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Copyright©2004 South-Western
1212The Design of the Tax System
Hönnun skattkerfis
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“In this world nothing is certain but death and taxes.” . . . Benjamin Franklin
020
4060
80100
Taxes paid in Ben Franklin’s time accounted for 5 percent of the
average American’s
income.1789
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“In this world nothing is certain but death and taxes.” . . . Benjamin Franklin
020
4060
80100
1789 Today
Today, taxes account for up
to a third of the average American’s
income.
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The Federal Government
• Individual Income Taxes• The marginal tax rate is the tax rate applied to each
additional dollar of income (skatthlutfallið sem á við fyrir hverja viðbótarkrónu sem viðkomandi fær í tekjur).
• Higher-income families pay a larger percentage of their income in taxes.
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The Federal Government
• Federal Government Spending• Expense Category:
• Social Security
• National Defense
• Income Security
• Net Interest
• Medicare
• Health
• Other
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The Federal Government
• Financial Conditions of the Federal Budget (Fjárlög)• A budget deficit (Halli á fjárlögum) occurs when
there is an excess of government spending over government receipts.
• Government finances the deficit by borrowing from the public.
• A budget surplus (Afgangur á fjárlögum) occurs when government receipts are greater than government spending.
• A budget surplus may be used to reduce the government’s outstanding debts.
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TAXES AND EFFICIENCY
• Policymakers have two objectives in designing a tax system...
• Efficiency (skilvirkni, nýtni, hagkvæmni)
• Equity (réttlæti, sanngirni)
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Marginal Tax Rates versus Average Tax Rates
• The average tax rate is total taxes paid divided by total income.
• The marginal tax rate (jaðarskattur) is the extra taxes paid on an additional dollar of income.
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Lump-Sum Taxes
• A lump-sum tax (skattur greiddur í einni greiðslu, óháð tekjum) is a tax that is the same amount for every person, regardless of earnings or any actions that the person might take.
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TAXES AND EQUITY
• How should the burden of taxes be divided among the population?
• How do we evaluate whether a tax system is fair?
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Benefits Principle
• The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services.
• An example is a gasoline tax:• Tax revenues from a gasoline tax are used to
finance our highway system.• People who drive the most also pay the most toward
maintaining roads.
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Ability-to-Pay Principle
• The ability-to-pay principle is the idea that taxes should be levied on a person according to how well that person can shoulder the burden.
• The ability-to-pay principle leads to two corollary notions of equity.• Vertical equity• Horizontal equity