Sources of Government Revenue: How the government collects money

1. Sources of Government Revenue:How the government collects money

3. Criteria (requirements) for Effective Taxes Effective Taxes Efficient: Should be easy to collect so govt gets the revenue ($) Equal: Must be fair Simple: Must be simple for people to understand

4. The Incidence of a Tax • Government adds tax to producer: • Example:. Utility company-gas, electric, medicine • Raise rates: consumer pays more (easy if demand is inelastic) • $ ____tax on producer • D/S $______ • D/S+tax $_____for consumer • D/S+tax $______for supplier • The ____curve shifts to the ______because of ________ Because the demand is ______, the consumer pays most of the ________and the producer ____.

5. The Incidence of a Tax • Government adds tax to producer: • Example: more tax on corporation • Raise rates: consumer pays some and producer pays some (elastic) • $ ____tax on producer • D/S $______ • D/S+tax $_____for consumer • D/S+tax $______for supplier • The ____curve shifts to the ______because of ________. Because the demand is ______, the consumer pays _____of the ________and the producer ____ of the tax.

6. Two Principles of Taxation • Benefit Principle: those who benefit from government and services should pay in proportion to the amount of benefits received • Gas tax: people who drive more buy more gas and pay more gas tax • the gas tax pays for roads

7. Two Principles of Taxation • Ability-to-Pay Principle: • People who earn more money should pay more taxes

8. Types of Taxes • Proportional: imposes same percentage rate of taxation on everyone • Progressive: imposes a higher percentage rate of taxation on people with high incomes than on those with low incomes • Regressive: imposes a higher percentage rate of taxation on low incomes than on high incomes

9. Figure 9.3 Figure 9.3

10. The Federal Tax System

11. IRS (Internal Revenue Service) Treasury Department

12. Individual Income Taxes • Fed. Gov’t collects 45% of its revenue (money coming in) from Individual income taxes • People who work taxes • $ (taxes) are paid each week and is subtracted from your check • Before April 15th each year, an employee must file a tax return: an annual report to the IRS summarizing total income, deductions, & taxes withheld by employers

13. Individual Income Taxes • Proportional tax • As income goes up, % of income tax paid is same • It doesn’t matter if you earn a lot of $ or a little $ • Progressive Tax that ranges from 15% -39.6%

14. Individual Income Taxes • Progressive tax • Individuals earning higher incomes pay higher tax rates

15. FICA: What is FICA? And why does it take part of my paycheck? • FICA: • Federal Insurance Contributions Act Social Security (6.2% of wages) + Medicare (1.45% of wages) FICA tax ( 7.65%of wages) • 2nd largest source of Gov’t revenue (money collected)

16. FICA • Social Security is a proportional tax up to $65,400 (the capping point) and then it is regressive • Medicare is not capped; it’s proportional at all levels of income • Total FICA tax = 7.65%

17. Corporate Income Taxes • 3rd largest category of federal taxes • Corporation is recognized as a separate entity • Rates vary from 15% -35% (slightly progressive)

18. Other Federal Taxes • Excise Tax: tax certain items, such as gasoline and liquor • Estate Tax: tax the gov’t levies (charges) on the transfer of property when a person dies (parent to child) • Gift Tax: tax on gift of money/wealth paid by person making gift

19. State and Local Tax Systems

20. State Government Revenue($ collected from..) 1.Intergovernmental Revenues - money from federal gov’t 2.Sales tax - general tax on consumer purchases 3.Employee Retirement Contributions 4.Individual Income Taxes (not all states)

21. Advantages of Sales Tax • Good way to raise large amount of money • All consumers pay • Easy to collect: business collects at point of sale

22. Local Property Taxes • Second largest source of revenue for local governments • Real Property: includes real estate, buildings, & anything permanently attached

23. Local Property Taxes • Tangible Personal Property: includes tangible items, not permanently attached. • Intangible Personal Property: property with invisible value, such as stock, bond, patent, check

24. Examining Your Paycheck • Payroll withholding statement: the summary statement attached to a paycheck • It shows: • income, • tax withholdings (for fed/state/city govt., and • other deductions

25. How much $ was deducted from this person’s paycheck?____

26. QUESTION: WHY ARE STATE & LOCAL GOVERNMENTS LOSING MONEY TO THEINTERNET??? • State & local governments rely heavily on sales tax for revenues • State & local governments already lose $3.3 billion each year to untaxed interstate sales • This figure will increase as more sales are made over the Internet • Should there be an Internet sales tax??? How would it work?