Taxes

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					Fiscal Policy, continued:


      Taxes
 How do taxes impact our economy?
• Resource allocation: consumers will spend less
  b/c they are forced to allocate their income for
  taxes
• Behavior adjustment: used to discourage or
  encourage certain behavior
  – Sin Tax: tobacco, alcohol, sugar/soda
• Productivity & Growth: changes the incentive to
  save, invest & work
  – Why work harder to make income and then pay
    more in taxes?
           Incidence of a Tax:
• The final burden of the tax doesn’t always fall
  on the taxed party
• Example: utility companies must pay a tax to
  the local government…. In turn, the utility
  company increases your monthly bill  i.e.,
  YOU pay the tax indirectly
      Criteria for Effective Taxes:
• Equity: should be fair
  – Problem: what is fair??
  – Loopholes: exceptions to the tax rule
• Simplicity: both the taxpayer & tax collector
  should be able to understand the tax
  – Problem: income tax is THOUSANDS of pages long
• Efficiency: should be easy to administer &
  successful at generating revenue
  – Problem: toll booth tax is costly b/c you must build
    the booths & hire collectors… and chase folks who
    don’t pay!
     Two principles of Taxation:
• Benefit principle: those who benefit from
  government goods & services should in
  proportion to the amount of benefits they
  receive
  – PROBLEM: those who benefit the most from gov’t
    spending, pay the least
• Ability-to-Pay Principle: people should be taxed
  according to their ability to pay, regardless of
  benefits they receive
  – PROBLEM: People who pay more taxes, benefit the
    least from gov’t spending
 Types of Taxes: classified based on the way in
   which the tax burden changes as income
                    changes
• Proportional Tax: imposes the same % of
  taxation on everyone, regardless of income
  – As income goes up, the % of income paid stays the
    same
• Progressive Tax: imposes a higher % of taxation
  on persons w/ higher incomes (i.e. larger dollar
  amount & larger % of income)
  – As income goes up, the % of income paid goes up
• Regressive Tax: imposes a higher % rate of
  taxation on low incomes than on high incomes
  – As income goes up, the % of income paid goes down
                  Directions:
• Use your textbook starting on pg. 231 to fill
  out the table on the back!
  – HINT: property tax is on pg. 241
• It goes in order, but you have to READ 
         Individual Income Tax
• Collected by the IRS (Internal Revenue Service)
• Businesses send tax return (annual to report
  outlining how much taxes were withheld & how
  much you made)
• 38.1% of total revenue collected by gov’t
• Type: progressive
• Direct
• Level of gov’t: federal & state
FICA (Federal Insurance Contributions Act)

•   Levied to pay for social security & medicare
•   6.2% tax rate for Social Security
•   7.65% tax rate for Medicare
•   Medicare is the federal healthcare program
    available to all seniors
•   Payroll taxes: tax paid directly out of your
    paycheck
•   Type: regressive
•   Direct
•   Level: Federal
            Corporate Income Tax
• Corporations pay tax on their profits
• Corporate income tax brackets:
   –   $0-$50,000: 15%
   –   $50,000-$75,000: 25%
   –   $75,000-$18.3 million: 34%
   –   Over $18.3 million: 35%
• Type: progressive
• Indirect: corporations will pass the tax onto
  consumers
• Level: Federal
      Excise Tax (aka Sales Tax)
• Tax levied on the sale of some items
• What is taxed? Basically everything
• Luxury good: if demand for the good rises
  faster than income when income grows
• Type: regressive
• Direct
• Level: federal & state
                   Estate Tax
• Tax the gov’t levies on the transfer of property
  (real estate, $$, jewelry, etc) when someone
  dies
• $2,000,000 limit (i.e. only the first $2 million is
  taxed)
• Typically 18-50% of the total value is taxed
• Type: progressive
• Direct
• Level: federal
                  Gift Tax
• Tax on the donation of money or wealth
• Used to prevent the wealthy from giving
  away their $$ before they die, since that
  would be avoiding paying your taxes…
• Type: progressive
• Direct
• Level: federal
            Customs Duties
• Charge levied on goods brought in from other
  countries
• Type: regressive
• Direct
• Level: federal
                   User Fees
•   Charge levied for the use of a good or service
•   Example: park fees
•   Type: regressive
•   Direct
•   Level: Federal
               Property Tax
• Tax on tangible and intangible items
• Real estate tax raises the most revenue
• Ad valorem tax (license plate fee based on
  year & model of your car; paid on your
  birthday)
• Type: progressive
• Direct
• Level: local

				
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