TAXES

1. TAXES

2. The following slides are theory • Bottom line…. July 18, 2011---- Congress needs to raise the Debt CeilingCongress needs to cut spending…. • Congress needs to close the loop holes for those who do not pay taxes and those who have received subsidies like Oil Companies • Congress needs to grow up. • That’s my rant!!!

3. SOURCES OF GOVERNMENT INCOME • TAXES • Why must government tax? • What is a fair tax? • Who should pay?

4. Virtually all of the recent growth in federal expenditure has come from increased income transfers, not purchases of goods and services. • *Exception….. Congress and Administration have been busy trying to bail out our sick economy. The lag time for seeing effects is obvious@ TARP just ended 10/3/10. QE2 ended June , 2011.

5. The primary function of taxes is to transfer command over resources (purchasing power) from the private sector to the public sector. Government has 3 methods for revenuea. user fees (minimal)b. taxes (progressive)c. Borrowing. (growing yearly)

6. Income Taxes • The Sixteenth Amendment to the U.S. Constitution (1915) granted the federal government authority to collect income taxes. • It is now the largest single source of government revenue.

7. GOVERNMENT INCOME Excise Customs Estate and Gift Miscellaneous Other taxes-3% Corporate10% Personal Income 50% Social Security 32%

8. GOVERNMENT OUTLAY $.14 Net interest on The debt $.02 law enforcement,general govt. $.08-agriculture,transportation Natural resources,education, Environment,college loans, Job training,space,energy, $.54 Social security Medicare,other Retirement,Medicaid Food stamps,assistance For needy,Supplemental Security income, health Research,health programs, Unemployment, assisted Housing, social services $.04 Surplus to pay down The debt. $.18 national defense,veterans,foreignaffairs

9. The Most Important Federal Taxes The federal personal income tax Accounts for about 43.6% of all federal revenue All U.S. citizens, resident aliens, and most others required to pay (includes income earned abroad) Rates paid rise as income increases

10. What Determines a Fair Tax? Very few people think a fair tax? of taxes as payment for certain services rendered. • When we purchase a new coat, we have chosen an item in the market system…pay for it… use it. • We don’t think of that when we call the fire department or the police department…even if we are delinquent on our taxes, they still show up. • What if the fire department or police left a bill? Ambulance services do…. Should they? • How should taxes be assessed?---benefits received----ability to pay!

11. Two ways to determine fair tax Benefit Received Ability to Pay

12. Benefits Received: Tax the user- gas tax for drivers- fishing license-ramp fees for boats- toll roads-bus and train tickets- Pay the government for benefits received- can’t pay for welfare received!

13. Ability to Pay • Should those who have the greatest wealth pay the most in taxes regardless of the benefits they receive?? • Should income and family size be assessed? • Determining fairest principle for a just tax is matter of values rather than economics and is determined by our political process.

14. Other Factors in Evaluating Taxes • Total Revenue yielded • Effect on Production (destroy incentive?) • Bracket Creep (AMT ) • Moral consequences (sin taxes) • Reflection of values shown in taxes imposed • Convenience (withholding, quarterly, penalties) • Shifting the burden (seller to consumer) • Ability to pay (relation of tax base to tax rate) Tax rate= percentage that is taxed Tax base = subject on which the tax is levied.

15. Types of Taxes • Progressive = tax rate increases as the tax base increases • Proportional = tax rate remains the same regardless of the base • Regressive= tax rate decreases as the base increases. (often cited as unfair because it places heaviest burden on the least able to pay ---sales tax--- social security tax.) • What is your preference?

16. Federal Government Tax System • Federal government gets most of its revenue from individual and corporate income taxes. • Very small portion of revenue from estate and gift taxes. • Larger share from excise taxes (gasoline, jewelry, alcohol, cigarettes, motor vehicles, admission to entertainment events, tires) • Small portion from tariffs. • Transfer of estates collected since 1916. Any estate over one million is subject to tax.

17. The Most Important Federal Taxes (cont'd) Capital Gain The positive difference between the purchase price and the sale price of an asset You buy a share of stock for $5 and sell for $15: you have a capital gain of $10. Capital Loss The negative difference between the purchase price and the sale price of an asset

18. Kiplinger report 2009Income earners (family 4) 1% $410,096 10% $113,018 25% $66,532 50% $32,879

19. 2008 Figures • Top 1% – $365kTop 5% – $174kTop 20% – $97kTop 40% – $60kTop 50% – $48kLowest 20% – $20k

20. Who really pays taxes?

21. Poverty 2008 statistics • For 2008, the poverty threshold for a single person under age 65 was an income of $11,201, or less than $1,000 a month. • For a family of four, the threshold was $21,834. • For a family of six, $28,769. Recession just completed finds 40 million in U.S. living in poverty.

