Chapter 9

1. Sources of Government Revenue Chapter 9

2. Taxes and economic impact • Resource allocation • Factors of production are affected whenever a tax is levied • Taxes on goods and services reduce supply because the supplier has to pay them • Supply curve goes to the left • Behavior adjustment • Taxes encourage or discourage behavior • Homeowners get to deduct the interest payments on their home • Local, state, and federal governments impose taxes on goods to discourage certain behaviors • These taxes are called sin taxes • The incidence of a tax • The party being taxed is not always the one that bears the burden • Pass the cost on to the consumers • Not give their employees higher salaries

3. This tax. . .works. . .I guess • Criteria for an effective tax • Equity • Fairness is key • But what is fair? • Simplicity • Easy to understand • Income taxes • So, our tax system is easy to understand. . .right? • Sales tax • A tax levied on sold goods • Efficiency • Easy to administer and easy to generate revenue • Are taxes collected in toll booths effective?

4. Two principles of taxation • Benefit principle • Those who benefit from government goods and services should pay in proportion to the amount of benefits they receive • Two limitations • Many services provided by the government provide the most amount of benefit to the people who can afford it pay for it the least • Welfare and subsidized housing (i.e. Section 8 housing) • Its hard to measure benefit for these types of taxes • Ability to pay principle • People should be taxed according to their ability to pay • Based on two factors • Societies cannot always measure the benefit derived from government spending • People who have higher incomes have less of a discomfort toward paying for taxes (stop laughing, it’s true)

5. Types of taxes • Proportional tax • Same rate for all persons • This is actually known as a flat tax • Progressive tax • Tax rate increases based on the amount of money you make • Progressive tax rates use a marginal tax rate • the tax rate that applies to the last dollar of the tax base (taxable income or spending) • Regressive tax • Higher tax percentage is imposed on individuals who have a lower income • Sales taxes are regressive • Let's imagine two frugal traveling salesmen.   They each have to buy a new car every four years to (say) keep up appearances, and they need reliable transportation.(One guy makes 20K, the other 300K)Run the numbers on a the RATE of total income each pays on 5% sales tax.   • Poor Boy buys a $20,000 car pays $1000 or 5.0% of his income.Rich Boy buys a $60,000 car pays $3000 or 1.0% of his income.

6. Individual income taxes • Congress is allowed to collect income taxes due to the 16th amendment • 45 % of government revenue comes from taxes • Government gets most of its money from taxes from the system of payroll withholding • The Internal Revenue Service is the agency of the Treasury Department that receives the money for your taxes • Click on this, Mr. Sich • There is a provision in the income tax code, called indexing that adjust the tax rate, so that a small increase in income (due to a raise, per se) does not bump a person to a higher tax bracket

7. FICA Taxes • Federal Insurance Contributions Act • Payroll taxes • Medicare • Health-care for senior citizens • No payroll cap for Medicare • Social Security • Capped at $106,800.00 • At the rate of collection and distribution of SS, the fund for SS should become solvent (or start going into deficit) between 2036-2040 • Some economists suggest to remedy this problem, there needs to be a removal on the payroll cap for SS • Corporate taxes • Taxes on profits

8. Wait. . .more taxes!? • Excise tax • Tax on select goods. . . Pretty much anything the government wants • Regressive tax • Estate tax • Tax on estates when a person dies • Has been called a “death tax” • Tax on estates worth more than. . . • $3,500,000.00 • Gift tax • Tax paid for large monetary gifts • Customs duties • Import tax • Capital Gains tax • Tax on profits from the sale of an asset held for 12 months

9. State and local government revenue • Intergovernmental revenue • Comes from the government • Funds projects for roads, education, hospitals, etc • State and local governments get a good amount of revenue from sales taxes • Five states have no sales tax • Property tax • Tax collected on tangible and intangible things such as real estate, buildings, automobiles, furniture, etc. • The tax assessor makes a determination of the value of the property • Public utilities generate money as well

10. VATS of Taxes • Value added tax • Tax placed on the value that manufacturers add at each stage of production • Found in Europe • Advantages • Almost impossible to avoid the tax • Because it is broken down and widely spread, it is harder for a single firm to shift the burden to another group • Easy to collect because it is added to other collected taxes • Encourages people to save their money • Disadvantages • It is almost invisible to consumers, so it might not be as good as indicator to save as expected • It’s an additional sales-type tax, so states that have no sales tax, or a low sales tax may adjust to make goods even more expensive

11. Flat tax • Advantages • Equality • Stupid-simple • Closes loopholes • Less evil IRS agents • Disadvantages • Removes ALL deductions • No one knows the right rate to tax • May be as high as 23% • Does equality equal fairness?