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American Income Tax System

Learn about the aims of government fiscal policies, including taxation, borrowing, and spending, and their impact on production, employment, and price levels. Discover how progressive taxes work, calculate taxes using examples, and understand state income tax variations.

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American Income Tax System

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  1. American Income Tax System Mr. Way, 3/5/12 Economics 12.3.3 Describe the aims of government fiscal policies (taxation, borrowing, spending) and their influence on production, employment, and price levels.

  2. What is a Progressive Tax? • Liberal-Progressives will tell you that progressive taxes are called that because they represent social progress. • The real reason is because you pay a progressively higher percentage of your income in tax as your income rises. • This is the inverse of a regressive tax, where you pay a higher portion of your income the less you make.

  3. Example of a Progressive tax • Below is a chart showing our federal tax rates for 2012:

  4. What is a “marginal tax rate?” • This is a system in which you only pay higher tax rates on money earned past each bracket. • If this weren’t the case, somebody could end up getting less money after receiving a raise because their tax rate increased.

  5. Calculating Taxes Example #1 • Take somebody who makes 10k per year: • 10k is in the second tax bracket, 15% • All the money they made in the first bracket (0-8700) is only taxed at the 10% rate. Money after 8700 is taxed at 15% • Their tax is calculated as: 8.7k(10%) + (10k – 8.7k) (15%) = 870 + 195 = 1065A grand total of 10.6%

  6. Calculating Taxes Example #2 • Now suppose somebody makes 100K • This is the 4th bracket (28%). Behold: • 8700 (10%) + (35350 – 8700) (15%) + (85650 – 35350) (25%) + (100k – 85650)(28%) =870 + 4000 + 12575 +4018 = 21,460 • A grand total of 21.46%

  7. Calculating Taxes example #3 • What about somebody making 1 million? • 8700 (10%) + (35350 – 8700) (15%) + (85650 – 35350) (25%) + • (178650 – 85651) (28%) + • (388350 – 178650)(33%) + • (1,000,000 – 388350) (35%) = • $326,761, or a grand total of 32.7%

  8. There’s more? Are you freakin’ kidding me? • That was just the Federal income tax (simplified)You didn’t think California would let you by without taking a cut, too, did you? • Each state has different laws, programs, and agencies. Therefore, each state has different costs, with some (like CA) higher than others. • Each state chooses how to pay for its costs through mixtures of various kinds of taxes, notably income, property, & sales.

  9. Where can you dodge state income taxes? • Red states have no state income tax. Yellow states only tax dividends and interest.Gray states have either a progressive or a flat tax.

  10. California Income Tax • Below is a chart showing our state tax rates for 2012:

  11. Calculating Total Tax Rates • First calculate federal income tax. • Then follow the same formula of progressive taxation using California’s rates. • Add the two together, and you find your total tax rate (God help you if your City has an income tax, too!) • In CA, people making over $250,000 end up paying a whopping 42% of their income in taxes. • Imagine being paid only 58 cents for every dollar you earn, and then being told you (the top 1% of income earners) aren’t paying your fair share!

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