sources of government revenue. economic impact of taxes resource allocation factors of production...
TRANSCRIPT
Economic Impact of Taxes
• Resource Allocation• Factors of
production are affected
• Raise in production costs
• Higher prices = less demand = increase unemployment
Economic Impact of Taxes
• Behavior Adjustment• Encourage or
discourage certain activities
• “sin tax”: high % tax that raises revenue while reducing consumption of a socially undesirable product
Economic Impact of Taxes
• Productivity– Change incentives to save,
invest, and work• The Incidence of a Tax– The party being taxed is
not always the one that bears the burden of a tax.
– Higher taxes on utility company = higher utility bills
Criteria for Effective Taxes
• Criterion One: Equity– Fairness is subjective– Tax loopholes: Can they be avoided?– Taxes are generally viewed as fair if there are
fewer exemptions, exceptions, and deductions
Criteria for Effective Taxes
• Criterion Two: Simplicity• Tax laws should be easy to understand
Criteria for Effective Taxes
• Criterion Three: Efficiency• Easy to administer and can generate revenue
easily
Two Principles of Taxation• Benefit Principle
• Those who benefit from the government should pay in proportion to the amount of benefits they receive
• Gasoline: If you drive more, then you pay more gas tax = more $$ for highway upkeep
• Two limitations:– Most government benefits go to those least able
to pay for them– Benefits are hard to measure
Two Principles of Taxation
• Ability-to-Pay Principle• People should be taxed according to their
ability to pay, regardless of benefits received• Ex: individual income tax• Two factors:• Benefits derived from government spending
cannot always be measured• Assumes higher income earners suffer less
discomfort in paying taxes than lower income earners
Types of
• Proportional• Imposes the same tax rate %
on everyone, regardless of income
• As income increases, the % of income tax stays the same.
• If tax rate is 20%, a person making $10,000 pays? A person making $100,000 pays?
Types of Taxes• Progressive Tax
• Imposes a higher tax rate % on persons with higher incomes
• Ex? Income Tax• As income increases,
the % of income paid in taxes also goes up
Types of
• Regressive Tax Example?• State sales tax• As income goes up, the % of income paid in
taxes goes down– Someone making $10,000/yr may spend $5,000
on food and clothing– Someone making $100,000 may spend $20,000 on
same essentials• If state sales tax is 4%, the lower income
household is paying a higher % of total taxes
Section 2: The Federal Tax System• Individual Income Taxes• Gov collects about 48% of revenue from
individual income tax• W/held from individual’s paychecks, with
employers sending taxes directly to IRS• Individuals file a tax return on/before April 15
each year.– If taxes w/held > taxes owed = refund– If taxes w/held < taxes owed = individual pays
balance
FICA
• Federal Insurance Contributions Act– Largest source of
government revenue– Regressive
• Medicare• Social Security Taxes:
Partially proportional, partially regressive
Quiz
1. What are the 3 the criteria for effective taxes?2. What are the 2 principles of taxation?3. What are the 3 types of taxes?4. What two areas or taxes make up FICA?5. What percentage of revenue is collected by the
Federal Government in the form of income tax?6. What is a progressive tax?7. What is a regressive tax?8. What does FICA stand for?