omic-lowdown-video-companion-series/episode-5- externalities
TRANSCRIPT
http://www.stlouisfed.org/education_resources/economic-lowdown-video-companion-series/episode-5-externalities/
Chapter 12 - Taxation
Taxes – money given to government Help to run different institutions and services Necessary to civilized groups; used for
centuries Four general rules to taxation (Adam Smith)
Equity – fairness in who pays Certainty – should know what, when and how
you pay Convenience – should be an easy process for
people Efficiency – should be efficient in collection
and use
What are Taxes?
Federal government allocates tax revenue as follows: Entitlements Interest Payments http://www.youtube.com/watch?v=0efqnvYz4YI National Defense
State and Local governments allocate tax revenues as follows: Public services & public safety Education Social welfare
Where do tax dollars go?
Individual Income tax Payroll Taxes Corporate Income Tax Excise Taxes
Sources of Federal Revenue
Revenue comes from 4 major areas Fiscal year is from Oct 1 – Sept 30, when $ is used Income, Payroll, Corporate Income and Excise
Taxes Federal gov’t doesn’t usually cover all expenses
Leads to deficit – current $17,234,132,052,323
2 types of spending – Mandatory & Discretionary Mandatory – fixed spending by law
Entitlements – Social Security, Medicare, welfare, etc.
Discretionary – can change based on Congressional decisions Largest amount spent on national defense. The
rest is spent on: education, science, health care, foreign aid
How Revenue is Spent
Get most of money from taxes Property tax, state income tax, etc.
Also use tax referenda – vote must pass Cannot raise taxes unless people vote for
it Lotteries – used as a major income source State spending usually focuses on
education, and public safety: law enforcement & fire protection Also focus on public issues – health clinics,
road projects, assistance for low income earners, etc.
State Gov’t Revenue and Spending
Tax equity – asks are taxes equal? Tough to answer due to differing definitions of
equal Should all pay, or only those who use it, etc.
Two principles to answer this Ability-to-Pay Principle
Says those who make more, pay more – b/c they can
Benefits-Received Principle Says only those who receive benefit should
pay Tax Incidence – who actually ends up paying tax
At times burden falls to others
Who should Pay?
Tax base – what is taxed (Income, property, etc.) Tax rate – the percentage of tax paid Types of Taxes – 3 kinds
Proportional Tax – same % for all levels (5% tax) Also called a flat tax – very simple to use
Progressive Tax – increased % with increased income Based on ability-to-pay principle – ex. Income
taxes Regressive Tax – increased % with decreased income
Proportional taxes can act as regressive – ex. Sales tax
People making less money pay higher % of yearly income
Taxation Basics 101
Examples of Each Tax
15000 Salary
Prop 10%
15000 Salary
Prog 10%
40000 Salary Prop
40000 Salary
Prog 20%
75000 Salary Prop
75000 Salary
Prog 30%
100000 Salary Prop
100000 Salary
Prog 40%
0
20000
40000
60000
80000
100000
120000
Takehome Salary
Tax Paid
Actually leaves the poor with less money to spend if given a proportional tax versus a pro-
gressive
Graphing the Differences
Difference in
spendable money
not much
Difference in
spendable money is
huge
Income Tax – once a year, each April 15 Fill out a W-2; tells gov’t how much to
withhold Payroll Taxes – 2 major taxes paid
Social Security Tax – money taken for retirement
Medicare Tax – money to pay for medical needs
Also may pay a disability and unemployment tax
Property Tax – % paid on value of owned land
Sales Tax - % paid on purchased goods
Types of Taxes You Will Pay
Corporate Income Taxes – levied on businesses Excise Taxes – used to regulate goods the gov’t
wants to control Cigarettes, alcohol, etc.
Luxury Taxes – used on major luxury items User Fees and Tolls – tax the user Estate or Inheritance Taxes (progressive) –
Estate tax taken by gov’t on money left after death
Inheritance tax may be levied by the state gov’t on top of the estate tax.
Other Taxes