TAXES: The main source of government revenue

TAXES: The main source of government revenue

…nothing is certain, but death and taxes.

B. Franklin

…nothing is certain, but death and taxes.

B. Franklin

Taxes Fund Public Goods and Services

Taxes Fund Public Goods and Services

National Defense

State and Local Police

Financial Aid

Health Care for Elderly

Public Education

Social Services

The Economics of Taxation

The Economics of Taxation

In addition to creating revenue for the government, taxes also impact the economy in the following ways:

Resource allocation - if taxes are too high, supply will decrease and /or prices will increase causing a shift in the allocation of land, labor and capital.

Behavior adjustment - sin taxes, such as those placed on cigarettes attempt to change a person’s behavior

Productivity and Growth - if taxes are too high, there is less incentive for people or businesses to continue to grow. Why earn more if most of it is taken away in higher taxes?

Correct negative externalities Stabilize the economy through fiscal policy

In addition to creating revenue for the government, taxes also impact the economy in the following ways:

Resource allocation - if taxes are too high, supply will decrease and /or prices will increase causing a shift in the allocation of land, labor and capital.

Behavior adjustment - sin taxes, such as those placed on cigarettes attempt to change a person’s behavior

Productivity and Growth - if taxes are too high, there is less incentive for people or businesses to continue to grow. Why earn more if most of it is taken away in higher taxes?

Correct negative externalities Stabilize the economy through fiscal policy

To be effective Taxes must meet the following

criteria:

To be effective Taxes must meet the following

criteria:

EQUITYIs this tax fair?

SIMPLICITYIs this tax easy to understand?

EFFICIENCYIs this tax easy to administer?

Does this tax generate enough money?

CRITERIA FOR TAXES

EQUITYIs this tax fair?

SIMPLICITYIs this tax easy to understand?

EFFICIENCYIs this tax easy to administer?

Does this tax generate enough money?

CRITERIA FOR TAXES

TWO PRINICPLES of TAXATION

TWO PRINICPLES of TAXATION

“Who pays What” is based on two principles:

Benefit Principle - The more you benefit from something, the more you should pay. Taxes on gasoline

Ability to Pay - The more you make the more you should pay.

“Who pays What” is based on two principles:

Benefit Principle - The more you benefit from something, the more you should pay. Taxes on gasoline

Ability to Pay - The more you make the more you should pay.

Types of TaxesTypes of Taxes

Taxes are classified according to the ay in which the tax burden changes as income changes.

Proportional Tax Progressive Tax Regressive Tax

Taxes are classified according to the ay in which the tax burden changes as income changes.

Proportional Tax Progressive Tax Regressive Tax

Proportional TaxesProportional Taxes

Regardless of Income, the same tax rate is imposed upon everyone. Another term for a proportional tax is a flat tax.

If there is a 20% flat tax, how much do you pay in taxes if you earn $10,000? What if you earn $100,000?

Note as a person’s income increases, the percentage of total income paid in taxes remains the same.

Property Tax is a proportional tax.

Regardless of Income, the same tax rate is imposed upon everyone. Another term for a proportional tax is a flat tax.

If there is a 20% flat tax, how much do you pay in taxes if you earn $10,000? What if you earn $100,000?

Note as a person’s income increases, the percentage of total income paid in taxes remains the same.

Property Tax is a proportional tax.

Proportional TaxProportional Tax

Income

10,000 50,000 100,000

Tax Rate

40%

20%

10%

Progressive TaxProgressive Tax People with higher incomes pay a higher percentage

in taxes. Federal and State income tax are progressive taxes.

Simple “the more you make the more they take”

People with higher incomes pay a higher percentage in taxes. Federal and State income tax are progressive taxes.

Simple “the more you make the more they take”

INCOME Amount Paid in Taxes

Amount Paid as a percentage of Income

$10,000 $1,000 10%

$50,000 $ 10,000 20%

$100,000 $ 30,000 30%

Progressive TaxProgressive Tax

Income

10,000 50,000 100,000

Tax Rate

40%

20%

10%

Regressive TaxesRegressive Taxes The lower the income the higher

percentage paid in taxes. Sales tax is an example of a regressive tax.

Assume two families paid $1000 in sales tax by the end of the year. Which family spent a higher percent of their income on taxes?

