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Sources of Government Revenue

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               Sources of Government Revenue
                        Chapter 9 pages 208 – 235


                    The Economics of Taxation

Economic Impact of Taxes

     Resource Allocation

     Decrease in S, if D remains unchanged, raises the rice

     People react to higher price by buying less




                                  Supply and Demand

                P
       Price




                    0                                                      Q

                                  Product (measurement)




     Behavior adjustment

     Sin tax – a relatively high tax designed to raise revenue as well as
     reduce consumption of a socially undesirable product

     Reduction or elimination of a tax can encourage behavior




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                                    Supply and Demand

               P
       Price




                    0                                                       Q

                                    Product (measurement)



     Productivity and Growth

     Workers may lose incentive to work

     Businesses may not expand production

     Households may save less thus hindering Investment




Criteria for Taxes

     Equity – fairness

               Tax loopholes – exceptions or oversights in the tax law that
                      allow some people and businesses to avoid paying
                      certain taxes

     Simplicity – written so that both the taxpayer and the tax
            collector can understand them

     Efficiency – relatively easy to administer and reasonably
            successful as a revenue-generating device




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Two Principles of Taxation

      Benefit Principle – those who benefit from government services
            should be the ones to pay for them and people should pay
            taxes in proportion to the amount of services or benefits
            they receive.

      Ability-to-pay Principle –people should be taxed according to
             their ability to pay, regardless of the benefits they receive



Types of Taxes

      Proportional Tax – imposes the same percentage rate of taxation
            on everyone regardless of income; the average tax rate is
            constant regardless of income

      Progressive Tax – imposes a higher percentage rate of taxation
            on persons with high incomes; a marginal tax rate is usually
            employed

      Regressive Tax – imposes a higher percentage rate of taxation on
            low incomes than on
            high incomes

      Average Tax Rate – total taxes paid divided by total income; tax
            paid as a percentage of income




                 The US Federal Tax System

Individual Income Taxes

      16th Amendment to the US Constitution (1913) gave US Congress
      power to tax incomes

      Individual Income Tax - a tax on people’s earnings

      Payroll withholding system – employer withholds taxes from
             employee and sends to the IRS (Internal Revenue Service);
             employee files tax return by 15 April to settle accounts
             with the government




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Progressive Income Tax
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                                                          2005 Tax Rate Schedules
                             Note: These tax rate schedules are provided so that you can compute your estimated tax for
                              2005. To compute your actual income tax, please see the instructions for 2005 Form 1040,
                                             1040A, or 1040EZ as appropriate when they are available.

                                                             Schedule X — Single
                                 If taxable income       But not over-
                                                                                          The tax is:
                                      is over--                -
                                         $0                 $7,300                10% of the amount over $0
                                       $7,300               $29,700         $730 plus 15% of the amount over 7,300
                                      $29,700               $71,950      $4,090.00 plus 25% of the amount over 29,700
                                                                            $14,652.50 plus 28% of the amount over
                                      $71,950              $150,150
                                                                                            71,950
                                                                            $36,548.50 plus 33% of the amount over
                                     $150,150              $326,450
                                                                                           150,150
                                                                            $94,727.50 plus 35% of the amount over
                                     $326,450               no limit
                                                                                           326,450

                                      Schedule Y-1 — Married Filing Jointly or Qualifying Widow(er)
                             If taxable income is over- But not over-
                                                                                         The tax is:
                                           -                  -
                                         $0                $14,600                10% of the amount over $0
                                      $14,600              $59,400       $1,460.00 plus 15% of the amount over 14,600
                                      $59,400              $119,950       $8,180 plus 25% of the amount over 59,400
                                                                           $23,317.50 plus 28% of the amount over
                                     $119,950              $182,800
                                                                                          119,950
                                                                           $40,915.50 plus 33% of the amount over
                                     $182,800              $326,450
                                                                                          182,800
                                                                           $88,320.00 plus 35% of the amount over
                                     $326,450               no limit
                                                                                          326,450

                                                  Schedule Y-2 — Married Filing Separately
                             If taxable income is over- But not over-
                                                                                         The tax is:
                                           -                  -
                                         $0                 $7,300                10% of the amount over $0
                                      $7,300               $29,700         $730 plus 15% of the amount over 7,300
                                      $29,700              $59,975        $4,090 plus 25% of the amount over 29,700
                                                                           $11,658.75 plus 28% of the amount over
                                      $59,975              $91,400
                                                                                           59,975
                                                                           $20,457.75 plus 33% of the amount over
                                      $91,400              $163,225
                                                                                           91,400
                                                                           $44,160.00 plus 35% of the amount over
                                     $163,225               no limit
                                                                                          163,225




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                             Schedule Z — Head of Household
   If taxable income is over- But not over-
                                                                The tax is:
                 -                  -
               $0                $10,450                 10% of the amount over $0
            $10,450              $39,800        $1,045 plus 15% of the amount over 10,450
            $39,800              $102,800     $5,447.50 plus 25% of the amount over 39,800
                                                 $21,197.50 plus 28% of the amount over
           $102,800              $166,450
                                                                102,800
                                                 $39,019.50 plus 33% of the amount over
           $166,450              $326,450
                                                                166,450
                                                 $91,819.50 plus 35% of the amount over
           $326,450              no limit
                                                                326,450


      Indexing – an upward revision of tax brackets to keep workers
            from paying higher taxes just because of inflation.

