Sources of Government Revenue:

How the government collects money

Criteria (requirements) for Effective Taxes

Effective Taxes

Equal:Must be

fair Simple:Must be

simple for people to

understand

Efficient:Should be

easy to collect so

govt gets the revenue ($)

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 ____.

• 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.

The Incidence of a Tax

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

• Ability-to-Pay Principle: • People who earn more money should

pay more taxes

Two Principles of Taxation

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

Figure 9.3Figure 9.3

The Federal Tax System

IRS (Internal Revenue

Service)

Treasury Department

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

• 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%

Individual Income Taxes

• Progressive tax– Individuals earning higher

incomes pay higher tax rates

Individual Income Taxes

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)

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%

Corporate Income Taxes

• 3rd largest category of federal taxes

• Corporation is recognized as a separate entity

• Rates vary from 15% -35% (slightly progressive)

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

State and Local Tax Systems

State Government Revenue($ collected from..)

1.Intergovernmental Revenues - money from

federal gov’t2.Sales tax - general tax on consumer purchases 3.Employee Retirement

Contributions4.Individual Income Taxes (not all states)

• Good way to raise large amount of money

• All consumers pay• Easy to collect: business

collects at point of sale

Advantages of Sales Tax

• Second largest source of revenue for local governments

• Real Property: includes real estate, buildings, & anything permanently attached

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

Local Property Taxes

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

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

• 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?

QUESTION: WHY ARE STATE & LOCAL

GOVERNMENTS LOSING MONEY TO THE INTERNET???