fire protection • Also focus on public issues – health clinics, road projects, assistance for low income earners, etc.

10. Who should Pay? • Tax equity – asks are taxes equal? • Tough to answer due to differing definitions of equal • Should all pay, or only those who use it, etc. • Two principles to answer this • Ability-to-Pay Principle • Says those who make more, pay more – b/c they can • Benefits-Received Principle • Says only those who receive benefit should pay • Tax Incidence – who actually ends up paying tax • At times burden falls to others

11. Taxation Basics 101 • Tax base – what is taxed (Income, property, etc.) • Tax rate – the percentage of tax paid • Types of Taxes – 3 kinds • Proportional Tax – same % for all levels (5% tax) • Also called a flat tax – very simple to use • Progressive Tax – increased % with increased income • Based on ability-to-pay principle – ex. Income taxes • Regressive Tax – increased % with decreased income • Proportional taxes can act as regressive – ex. Sales tax • People making less money pay higher % of yearly income

12. Examples of Each Tax

13. Graphing the Differences Difference in spendable money is huge Difference in spendable money not much

14. Types of Taxes You Will Pay • Income Tax – once a year, each April 15 • Fill out a W-2; tells gov’t how much to withhold • Payroll Taxes – 2 major taxes paid • Social Security Tax – money taken for retirement • Medicare Tax – money to pay for medical needs • Also may pay a disability and unemployment tax • Property Tax – % paid on value of owned land • Sales Tax - % paid on purchased goods

15. Other Taxes • Corporate Income Taxes – levied on businesses • Excise Taxes – used to regulate goods the gov’t wants to control • Cigarettes, alcohol, etc. • Luxury Taxes – used on major luxury items • User Fees and Tolls – tax the user • Estate or Inheritance Taxes (progressive) – • Estate tax taken by gov’t on money left after death • Inheritance tax may be levied by the state gov’t on top of the estate tax.