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Sources of Government Revenue: How the government collects money. Criteria (requirements) for Effective Taxes. Effective Taxes. Efficient: Should be easy to collect so govt gets the revenue ($). Equal: Must be fair. Simple: Must be simple for people to understand.
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Sources of Government Revenue:How the government collects money
Criteria (requirements) for Effective Taxes Effective Taxes Efficient: Should be easy to collect so govt gets the revenue ($) Equal: Must be fair Simple: Must be simple for people to understand
The Incidence of a Tax • Government adds tax to producer: • Example:. Utility company-gas, electric, medicine • Raise rates: consumer pays more (easy if demand is inelastic) • $ ____tax on producer • D/S $______ • D/S+tax $_____for consumer • D/S+tax $______for supplier • The ____curve shifts to the ______because of ________ Because the demand is ______, the consumer pays most of the ________and the producer ____.
The Incidence of a Tax • Government adds tax to producer: • Example: more tax on corporation • Raise rates: consumer pays some and producer pays some (elastic) • $ ____tax on producer • D/S $______ • D/S+tax $_____for consumer • D/S+tax $______for supplier • The ____curve shifts to the ______because of ________. Because the demand is ______, the consumer pays _____of the ________and the producer ____ of the tax.
Two Principles of Taxation • Benefit Principle: those who benefit from government and services should pay in proportion to the amount of benefits received • Gas tax: people who drive more buy more gas and pay more gas tax • the gas tax pays for roads
Two Principles of Taxation • Ability-to-Pay Principle: • People who earn more money should pay more taxes
Types of Taxes • Proportional: imposes same percentage rate of taxation on everyone • Progressive: imposes a higher percentage rate of taxation on people with high incomes than on those with low incomes • Regressive: imposes a higher percentage rate of taxation on low incomes than on high incomes
Figure 9.3 Figure 9.3
IRS (Internal Revenue Service) Treasury Department
Individual Income Taxes • Fed. Gov’t collects 45% of its revenue (money coming in) from Individual income taxes • People who work taxes • $ (taxes) are paid each week and is subtracted from your check • Before April 15th each year, an employee must file a tax return: an annual report to the IRS summarizing total income, deductions, & taxes withheld by employers
Individual Income Taxes • Proportional tax • As income goes up, % of income tax paid is same • It doesn’t matter if you earn a lot of $ or a little $ • Progressive Tax that ranges from 15% -39.6%
Individual Income Taxes • Progressive tax • Individuals earning higher incomes pay higher tax rates
FICA: What is FICA? And why does it take part of my paycheck? • FICA: • Federal Insurance Contributions Act Social Security (6.2% of wages) + Medicare (1.45% of wages) FICA tax ( 7.65%of wages) • 2nd largest source of Gov’t revenue (money collected)
FICA • Social Security is a proportional tax up to $65,400 (the capping point) and then it is regressive • Medicare is not capped; it’s proportional at all levels of income • Total FICA tax = 7.65%
Corporate Income Taxes • 3rd largest category of federal taxes • Corporation is recognized as a separate entity • Rates vary from 15% -35% (slightly progressive)
Other Federal Taxes • Excise Tax: tax certain items, such as gasoline and liquor • Estate Tax: tax the gov’t levies (charges) on the transfer of property when a person dies (parent to child) • Gift Tax: tax on gift of money/wealth paid by person making gift
State Government Revenue($ collected from..) 1.Intergovernmental Revenues - money from federal gov’t 2.Sales tax - general tax on consumer purchases 3.Employee Retirement Contributions 4.Individual Income Taxes (not all states)
Advantages of Sales Tax • Good way to raise large amount of money • All consumers pay • Easy to collect: business collects at point of sale
Local Property Taxes • Second largest source of revenue for local governments • Real Property: includes real estate, buildings, & anything permanently attached
Local Property Taxes • Tangible Personal Property: includes tangible items, not permanently attached. • Intangible Personal Property: property with invisible value, such as stock, bond, patent, check
Examining Your Paycheck • Payroll withholding statement: the summary statement attached to a paycheck • It shows: • income, • tax withholdings (for fed/state/city govt., and • other deductions
QUESTION: WHY ARE STATE & LOCAL GOVERNMENTS LOSING MONEY TO THEINTERNET??? • State & local governments rely heavily on sales tax for revenues • State & local governments already lose $3.3 billion each year to untaxed interstate sales • This figure will increase as more sales are made over the Internet • Should there be an Internet sales tax??? How would it work?