FICA Taxes (Federal Insurance Contributions Act)

A tax levied on both employers and employees for Social Security
(pension scheme) and Medicare (health-care program). Medicare is open
to all senior citizens regardless of income. Social Security is only
received by those who have paid into the system and meet other minimal
requirements.
                               2007 FICA Tax Rates
         Tax          Tax Rate      Maximum Wage Base              Maximum Tax
    Social Security    6.20%                  $97,500                   $6,045
      Medicare         1.45%                  No limit                 No ceiling


      12.4% FICA for self-employed
       2.9% Medicare for self-employed

Corporate Income Tax

      Corporate Income Tax – the tax a corporation pays on its profits

                             2007 Corporate Tax Rates
                      Rate                               Taxable Income
                      15%                                      $0-50,000
                      25%                                  50,001-75,000
                      34%                                 75,001-100,000
                      39%                                100,001-335,000
                      34%                             335,001-10,000,000
                      35%                          10,000,001-15,000,000
                      38%                          15,000,001-18,333,333
                      35%                                Over 18,333,333

           *Personal service corporations pay a flat 35%




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Other Federal Taxes

      Excise Taxes – a tax on the manufacture or sale of certain items,
            such as gasoline and liquor; placed on domestic goods; tend
            to be regressive

      Luxury Tax – an excise tax on a luxury good or service (a good or
            service whose demand increases faster than income when
            income grows)

      Estate Tax – the tax the government levies on the transfer of
            property (assets) when a person dies

      Gift Tax – a tax on donations of money or wealth and is paid by
            the person who makes the gift

      Tariffs (customs duties) – a charge levied on goods brought in
            from other countries (imports)

      User fees – charges levied for the use of a good or service (e.g.
            national park entrance fees)



                 State and Local Tax Systems

Intergovernmental revenues – funds collected by one level of government
      that are distributed to another level of government for
      expenditures

US State Government Revenues

      Four Main Sources (ordered by amount collected):

1. Intergovernmental revenues - largest source and funds are used for
      welfare, education, highways, health, and hospitals among others

2. Sales Tax – a general tax levied on consumer purchases of nearly
      all products; many states do not tax necessities such as food and
      drugs; a regressive tax

3. Employee Retirement Contributions – state retirement plans

4. Individual Income Taxes




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US Local Government Revenue Sources

      Four Main Sources (ordered by amount collected):

1.    Intergovernmental revenues – received from State Governments;
         largest source and funds are used for education and public welfare

2.    Property Tax – a tax on real property and tangible and intangible
            property

             Real Property – includes real estate, buildings, and anything
                       permanently attached such as elevators and
                       central air conditioners; raises the most revenue

             Tangible Personal Property – all tangible items of wealth
                       not permanently attached to land or buildings
                       such as automobiles, furniture, farm animals, the
                       stock of goods in retail stores, and clothing

             Intangible Personal Property – property with an invisible
                       value and is represented by paper documents
                       such as a stock, bond, patent, or check

3.    Utility and Liquor Store Income

             Earnings of public utilities and state-owned liquor stores

4.    City and town sales taxes




                       Current Tax Issues

Incidence of a tax

Who actually bears the burden of a tax, the consumer or the producer?




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                    Incidence of a Tax

        P
Price




            0                                                Q

                             Good ‘A’




                    Incidence of a Tax

        P
Price




            0                                                Q

                             Good ‘A’




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The Value Added Tax

     VAT (Value Added Tax) – a tax placed on the value that
           manufacturers add at each stage of production; a tax on
           consumption instead of income



     Advantages of a VAT

     1. Hard to avoid because tax collector levies it on the total
        amount of sales minus the cost of inputs

     2. Incidence of the tax is widely spread

     3. Tax is not visible to the consumer because it has been built in
        to the price

     4. Easy to collect since businesses already make regular tax
        payments to the government

     5. A relatively small VAT can raise a large amount of revenue



     Disadvantages of VAT

     1. Tends to be invisible to consumers

     2. Would compete with already existing US sales taxes




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                      Tax Terminology
                       (Chapter 9 pages 208-235)

Income Tax - a tax on people’s earnings

Proportional Tax – imposes the same percentage rate of taxation on
      everyone regardless of income; the average tax rate is constant
      regardless of income

Progressive Tax – imposes a higher percentage rate of taxation on
      persons with high incomes; a marginal tax rate is usually employed

Regressive Tax – imposes a higher percentage rate of taxation on low
      incomes than on high incomes

Average Tax Rate – total taxes paid divided by total income; tax paid as
      a percentage of income

VAT (Value Added Tax) – a tax placed on the value that manufacturers
      add at each stage of production

Sales Tax – a general tax levied on consumer purchases of nearly all
      products

Corporate Income Tax – the tax a corporation pays on its profits

Excise Taxes – a tax on the manufacture or sale of certain items, such as
      gasoline and liquor; placed on domestic goods

Estate Tax – the tax the government levies on the transfer of property
      (assets) when a person dies

Gift Tax – a tax on donations of money or wealth and is paid by the
      person who makes the gift

Tariffs (customs duties) – a charge levied on goods brought in from other
      countries (imports)

Luxury Tax – an excise tax on a luxury good or service (a good or service
      whose demand increases faster than income when income grows

Capital Gains Tax – tax on profits made from the sale of an asset held
       for 18 months




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Tax for a government sponsored pension – a tax to provide an income
      after a person retires

Health Care Tax – a tax to provide health and medical care for citizens

Property Tax – a tax on real property and tangible and intangible
      property

Real Property – includes real estate, buildings, and anything permanently
       attached such as elevators and central air conditioners

Tangible Personal Property – all tangible items of wealth not permanently
      attached to land or buildings such as automobiles, furniture, farm
      animals, the stock of goods in retail stores, and clothing

Intangible Personal Property – property with an invisible value and is
      represented by paper documents such as a stock, bond, patent, or
      check

User fees – charges levied for the use of a good or service




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