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Sources of Government Revenue
The Economics of Taxation : Economic Impact of Taxes
• Taxes/Other government revenues affect:– resource allocation, – consumer behavior, – nation’s productivity – Growth
Economic Impact of Taxes : Resource Allocation
• Affects factors of production
• A TAX placed on a good at the factory = rise in production cost
• Supply curve shifts to the left
• If demand stays the same = equilibrium price goes op
Economic Impact of Taxes: Behavior adjustment
• TAXES affect the economy – Encourage or discourage
certain activities – SIN Tax: high percentage tax
that raises revenue while reducing consumption of a socially undesirable product
Economic Impact of Taxes: Productivity and Growth
• Taxes affect productivity and economic growth:– Change incentives to save,
invest, and work
• Why people favor lower taxes….
Economic Impact of Taxes: The Incidence of a Tax
• “Final Burden of the Tax”• I.e. Utility company:
– Raise rates: consumer bears the burden
• (easy if demand is inelastic)
– Rates are regulated = • Shareholders receive smaller
dividends; postpone raises• (more elastic = producer will
absorb the tax)
Criteria for Effective Taxes
• TAXES are effective when they are:– Equitable– Simple – Efficient
Criteria for Effective Taxes
• Criterion 1: Equity or fairness – Taxes should be
IMPARTIAL and JUST– Fairness is subjective– Taxes are considered
FAIRER – Fewer loopholes:
exceptions, deductions, and exemptions
• Criterion 2: Simplicity – Tax LAWS should be EASY to
understand – Individual income taxes: the
taxes on peoples earnings • Complex tax = dislike
– Sales tax: general tax levied on most consumer purchases;
• paid at the time of purchase • Anyone purchases = pay tax
Criteria for Effective Taxes
• Criterion 3: Efficiency – Easy to administer and
successful at generating revenue
– Individual income tax – Less efficient: toll booths – Luxury taxes
Criteria for Effective Taxes
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 (built in) pay more if you
drive more
• Two limitations:– Many gov’t services provide the
greatest benefits to those who can least afford to pay for them
– Benefits are hard to measure
• Ability-to-Pay Principle: people should be taxed according to their ability to pay, regardless of the benefits they receive.
• Two factors– Recognizes that societies cannot
always measure benefits – Assumes that people with higher
incomes suffer less discomfort paying taxes than people with lower income
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 9.3
The Federal Tax System
IRS (Internal Revenue
Service)
part of the Treasury Department
Individual Income Taxes
• Fed. Gov’t collects 45% of its revenue from Individual income taxes
• Paid over time through payroll withholding system
• 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
• Progressive tax– Individuals earning higher
incomes pay higher tax rates
• Progressive Tax that ranges from 15% -39.6%
Individual Income Taxes
FICA: What is FICA? And why does it take part of my
paycheck
• FICA stands for Federal Insurance Contributions Act
• FICA tax includes Social Security (6.2% of wages) & Medicare (1.45% of wages)
• 2nd largest source of Gov’t revenue
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 on the manufacture or sale of certain items, such as gasoline and liquor
• Estate Tax: tax the gov’t levies on the transfer of property when a person dies
• Gift Tax: tax on gift of money/wealth paid by person making gift
State and Local Tax Systems
State Government Revenue Sources
• Intergovernmental Revenues - money from federal gov’t
• Sales tax - general tax on consumer purchases
• Employee Retirement Contributions
• Individual Income Taxes (not all states)
States with the Highest Sales Tax:
• Mississippi• Rhode Island• Washington• Texas• Illinois
STATE SALES TAX
• States Without a State Sales Tax:
• Alaska• Delaware• Montana• New Hampshire• Oregon
STATE SALES TAX
• Effective way to raise large sums of money
• Difficult to avoid because it affects large numbers of consumers
• Relatively easy to administer - merchant 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 that summaries income, tax withholdings, and other deductions
• 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???