22. Types of Taxes We Pay PERSONAL INCOME TAX Progressive with marginal tax rates Marginal tax rates = those assessed on additional income ranging from 10 to 35% Individuals may deduct: • Interest on Home mortgages and Property Taxes • Interest on State and local bonds • This year in TX still state sales tax (2010) But,,,,,Average tax rate does rise with income

23. Sales Tax At first glance… sales tax would appear to be proportional…. Why is it not? Sales Tax is regressive? • Larger portion of a low-income person’s income is exposed to the tax than is a person with higher income. • Rich pay no tax on the part of their income that is saved when they can shelter it… poor are unable to save. • It is a % of income that allows it to become regressive… poor person spends all his income at 5% and the higher income person spends only 80% of his income at 5% for sales.

24. Payroll Taxes MEDICARE AND SOCIAL SECURITY Regressive Medicare Tax…. 1.45 on all wage income Average payroll tax falls (percentage wise) as income rises. Government does not collect payroll taxes on nonwage income (such as interest, dividends, or rents) If both nonwage and wage incomes were added… and the total paid into SS divided by both these… the % would be even lower.

25. HISTORY OF SOCIAL SECURITY Began in 1937 as OASDHI Program of compulsory savings financed from compulsory payroll taxes levied on employees and employers. Social Security is a regressive tax

26. History of OASDHI Contributions 1937-50 -$3,000 1990 - $51,300 2001 - $80,400 1951-54 - $3,600 1991 - $53,400 2002 - $84,900 1955-58 - $4,200 1992 - $55,500 2003 - $87,000 1959-65 - $4,800 1993 - $ 57,600 *1972 - $9,000 1974 - $13,2000 1994 - $60,600 1 1995 - $61,200 1976 - $15,300 1996 - $62,700 • - $25,900 1997 - $65,400 1985 - $39,600 1998 - $68,400 1999 - $72,600 2000 - $76,200 Since 1981- amounts determined under automatic adjustment provisions of the SS Act

27. Wage Base continued. 2004 - $87,900 2005 - $90,000 2006 - $94,200 2007 - $97,500 2008 - $102,000 2009 - $106,800 2010 - $106,800 2011 - $106,80

28. Social Security The wage base is increased every January as long as the fund is deficient… which is probably forever now because: • People live longer, retire earlier, more drawing on fund (disabled, single parents, etc.) • Ratio of retirees/workers will be significantly reduced by year 2010. • Eighteen year olds today (2002) will pay over a million and a half dollars into SS. Benefits received???? • SS payroll tax today is 7.65 (FICA= 6.2% SS + l.45% Medicare) 6.2% of your wages are withheld. Your employer matches that amount for the required contribution to the SS Fund up to the wage base amount for that year.

29. Social Security Continued • The employer also matches the Medicare contribution of 1.45% of your monthly earnings and there is no ceiling on this amount. Hence, this is a continual tax deduction from your earnings. • if self-employed 15.3 (12.4 SS + 2.9 Medicare) Wage base applies to SS but no limits on Medicare. As a self-employed person, you get to take a special deduction from your income when it comes time to pay your federal income tax.(l/2 of SS paid goes under deduction for adjusted gross income)

30. Social Security taxes20102011Employee • 6.2% on earnings up to $106,800 • 4.2% on earnings up to $106,800 • Employer 6.2% on earnings up to $106,800 6.2% on earnings up to $106,800 Self-employed *Can be offset by income tax provisions 12.4%* on earnings up to $106,800 • 10.4%* on earn

31. Changes in SS to help boost consumer spending

32. Economics of Transfer Payments Redistribution through public sector will reduce the size of the economic pie: • Weakens the link between productiveactivity and reward (taxes increased reduce individual reward for hard work-less productive. • As public policy redistributes large share of income,more resources flow into increasing it

33. Economics of Transfer • Higher taxes to finance redistribution will induce taxpayers to focus less on income producing activities and more on incomeshelters *higher incomes have greater opportunity here • When leakages flow in taxes rather than in savings (money is unproductive) • Money that is productive generates more capital • More capital generates more jobs. • More jobs generates more income.