The lower the income the higher percentage paid in taxes.

Sales tax is an example of a regressive tax. Assume two families paid $1000 in sales tax by the end of the year. Which family spent a higher percent of their income on taxes?

Income Amount paid in taxes

Amount paid in taxes as a percentage of their income.

$10,000 $1000.00 10%

$50,000 $1000.00 5%

Regressive TaxRegressive Tax

Income

10,000 50,000 100,000

Tax Rate

40%

20%

10%

FEDERAL TAXESFEDERAL TAXES-Amendment 16 gives Congress the power to lay and collect taxes. Federal Income Taxes are due April 15. -The Internal Revenue Service (IRS) enforces/ collects from the tax code.

Income TaxIncome Tax

Individual income taxes are paid over time through a payroll withholding system (just look at your paycheck). By April 15, of every year you must file a tax return. Any difference in the amount paid compared to the amount owed is settled at this time.

Two forms to know are your W4 and your W2. What are they?

Individual income taxes are paid over time through a payroll withholding system (just look at your paycheck). By April 15, of every year you must file a tax return. Any difference in the amount paid compared to the amount owed is settled at this time.

Two forms to know are your W4 and your W2. What are they?

W4W4

Your withholding allowance Fill out a W4 every time you start a new job Increases or Decreases the amount of

withholdings based on the number of dependents

0=more withheld 2 =less withheld Your employer and you are putting away

small portions of your paycheck, in order for you to pay your income tax at the end of the year.

Your withholding allowance Fill out a W4 every time you start a new job Increases or Decreases the amount of

withholdings based on the number of dependents

0=more withheld 2 =less withheld Your employer and you are putting away

small portions of your paycheck, in order for you to pay your income tax at the end of the year.

What does W4 look like?What does W4 look like?

http://www.irs.gov/pub/irs-pdf/fw4.pdf

http://www.irs.gov/pub/irs-pdf/fw4.pdf

Sample W-2 FormSample W-2 Form

Contains your tax information for one job in one year You’ll receive one for each job you worked at during the year Must be mailed by January 31 or every year.

Contains your tax information for one job in one year You’ll receive one for each job you worked at during the year Must be mailed by January 31 or every year.

Real World Business

Chicago, IL 60640

Irma Money

2301 South Jackson

Chicago, IL 60640

000-00-000

16,680.24

16,680.24 1034.16

1,728.00

241.9216,680.24

IL 12-2222222 16,680.24 440.40

12-2222222

D 2000.00

Payroll Taxes Payroll Taxes

More Federal TaxesMore Federal Taxes Corporate Income Tax - As a separate

legal entity, corporations are taxed. Excise Tax - tax on the manufacture or

sale of selected items Estate Tax - tax (18-50%) on the

transfer of property upon a death. As of 2006, estates worth less than 2 million dollars are exempt.

Gift Tax - Tax on money donations, paid by the person donating.

Customs Duties: Tax on imported goods. Exported goods may not be taxed.

Corporate Income Tax - As a separate legal entity, corporations are taxed.

Excise Tax - tax on the manufacture or sale of selected items

Estate Tax - tax (18-50%) on the transfer of property upon a death. As of 2006, estates worth less than 2 million dollars are exempt.

Gift Tax - Tax on money donations, paid by the person donating.

Customs Duties: Tax on imported goods. Exported goods may not be taxed.

State Taxes and Local Taxes

State Taxes and Local Taxes

Intergovernmental Revenues - transfer of money from the federal government

Sales Tax Employee

Retirement Contributions

Individual Income Tax

Intergovernmental Revenues - transfer of money from the federal government

Sales Tax Employee

Retirement Contributions

Individual Income Tax

Intergovernmental Revenues -from state level

Property Tax Public Utility or

State owned liquor stores

Sales Tax - this varies from city to city!

Intergovernmental Revenues -from state level

Property Tax Public Utility or

State owned liquor stores

Sales Tax - this varies from city to city!

Where does our tax money come from and then go?

Where does our tax money come from and then go?

Where do your Wisconsin tax dollars go?

Where do your Wisconsin tax dollars go?

http://www.nationalpriorities.org/auxiliary/taxday2008/243.pdf

http://www.nationalpriorities.org/auxiliary/taxday2008/243.pdf