Everyone’s favorite……..taxes!!!

1. Everyone’s favorite……..taxes!!!

2. The Role of Government • Two typical microeconomic roles of government in a market economy are: • provision of public goods and services • redistribution of income

3. The dilemma • Markets produce too few public goods • The government determines the amount to produce through looking at benefits and costs

4. 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

5. 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.

6. 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.

7. 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

8. 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

9. 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

11. 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

12. 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

13. 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

14. Challenge Question #3 • How do people pay their income and FICA taxes? • It is deducted from each paycheck

15. Federal taxes • Corporate Income Tax- is tax on corporate profits

16. 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.

17. 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.

18. 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

19. 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

20. 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- moststates 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

21. 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.

22. 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).