34. Merit Goods The government is called upon to distribute merit goods when the market does not provide enough. • A merit good is a good or service society deems everyone is entitled to some minimal quantity .Public goods have two particular characteristics. They are: • Non-excludable - once the goods are provided, it is not possible to exclude people from using them even if they haven't paid. This allows 'free-riders' to consume the good without paying. • Non-rival - this means that consumption of the goods by one person does not diminish the amount available for the next

35. How is Social Security Funded?www.sss_enews SS made possible by tax dollars • Out of every dollar paid in SS taxes ($.69 goes into fund to pay retirement and survivors benefits) ($.19 goes to fund that pays Medicare benefits)($.12 goes to fund that pays disability benefits) East = $.69 - retirement West = $.19 - medicare North = $.12 - disability

36. Taxes paid today go to pay benefits for people drawing today. • Do you think there is a “special fund” where the SS dollars go???

37. Continued SS Funding • Today 3+ workers for every person drawing. (extra money in fund invested in U.S. Treasury bonds) • Number of retirees is increasing and number of workers/retiree is decreasing. In 30 years 2+ workers for every person drawing. • By 2016 - U.S. paying out more in retirement benefits than collecting • By 2038- the fund is projected to be empty –(spring,2004, released data that said 2052) • Re-design of system is imperative.

38. More Grim Statistics Concerning SS 70% of SS goes to retirees - avg monthly benefit of $898.20 15% to disabled workers and families May, 2003- avg benefit for disabled workers was $837.70 15% goes to widows, widowers, and families – avg check of $850.80 By 2030-twice as many older Americans 35 million to 70 million. Now there are 3.4 workers for every beneficiary… by 2030 there will be just 2.1 workers for each beneficiary.

39. POVERTY LEVEL • Poverty Guideline level : family of four • 1999= $16,000 • 2000 =$17,050 • 2001 = $18,100 (Alaska $22,630) • 2002 = $18,392 • 2003 = $18,725 • 2006 = $22,000 • 2010 = $ 22,491(roughly) • Paid no taxes • Budget Problems • $1,818 a month. • Food,clothing,insurance, transportation, sales taxes,shelter,etc.

40. he 48 Contiguous States and DC U.S. Poverty Guidelines 2009 – Contiguous States

41. Earned Income Credit The EITC (Earned Income Tax Credit) is aimed at low-income workers. It is a tax credit that is direct dollar-for-dollar reduction in your tax bill (or boost to your refund) Married couples filing joint returns with 2+ children, can get a credit of more than $4,000. (up to a certain income threshold)

42. Who Qualifies for EITC? In 1999, if taxpayers earned less than $30,580 and had more than one qualifying child living with them, Less than $26,928 with one qualifying child Less than $10,200 if they didn’t have children The IRS has “tests” your child has to meet before being considered a qualifying child.

43. Trail of tears or smilesMedian Income history 1974 = $14,747 According to a separate 1978 = $20,428 report from the Census 1982 = $27,619 Bureau (last week of Sept 1986 = $34,716 2002), American 1990 = $41,451 households had taken a 1993 = $45,161 beating during last year’s 1997 = $53,350 recession & unemployment 2000 = $62,228 Median household incomes

44. MEDIAN INCOMES in U.S. in 2001 …. Fell to $42,228 2002…$43,381… (unemployment, economic downturn) “Rising Tide Lifts All Boats. ”2003…$43,318…(reflects economic sluggishness) 2005…$46,326 2007… $50,233 2008 … $44,389 2009 …..$48,500 2010 ….. Close to $50,000

45. Highest and Lowest Median Income States Lowest 2003 Mississippi $31,887 West Virginia $31,210 Arkansas $33,210 Highest, 2003 New Jersey $55,221 Maryland $55, 213 New Hampshire $55,16

46. States/areas with highest percentage of people below poverty line, 2003 Lowest Percentage New Hampshire 6.0 Minnesota 7.1 Delaware, Maryland 7.7 Highest Percentage Arkansas 18.5 Mississippi 17.9 District of Columbia 17.3

47. Why is the U.S. Economy owing billions of dollars?“If you subsidize something you get more of it.”Dr. Milton Friedman, Free to Choose • Virtually all of the recent growth in federal expenditure has come from increased income transfers, not purchases of goods and services.

48. So, it all gets back to Joe Q Citizen… Taxes paid to government. Question is: What kind of an economy do we Joe Q’s want? The primary function of taxes is to transfer command over resources (purchasing power) from the private sector to the public sector. Why from private to public? Why not the other way around?

49. Government failure occurs when government intervention fails to improve economic outcomes.

50. Perceptions of Waste • Government waste implies that the public sector isn’t producing as many services as it could with the sources at its disposal. • With such inefficiency, we are producing inside our production-possibilities curve. Opportunity cost The issue of government waste encompasses questions of efficiency and opportunity cost.